PARTICIPATION REQUIREMENTS

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#006699" TEXT="#080000" bgproperties="fixed" background="0be285a1erlcgo.gif"> <div> <FONT SIZE="5" COLOR="#FFCC66" FACE="Arial" ><B>INDIVIDUAL RETIREMENT ACCOUNTS</B></FONT><B>     |     </B><A HREF="index.htm" TARGET="_top" TITLE="INDIVIDUAL RETIREMENT ACCOUNTS"><U><B>home</B></U></A></div> <div> <A HREF="id22.htm" TARGET="_top" TITLE="TRADITIONAL IRAs"><U>TRADITIONAL  IRAs</U></A>   |   <A HREF="id23.htm" TARGET="_top" TITLE="ROTH IRAs"><U>ROTH IRAs</U></A>   |   <A HREF="id24.htm" TARGET="_top" TITLE="SIMPLIFIED EMPLOYEE PENSIONS (SEPIRAs)"><U>SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAs)</U></A>   |   <A HREF="id26.htm" TARGET="_top" TITLE="SIMPLE IRAs"><U>SIMPLE IRAs</U></A>   |   <A HREF="id25.htm" TARGET="_top" TITLE="IRA Custodians"><U>IRA Custodians</U></A>   |   <A HREF="id72.htm" TARGET="_top" TITLE="Savers Credit"><U>Saver's Credit</U></A>   |   <A HREF="id89.htm" TARGET="_top" TITLE="REVIEW QUESTIONS"><U>REVIEW QUESTIONS</U></A>   |   <A HREF="id50.htm" TARGET="_top" TITLE="PRINTABLE VERSION"><U>PRINTABLE VERSION</U></A></div> <div> </div> </td> </tr><tr> <td valign="top" width=210 BGCOLOR="#FFCC66" TEXT="#080000" background="0bdd2c00dkelyh.gif"> <div> <A HREF="http://www.wallstreetinstructors.com" TARGET="_top" TITLE="http://www.wallstreetinstructors.com"><U><IMG SRC="0caaf630.gif" border=0 width="175" height="99" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></U></A></div> <div> copyright © 2002-2007 Wall Street Instructors, Inc.  All rights reserved.  </div> <bR> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="164" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#FFFFFF > <tR> <tD VALIGN=TOP HEIGHT= 20 ><NOBR><div> <A HREF="mailto:instructor@wallstreetinstructors.com" TARGET="_top" TITLE="mailto:instructor@wallstreetinstructors."><U><B>E-Mail An Instructor</B></U></A></div> </NOBR></tD> </tR> </TABLE></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Module 3</B></div> <div> <B>SEP- IRAs</B></div> <div> <B>__________________</B></div> <div> <A HREF="id77.htm" TARGET="_top" TITLE="WHAT IS A SEP PLAN?"><U><B>WHAT IS A SEP PLAN?</B></U></A></div> <div> <B>PARTICIPATION REQUIREMENTS</B></div> <div> <A HREF="id79.htm" TARGET="_top" TITLE="CONTRIBUTIONS"><U><B>CONTRIBUTIONS</B></U></A></div> <div> <A HREF="id80.htm" TARGET="_top" TITLE="PLAN ADMINISTRATION"><U><B>PLAN ADMINISTRATION</B></U></A></div> <div> <A HREF="id81.htm" TARGET="_top" TITLE="SALARY REDUCTION PLANS (SARSEPs)"><U><B>SALARY REDUCTION PLANS (SARSEPs)</B></U></A></div> <div> <A HREF="id93.htm" TARGET="_top" TITLE="Review Questions Module 3"><U><B>Review Questions Module 3</B></U></A></div> <bR> </td> <td valign="top" height=390 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <I>PARTICIPATION REQUIREMENTS</I></div> <bR> <div> <B> <A NAME="eligible_employees"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>Eligible employees</B></div> <bR> <div> If an employer contributes to a SEP, the employer must contribute for each employee who has reached the age of 21, has worked for the employer in at least three of the immediately preceding five years, and received at least $300 in compensation from that employer for the year that the contribution is made. The $300 per employee compensation requirement is indexed for inflation -- for 2007 the compensation threshold is $500. Employers can set less (but not more) restrictive participation requirements if they wish — by simply filling in the appropriate amounts on Form 5305-SEP.</div> <bR> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="10" CELLSPACING="1" WIDTH="483" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 213 WIDTH="455"><div> <B>Example: </B></div> <bR> <div> <B>Spinning Disc Music Co, Inc. maintains a SEP. Doug Roberts worked for Spinning Disc while in college in 2002, 2003, and 2004, never working more than 35 days in a particular year. In February 2007, Doug turns 21. In April, Doug begins working for Spinning Disc on a full-time basis, earning $30,000. Spinning Disc must make a SEP contribution for Doug in 2007 because he meets the minimum age requirement, the minimum compensation requirement for 2007, and has worked for Spinning Disc in 3 of the 5 years preceding 2007.