Who Qualifies for SEP Retirement Plans?
SEP retirement plans (also known as SEP IRAs) are set up by employers for the benefit of qualified employees. Nearly any type of employer can set up an SEP, although most are established by small companies and the self-employed. An employee qualifies for an SEP contribution if he meets certain eligibility requirements.
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Basic Eligibility
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If you are an employer, your employees qualify for SEP contributions if they meet certain requirements. The requirements as of 2010 are: they must be 21 years of age or older, they must have worked for you in three of the last five years, and they must have received a minimum compensation of at least $550.
Clarifications
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For purposes of SEP plan eligibility, an employee is considered to have worked for you if she meets the employment qualifications listed above. You, as employer, must be able to control the outcome of the work, and provide her with the tools and space she needs to complete the work. You must also be able to fire her.
Leased employees come under slightly different rules. A leased employee qualifies for an SEP contribution if he is substantially under your control, provides services based on a contract between your company and the leasing agency, and has worked for you full-time for the last year.
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Self-Employed Persons
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Self-employed persons are also eligible for SEP IRA contributions, either as a sole employee or as the business owner. You are considered self-employed for retirement plan purposes if you produce material income from your services, and you are not a common-law employee of someone else.
In simple terms, this means you must earn all or part of your income while under your own control. You provide your own tools and workspace, you are in business for yourself and your business is not incorporated.
Exclusions
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Employers are not required to provide SEP contributions participants in collective bargaining agreements, or for foreign nationals who do not receive income from sources within the United States.
An employer cannot add more restrictions to eligibility than outlined above, but she may elect to loosen the eligibility requirements if it is suitable for her business.
Mandatory Participation
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If an employer creates an SEP plan, all eligible employees must receive contributions, whether or not they choose to participate. This may affect their ability to deduct contributions to other IRA types, depending on the employee's income. It does not prevent them from establishing and funding other IRAs, nor does it affect any tax benefit received from those IRAs.
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