SEP Dual Eligibility?

[Guest Prof]

Gary,

The answer to question 2:53 in the latest SIMPLE, SEP, and SARSEP Answer Book seems to contradict itself. It says the following:

"May future employees be required to satisfy an age or service condition not applicable to current employees?"

"No. Provisions allowing current employees to participate whether or not they have satisfied the eligibility requirements applicable to future employees are not expressly prohibited;...."

By the way, the document being used is not an IRS model document.

Shouldn't the answer be yes, because future employees would be required to satisfy age and service?

[Appleby]

Prof,

It appears that it should “No”…as it is in the book. The example provided also support the ‘No’ response. According to the response, while it is not expressly prohibited, no allowances are made for it ( dual eligibility) in IRS model and approved prototype plans. Therefore, current and future employees must satisfy the eligibility requirements, if the employer is using an IRS model or IRS approved prototype SEP.

If you are using an individually designed SEP, you may consider including a provision for dual eligibility, and see whether the IRS will approve the document.

[Gary Lesser]

Prof,

Thank you for your inquiry. Having dual eligibility is likely to result in prohibited discrimination in favor of the group in which discrimination is prohibited. If prohibited group members could have satisfied the plan's "new" eligibility requirement at the time the plan was originally instituted, the plan could be amended to provide for a longer (new) service requirement. This is a borrowed rule from the qualified plan area. See Revenue Rulings 70-75, 70-77, and especially 73-382.

Although, the example (Q 2:53 in 9th ed.) is correct, I will word it differently in the next edition to clarify the rule and the point you make. Perhaps add a Joe-type example....

Joe starts a SEP for his business, MoJoe Inc.. He uses 1 yr eligibility and, but has performed service for the MoJoe during the prior 3 years. Joe cd amend the plan and provide for a 3-year service requirement. Because he would have participated had the plan originally contained a 3-year service requirement, prohibited discrimination would not occur. An individually designed plan could have been used with dual eligibility (or a model/prototype used, and amended for year 2).

If Joe only had 1 year of prior service, the i.d. plan (or amended model/prototype) would likely be discriminatory under Code Section 408(k)(3).

Hope this helps. Any other suggestions are welcome. Thanks again.