</B></div> <bR> </tD> </tR> </TABLE></div> <bR> <bR> <div> The “three-out-of-five” year service requirement for SEP participation is unique among qualified plans, but it is an effective means of restricting participation to those employees who have devoted a substantial amount of time to a company. Most other types of qualified plans allow employees to participate after one or two years of service.</div> <bR> <div> All employees who are employed by a commonly-controlled group of businesses or all employees of an affiliated group are treated as if they were employed by a single employer. The “single employer” rule for controlled groups can work to the advantage of a business owner who owns several businesses but wants to have the low administrative and documentation costs of one SEP for all of its employees.</div> <bR> <div> If an employer uses “leased employees”, those employees generally must be included in SEP coverage. Leased employees include those whose services are provided under an agreement between the employer and a leasing organization. To be eligible for SEP participation, a leased employee’s services must be performed for the employer on a substantially full-time basis for at least one year and must be of a type historically performed by employees in that organization’s field of business.</div> <bR> <div> Employers must contribute on behalf of all employees who meet the SEP eligibility requirements during the year for which a contribution is made.  This includes any individuals who are no longer employed when the contribution is made: employers must contribute on behalf of those no longer working who meet the eligibility requirement,  employees who died during the year, and even those whose whereabouts is unknown.</div> <bR> <div> If a former or current employee established an IRA but closed it prior to the date of the employer’s SEP contribution, the employer must establish an IRA on behalf of that employee. The employer must deliver a notice either in person or by mail to the employee’s last known address.  The same applies for employees who have never opened an IRA.  The IRS permits employers to safeguard the tax qualification of their SEPs by establishing IRAs on behalf of employees who refuse to do so or cannot be located.</div> <bR> <div> If an employee is not required to participate in a SEP as a condition of employment, the employee’s election not to participate may also prevent all other employees of the employer from participating in the SEP.   For this reason, employers who establish a SEP should mandate participation in the plan by all eligible employees.</div> <bR> <div> Employers need not make SEP contributions for employees who are nonresident aliens and have no U.S. source of earned income. SEP plans may also exclude employees who are covered by a collective bargaining agreement in which retirement benefits were negotiated.  The employer indicates its decision to include or exclude these employees by checking the appropriate boxes on Form 5305-SEP.</div> <bR> <bR> <bR> <div> <B> <A NAME="nondiscrimination"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>Nondiscrimination</B></div> <bR> <div> As with qualified plans, employer contributions to a SEP must not discriminate in favor of any officer, shareholder or “highly compensated employee” as defined in the Internal Revenue Code. These employees are known as the "prohibited group".   Generally, the IRS considers a SEP plan “nondiscriminatory” if the employer contributes: </div> <bR> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">a flat percentage of earnings,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">a fixed dollar amount, or </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">a formula in which contributions actually decrease as an employee's earnings increase.</div> <bR> <div> SEPs are discriminatory unless the employer contributions bear a "uniform relationship" to compensation.</div> <div>  </div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="10" CELLSPACING="1" WIDTH="483" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 231 WIDTH="455"><div> <B>Example: </B></div> <bR> <div> <B>Spinning Disc Records installs a SEP in which it contributes for each active employee. The company proposes to contribute to the SEP 10% of the total compensation of each employee who has completed up to five years of service and 12% of the total compensation of each employee who has completed more than five years of service. The IRS will rule Spinning Disc's SEP to be discriminatory because employer contributions are based on non-compensation factors, i.e. years of service.  