Assume an employee worked during 2001, 2002 and 2003. Does the 3-year qualification requirement mean that they do not participate in a SEP until 2004 (i.e. they had to work 3 out of 5 "preceding" years), or do they participate in 2003--the 3rd year of employment? Thanks!

SEP eligibility is 3 of prior 5 years....if someone works for you three consecutive years, they become eligible in the 4th year. In your example, they become a participant in 2004

SEP eligibility is pursuant to the options filled in on the SEP document. While it can be filled in with "3 of the last 5", it might be filled in with "2 of the last 5". So, check the document before assuming it is always "3 of the last 5". I agree that if the person is full time and was employed in 2001, 2002 and 2003 then that person first participates in 2004 assuming the document was filled in with "3 of the last 5".

Mike, I am sure you know, but just to clarify for anyone who may not… for SEP purposes, a year of service in a SEP IRA is any period, however short. Therefore, an individual who works even only for a few days in the year is considered to have accrued one year of service [read: "perfomed service during that year (regardless of whether they are paid or not" -- gsl], whether the service was performed on a full time or part time basis.

Actually, I was trying to avoid the issue. ;-)

Correct me if I'm wrong, but while the individual could work as little as 1 hour in each of the three years, the individual must have $450 in compensation in 2004 in order to be eligible for a contribution. Agreed?

Agreed.
The employer could choose to waive that requirement, thereby allowing individuals who earn less than $450(indexed), to be eligible, providing they meet all other eligibility requirements. .