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Sieve

Sep 25 2009, 03:13 PM

I did not think that an employee eligible to participate in an SEP could waive participation (as is permitted in a qualified plan), since there is no comparable test to IRC Section 410(b), but the following appears in the Instructions to IRS Form SEP-5305 (the IRS SEP document):

"SEP participation. If your employer does not require you to participate in a SEP as a condition of employment, and you elect not to participate, all other employees of your employer may be prohibited from participating. If one or more eligible employees do not participate and the employer tries to establish a SEP for the remaining employees, it could cause adverse tax consequences for the participating employees."

So, what are the standards (if any) relating to waiver of participation? Can an HCE waive? Or is the IRS statement nothing more than stating the obvious: limitations on SEP participation, even voluntary waivers, are impermissible?

jevd

Sep 25 2009, 03:27 PM

QUOTE (Sieve @ Sep 25 2009, 02:13 PM)

I did not think that an employee eligible to participate in an SEP could waive participation (as is permitted in a qualified plan), since there is no comparable test to IRC Section 410(b), but the following appears in the Instructions to IRS Form SEP-5305 (the IRS SEP document):

"SEP participation. If your employer does not require you to participate in a SEP as a condition of employment, and you elect not to participate, all other employees of your employer may be prohibited from participating. If one or more eligible employees do not participate and the employer tries to establish a SEP for the remaining employees, it could cause adverse tax consequences for the participating employees."

So, what are the standards (if any) relating to waiver of participation? Can an HCE waive? Or is the IRS statement nothing more than stating the obvious: limitations on SEP participation, even voluntary waivers, are impermissible?

My understanding is that no waivers are permitted. Period. That's why employers have the right to set up Traditional IRAs for unwilling, deceased or missing employees.

Sieve

Sep 25 2009, 03:54 PM

So, if the 72-year old owner did not want to participate, he/she could not use an SEP, correct?

jevd

Sep 25 2009, 03:57 PM

QUOTE (Sieve @ Sep 25 2009, 02:54 PM)

So, if the 72-year old owner did not want to participate, he/she could not use an SEP, correct?

Correct. However, he/she could take a distribution immediately after the deposit. Taxable to him/her but offset by business deduction.