Due to a court settlement EE will receive W-2 showing gross income of $55,000 for 1998. As part of the settlement EE resigned effective 12/31/97. Is he in the SEP for '98 because of the W-2 or is he out because he performed no hours of service in '98?

Interesting question. Could you elaborate on the settlement, what happened, when, and so on? A SEP is not dependant on hours of service (but rather on the performance of services). Can we assume that the e/ee was once a participant? In 1997? Was any service performed during 1998 even though the effective date was 12/31/97? How is compensation defined in the document?