This type of plan does not bear a uniform relationship to each employee's compensation.</B></div> <bR> </tD> </tR> </TABLE></div> <bR> <bR> <div> Similarly, plans that propose to contribute higher percentages on behalf of highly-compensated employees would be discriminatory.</div> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="10" CELLSPACING="1" WIDTH="483" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 142 WIDTH="455"><div> <B>Example: </B></div> <bR> <div> <B>Spinning Disc Records proposes to contribute to the SEP 10% of the an employee's first $50,000 of compensation and 12% of any compensation in excess of $50,000. This formula would also be disallowed by the IRS since it favors higher-paid employees at the expense of lower-paid workers.</B></div> <bR> </tD> </tR> </TABLE></div> <bR> <bR> <div> Or, a rate of contribution that actually decreases as compensation increases is considered "uniform" - that is to say, allowable under IRS guidelines. </div> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="10" CELLSPACING="1" WIDTH="483" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 142 WIDTH="455"><div> <B>Example: </B></div> <bR> <div> <B>Spinning Disc installs a SEP under which it will contribute 15% of an employee's first $15,000 in compensation and 10% of all compensation above $15,000. The company's SEP will not be considered discriminatory because the rate of contribution decreases as compensation increases.</B></div> <bR> </tD> </tR> </TABLE></div> <bR> <bR> <bR> <div> The IRS also allows a contribution method that requires an identical dollar amount to be contributed for all participants.    </div> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="10" CELLSPACING="1" WIDTH="483" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 124 WIDTH="455"><div> <B>Example: </B></div> <bR> <div> <B>Spinning Disc proposes to contribute $3,500 to each eligible employee's SEP-IRA, regardless of the employee's income.  Although not based on compensation, the IRS will allow such a "fixed dollar" formula.</B></div> <div> <B> </B></div> </tD> </tR> </TABLE></div> <bR> <bR> <div> To limit the size of contributions made on behalf of highly-paid employees, employers must limit the total amount of annual compensation taken into consideration when making a SEP contribution to $150,000 (adjusted for inflation — or $225,000 in 2007).  </div> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="10" CELLSPACING="1" WIDTH="483" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 214 WIDTH="455"><div> <B>Example: </B></div> <bR> <div> <B>Spinning Disc Music has three eligible employees: Doug Roberts earned $30,000 in 2007, John Thompson earned $50,000, and Jane Morgan, the owner, earned $260,000.  The SEP plan calls for a 10% contribution to each employee's IRA.  Spinning Disc will contribute $3,000 to Roberts' IRA (10% of $30,000) and $5,000 for Thompson (10% of $50,000).  When computing the contribution for Morgan, Spinning Disc may only consider her first $225,000 of compensation, so the contribution to her IRA will be $22,500 (10% of the "maximum" $225,000).</B></div> <bR> </tD> </tR> </TABLE></div> <bR> <div> For SEP nondiscrimination purposes, all employees who are employed by a commonly-controlled group of businesses or all employees of an affiliated group are treated as if they were employed by a single employer.  This eliminates the possibly of an employer creating another business entity to hire highly-paid employees and offering them more advantageous benefits than other employees.  In short, all employees of a controlled group of businesses must be treated “equally”. </div> <bR> <DIV ALIGN="LEFT"></DIV> <div>  </div> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="76" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#FFCC66 > <tR> <tD VALIGN=TOP HEIGHT= 23 WIDTH="64"><div> <A HREF="id79.htm" TARGET="_top" TITLE="CONTRIBUTIONS"><U><B>NEXT</B></U></A></div> </tD> </tR> </TABLE></div> <div> <I><B>  </B></I></div> <bR> </td> </tr></table></body>