Less restrictive guidance on a SEP IRA

[senorsassy]

Per the 408(k) IRS rules, less restrictive rules may be established to include employees and owners in this retirement plan (see below). Assuming that I start the 408(k) for my company on January 1st, 2017, and we just started a new company on the same date, can one of the less restrictive eligibility requirements be the following?:

Employees do not have to fulfill the requirement of the 3 out of 5 year working at the company and may qualify for the 408(k) regardless of the number of years they have worked for the company if they are part of the executive staff. The executive staff includes the following positions: CEO, CTO, CFO, President, Vice President, Director. All other employees qualify for the 408(k) once they meet the 3 out of 5 year requirement.

This seems like a less restrictive requirement that we can set up and allows us to fund the SEP IRA's for owners and/or executive staff as an incentive to attract people at those positions, while also not mandating that we fund everyone's SEP IRA immediately.

4.72.17.4  (07-06-2016)
Coverage and Participation Requirements

 

1. All eligible employees must be allowed to participate. An eligible employee is an employee who:

   1. Is at least 21 years old. See IRC 408(k)(2)(A).

   2. Has performed service for the employer in at least three of the immediately preceding five years. See IRC 408(k)(2)(B).

   3. Has received at least $450 in compensation (as adjusted under IRC 408(k)(8)) from the employer for the current year. See IRC 408(k)(2)(C). Also see IRM 4.72.17.13 for the SEP minimum compensation limits.

2. An employer may establish less restrictive eligibility requirements than these.

 

[Mike Preston]

You are kidding, right?

[My 2 cents]

9 minutes ago, Mike Preston said:

You are kidding, right?

I think he means "You want to establish less restrictive eligibility requirements for owners and officers but apply the more restrictive normal eligibility requirements to everyone else?  You are kidding, right?"

Mike, is that what you meant?

[Kevin C]

No, you can't do that.  Whatever eligibility requirements they select apply to all employees.  The Form 8905-SEP or document used to establish the SEP should clearly say that.

We have a huge volume of rules in ERISA and the Internal Revenue Code intended to prevent the type of discrimination you are asking about.

 

[senorsassy]

On 5/10/2017 at 3:37 PM, Kevin C said:

The IRS rules do state that you can create less restrictive eligibility requirements than what is posted for the 408(k). It doesn't really give much guidance on what the less restrictive eligibility requirements are though. What I am asking is can we keep the normal eligibility requirements (not more restrictive... just the normal posted requirements), but establish less restrictive requirements such as you can participate early if you qualify for any reason such as "your name is Fred", or you can participate early if you make less than $10,000 per year... etc. Anything that allows people in early is considered a less restrictive requirement, not more restrictive. I do not see anywhere listed in the IRS publications that establish what a less restrictive requirement can be.

 

[My 2 cents]

The problem is that you cannot treat officers and highly paid employees more favorably than the other people (i.e., give officers more favorable rules than required but not the rank and file).  That is a first principle of tax-favored retirement plans.

[senorsassy]

That makes sense. Why the heck does the IRS have that stupid rule listed in their law then?!!! This is an incredibly poorly written rule:

"An employer may establish less restrictive eligibility requirements than these".

Thank you for the help on this.

[My 2 cents]

25 minutes ago, senorsassy said:

That makes sense. Why the heck does the IRS have that stupid rule listed in their law then?!!! This is an incredibly poorly written rule:

"An employer may establish less restrictive eligibility requirements than these".

Thank you for the help on this.

FOR EVERYONE!  May, but don't have to, but if you do, make sure that it benefits the lowest paid as well as the highest. Don't discriminate!  Stop thinking of the officers first, as though their interests are all that matter.  The favorable tax treatment is there to help take the sting out of spending money on the rank and file.

[Lou S.]

3 hours ago, senorsassy said:

That makes sense. Why the heck does the IRS have that stupid rule listed in their law then?!!! This is an incredibly poorly written rule:

"An employer may establish less restrictive eligibility requirements than these".

Thank you for the help on this.

SEP is Simplified Employee Pension. It is very basic and covers everyone who meets the conditions listed in eligibility but those conditions apply to every employee and everyone generally gets the same rate of contribution. It is well simple.

If you want a complicated plan that has different eligibility and or different rates of contributions for different groups of employees you can do it with other types of plans (as long as you pass discrimination testing) but you can't do it with a SEP.

That said, it's unlikely you could accomplish what you are trying to do even in a qualified plan because of that pesky nondiscrimination testing.

[spiritrider]

7 hours ago, senorsassy said:

That makes sense. Why the heck does the IRS have that stupid rule listed in their law then?!!! This is an incredibly poorly written rule:

"An employer may establish less restrictive eligibility requirements than these".

Thank you for the help on this.

Sorry, but this section is very clearly written. The "less restrictive" "than these" from 2. clearly refers to the list under 1. For example:

A. You could specify age 18 minimum instead of 21.

B. You could specify minimum employment of one year of the last one year instead of 3 of 5.

C You could have no minimum compensation requirement