What are the eligibility requirements for a Simplified Employee Pension (SEP) plan?

For a Simplified Employee Pension (SEP) plan, the eligibility requirements are designed to ensure that employees have a certain level of service and compensation before becoming eligible for contributions made by the employer. The correct eligibility criteria stipulate that employees must be at least 21 years old, have worked for the employer for at least three out of the last five years, and have received at least $600 in compensation during the year.

Choosing the criteria of employees age 21 or older who have worked in three of the last five years and earned at least $600 aligns perfectly with the IRS regulations regarding SEP plans. This ensures that only employees with a certain degree of tenure and earnings are eligible, which helps employers manage their retirement contributions effectively.

Other criteria, such as just requiring employees simply to be 21 and having worked for two out of the last five years, would not meet the standard established by the IRS. Similarly, stating that all employees regardless of age or time worked qualify ignores the specific stipulations that regulate the employee benefit plans under SEP guidelines. The requirement of earning at least $600 in the current year further ensures that the employee is engaged in meaningful employment, reinforcing the intent behind the retirement savings structure provided by the SEP plan.