SEP: Which years are the "immediately preceding 5 years"?

[jukeboy56]

For years I've thought I understood the SEP coverage rules regarding service, but now I'm not so sure.

IRS Code Section 408(k)(2)(B) says that participation requirements are satisfied for a year if the employer contributes to the SEP of each employee who "has performed service for the employer during at least 3 of the immediately preceding 5 years"

I have always assumed that the year for which the contribution is being made is one of those five years. So, for example, if Employee A performed services during 2003, 2004 and 2005, the employer would have to cover him for the year ending 12/31/2005.

However, I noticed in an outdated version of IRS Publication 590 (which covers IRA's) the coverage requirement described as "has worked for the employer during at least 3 of the 5 years immediately preceding the tax year".

The current Publication 590 doesn't discuss SEPs, and the current Publication 560 (Retirement Plans for Small Businesses) uses the phrase "has worked for you in at least 3 of the last 5 years".

So does "immediatly preceding" mean before the start of the tax year for which a contribution is being made? Has anyone found anything else that clarifies when the 5 year period falls?

[saabraa]

"Immediately preceding" the current year does not include the current year, for purposes of counting years of eligibility to participate. In your example, presuming the plan requires 3 out of 5 prior years' service, the employee can't participate earlier than for the 2006 calendar year. See proposed reg. 1.408-7(d)(5), which is an example using 1979 as the year in question. The text of the reg. speaks of the employee having had 3 years of service in the 3 years preceding 1979. The reg. still isn't 100% convincing/is not the ideal example, as it hinges on the person attaining the then in effect age requirement of 25 in 1979, but it's close enough.

[jukeboy56]

Thank you. I now see that an IRS Notice dated April 28, 1997 contains the language "has worked for the employer during at least 3 of the 5 years immediately preceding the tax year", which reinforces your interpretation.