SEP IRA rules confusion

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Boston Barry
Posts: 125
Joined: Sat Jan 14, 2017 4:55 pm

SEP IRA rules confusion

Post by Boston Barry » Tue Jun 30, 2020 11:59 pm

My wife owns / runs a small retail business (LLC). She has one full-time employee, whom she had to lay off March 16-May 8 because of CoVid (store had to close).

Her accountant said that she could open a SEP-IRA and contribute 14K to it, based on the business earnings for 2019. Tragically, the accountant died (within the past month) before further questions could be clarified.

The business opened in 2017. The current employee started mid 2018, and is back again after the layoff from March-May.

The accountant never mentioned that the employee would qualify for SEP IRA but I don’t know how to structure it for my wife to avoid having employee included. Any advice? There is the 3/5 rule, but I am not clear whether the SEP IRA has to have been established in 2017 for my wife to be able to contribute under the “have to have worked at least 3 of the past 5 years” or whether a sep Ira can be established in 2019 with a 3/5 rule and, because she has been operating since 2017, she can make a 2019 contribution.

Thanks in advance for any guidance

Thanks In advance.

Spirit Rider
Posts: 13177
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP IRA rules confusion

Post by Spirit Rider » Wed Jul 01, 2020 12:33 am

The 3 of 5 year rule is based on prior years of service. Adopting a plan for the 2019 means the prior years of service begin in 2018. This means she would have two (2) prior years of service and the employee would have one (1) prior year of service.

Employee eligibility restrictions apply to all employees including the owner. If she elects 3 of 5, neither the owner or employee can receive 2019 SEP IRA employer contributions. If she elects 2 of 5, only the owner is eligible to receive 2019 SEP IRA employer contributions. The employee will not be eligible for 2019, but will be eligible for 2020.

Topic Author
Boston Barry
Posts: 125
Joined: Sat Jan 14, 2017 4:55 pm

Re: SEP IRA rules confusion

Post by Boston Barry » Wed Jul 01, 2020 6:31 pm

I don’t begin to understand the rules, but my reading online says that if you earned $600+ in a year then you qualify.

Employee worked there July 2018-March 2020, then laid off. Then rehired May 2020.

Wife worked / owned continuously October 2017-present.

Want to do SEP IRA contribution now, counting toward 2019 tax year. Is there any way to structure the eligibility so that my wife can contribute for 2019 without employee being eligible?

“ An employee will be eligible to become a Participant in the Plan after having perform service for the Employer during at least (0,1,2 or 3) of the immediately preceding five Plan Years.”

Thanks again and sorry I am not understanding...

Spirit Rider
Posts: 13177
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP IRA rules confusion

Post by Spirit Rider » Wed Jul 01, 2020 11:18 pm

From the IRS SEP IRA FAQ: Employees must be included in the SEP plan if they have:
  • attained age 21;
  • worked for your business in at least 3 of the last 5 years;
  • received at least $600 in compensation (in 2016 - 2020) from your business for the year.
Your plan may use less restrictive requirements, for example age 18 or three months of service, to determine which employees are eligible.

My previous post was very clear. Notwithstanding the other employee eligibility restriction, if she elects 2 of 5 prior years of service. She can receive contributions for 2019 and the employee will not be eligible until 2020.

Topic Author
Boston Barry
Posts: 125
Joined: Sat Jan 14, 2017 4:55 pm

Re: SEP IRA rules confusion

Post by Boston Barry » Thu Jul 02, 2020 10:58 am

Ok I see now — the 2019 year does not count toward the tally of needed 2 of 5 previous years. Thanks!!

Lee_WSP
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Location: Arizona

Re: SEP IRA rules confusion

Post by Lee_WSP » Thu Jul 02, 2020 9:34 pm

Boston Barry wrote:
Thu Jul 02, 2020 10:58 am
Ok I see now — the 2019 year does not count toward the tally of needed 2 of 5 previous years. Thanks!!
Correct. But she needs to start thinking about 2020 right now. She still has time to setup a simple IRA or 401k if she doesn't want to do a sep.

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