SEP Performed Service

[Guest dmays]

If someone did not receive compensation in a year can they be deemed to have performed service for SEP eligibility? Owner of an S-Corp received no compensation in 1999 he received his first compensation in Feb. 2000. In 2000 he also had another employee start work. This employee was terminated in Feb 2002. The S-Corp owner wants to set up a SEP with a two out of the immediately preceding 5 year service requirement count his 1999 service and therefore exclude the other employee that started in 2000. What determines performed service?

[Gary Lesser]

Service for SEP purposes DOS NOT require that compensation be paid. If the individual performed any service in 1999, then a 2-year service requirement will work for owner--participation to commence in 2001.

[maverick]

Related question, sort of:

- Firm established in 2000, owner only employee

- Joe X (NHCE) hired 2001.

Can the employer establish a SEP in 2002 using more liberal eligibility reqr of "performed service in at least 2 of the 5 years immediately preceding the year a contrib is made?" Why? He wants to get a 2002 contrib, but exclude his employee.

I know you can let people in sooner, just not sure if the company has to have been in business in each of the 5 years immediately preceding.

Thanks. Maverick

[Gary Lesser]

Please clarify your question. Was the firm started in 1999 or 2000? The owner must meet whatever service requirement is specified; it can not be later changed unless the owner could have met the service requirement at the time the plan was originally established.

If business not in existance (in 1999), then there can be no service for it. ???

[maverick]

Firm est. in 2000. So, the more liberal eligibility rule would have to be "service in 1 of the 5 years immediately preceding the year a contrib is made." Right?

Then Joe X would be eligible for a contrib in 2002.

Thanks Gary.

[Gary Lesser]

Since the firm started in 2000, and the first contributions are for 2002, why not use a 2 year service requirement and Joe will participate in 2003 (rather than in 2002 with a 1 yr requirement). The owner, who performed service in 2000 and 2001, will participate in 2002 (with a 2 yr requirment).