SEP IRA Plan

[Guest Darcy L. Hitesman]

What do you do when an employee refuses to set up an IRA?

[Belgarath]

I'd make participation in the SEP a condition of further employment, and tell them they will be fired if they don't participate.

[Michael Devault]

You can establish the IRA for the employee. Proposed regulation section 1.408-7(d)(2) permits this in order to safeguard the tax qualification of the SEP for other employees.

You'll have to provide the employee notice, either in person or by mail. I suggest mail, return receipt requested, in order to have evidence of the notice.

You should also set it up at a bank or similar institution where there are no fees and/or charges. That way, if the employee surrenders the IRA for cash, they will have the entire contribution (less taxes and penalty, of course).

Hope this helps.

[Gary Lesser]

Forced participation. Form 5305-SEP indicates that an employer may require an employee to join its SEP as a condition of continued employment

At least one state court has addressed the issue of providing a summary plan description (SPD) for a SEP. In Schultz v Production Stamping Corp [434 NW 2d 780 (Wis 1989)], the court held that ERISA does not require that an SPD be given to an employee before SEP coverage begins. That ruling was less broad than it would seem because the employer distributed a copy of Form 5305-SEP to its employees. Form 5305-SEP was the plan document and contained summaries and disclosures. In addition, the employer held a meeting at which the plaintiff-employee asked no questions. The employee signed up, but her husband persuaded her to go back the next day and cross her name out. The employer warned the employee that she would be fired, and she was. The court, reversing a lower court damage award of $173,000, concluded that it was reasonable for the employer to discharge the employee because one employee should not have the power to destroy the pension arrangement for all the other employees. (The explanation portion of the standard SEP plan document confirms that the employer may terminate an uncooperative employee.) [see Form 5305-SEP, Information for the Employee, SEP Participation.]

The court in Schultz also had to rule on the issue of whether, in Wisconsin, such a discharge would be impermissible as a matter of public policy. Again, the court noted that the employer's disclosure exceeded the minimum requirements of ERISA; there could be no bar to a dismissal authorized by ERISA.