SEP and 401(k) Combo

[ERISA1]

I've got a potential client that is fortunate enough to be experiencing rapid growth. There are only a handful of employees with 3 or more years of service. They are covered under an existing SEP. There are another 50 employees who have less than two years of service. The employer would like to provide a 401(k) plan with matching contributions. She understands the k feature must be offered to all employees with at least one Year of Service. The question is this:

Can the Employer continue to fund the SEP for those employees who have at least 3 years of service?

As you know, if profit sharing were offered in the k plan, the employer could not require more than a two years of service. Can you stretch this to a 3 year wait by funding a SEP instead of Profit Sharing in a 401(k) Plan?

There is plenty of guidance saying the two plans must be aggregated for 415 purposes. Does anyone know of an issue under 401(k), 401(a)(4), 410(a) or (b) that would prohibit the employer from funding the SEP (with only a few participants) for another year or two?

Thanks very much.

[Guest Sieve]

If there's an IRS Form 5305A SEP, then you cannot maintain both plans (SEP & 401(k)) simultaneously. If the SEP is not on the IRS Form, you can have both plans. And, if you maintain both--thus allowing part-timers into the plan--I see no reason why you couldn't make the PS contribution into the SEP (understanding, of course, that the SEP contribution is immediately vested and can be withdrawn--like a cash bonus--by the employee at any time).