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Rules For Sponsoring Both a SEP and a Profit Sharing Plan


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A company with an existing PSP wants to start a SEP so that it can contribute to one specific employee who's not eligible for the PSP yet. Would all employees be eligible to participate in the SEP or can you just specify a class of employees to be eligible (e.g., owners' spouses)? All other employees would get a comparable allocation in the PSP. The PSP has a 1 year eligibility requirement while the SEP would have a 6 month requirement. There would only be 2 employees who would qualifiy for the SEP but not for the PSP. If most employees cannot be excluded from the SEP, would it be possible to 1) have those two employees waive participation from the SEP, and 2) not contribute to the other employees in the SEP since they would be getting comparable allocations in the PSP? I imagine you would have to combine both plans to do the crosstesting (since the PSP is a new comparability plan). All help is greatly appreciated.

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A SEP does not have the exclusion mechanisms similar to profit sharing plans. Hence, you cannot exclude by class (except for union, non-resident alien, or employees whose compensation during the year failed to meet the $550 standard). Therefore, when you lower the service standard to allow the one employee in, you've actually opened the door to allow everyone in. Also, there is no such thing as a 6 month requirement. You are only measuring the number of "PRIOR YEARS" during which the employee has performed "ANY" service.

Good Luck!


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