SEP IRA eligibility rules
Last updated August 2026
Short answer
For a business of one, eligibility is a formality. For a business with part-time or seasonal workers, it is the whole question, and the three-of-five test catches more people than employers expect.
The three tests
Age 21 or older during the year.
Service in at least three of the immediately preceding five years, where any work at all in a year counts as a year.
Compensation of at least the minimum amount for the year, which is a low threshold set by the IRS and adjusted for inflation.
Why the service test catches people
It counts years, not hours. A student who worked three summers is eligible in the fourth year.
The five-year window looks backwards from the current year, so someone who has since reduced their hours can still qualify.
Employers who assume part-time staff are excluded discover otherwise at exactly the point they want to make a large contribution for themselves.
The uniform percentage requirement
Whatever percentage of compensation the owner receives, every eligible employee receives.
A 20% contribution for an owner earning $150,000 is $30,000, and the same 20% applies to a $40,000 employee, costing another $8,000.
There is no vesting schedule to soften it. The money belongs to the employee immediately.
Try it in Walnut
Walnut connects to your brokerage and reads a SEP IRA alongside everything else, which for a self-employed saver is usually several accounts in different places.
Making the rules easier, not harder
An employer may set lower thresholds: no age requirement, one year of service, or no minimum compensation.
Nothing permits going the other way, so a plan cannot require five years of service or exclude part-time staff.
Where broader coverage is affordable, easier terms simplify administration and reduce the chance of an eligibility failure later.
When a different plan fits better
With several employees, a SIMPLE IRA or a 401(k) usually costs less, because the employer obligation is smaller and employees fund part of it themselves.
With no employees, a solo 401(k) generally allows a larger contribution at moderate income and adds a catch-up after 50.
The SEP keeps its advantage on simplicity and on the extended deadline, which is a real consideration for irregular self-employed income.
Documenting the plan
Most SEPs are established on IRS Form 5305-SEP, which is completed and retained rather than filed with the IRS.
Employees must receive a copy, along with notice of the contribution made for the year.
A prototype plan from a financial institution is the alternative where the standard form is too restrictive, such as when integrating with Social Security.
Sources
Eligibility conditions, permitted exclusions, the uniform percentage requirement and Form 5305-SEP are covered in IRS Publication 560, with the 2026 compensation cap in Notice 2025-67. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax advice.
FAQ
Who is eligible for a SEP IRA?
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Any employee who is at least 21, has worked for the employer in at least three of the immediately preceding five years, and received at least the minimum compensation for the year. The employer may set easier conditions but not stricter ones.
Does part-time work count toward the three years?
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Yes. Any work in a year counts as a year of service for this test, however brief. Someone who worked a few weeks in each of three years can be eligible, which surprises employers who assume the test is about hours.
Can I exclude anyone?
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Employees covered by a collective bargaining agreement where retirement benefits were bargained, and certain nonresident aliens with no US source income, may be excluded. Beyond that, exclusions are narrow.
Do I have to contribute the same percentage for everyone?
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Yes. Every eligible employee receives the same percentage of compensation as the owner. That single rule is what makes a SEP inexpensive with no employees and expensive with several.
Can I open a SEP if I have a side business?
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Yes, based on that business's net earnings, even while employed elsewhere with a 401(k). Watch the controlled group rules if you also own or partly own another business, because related businesses can be treated as one employer.
Am I eligible if my business made a loss?
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No. A SEP contribution requires net earnings from self-employment, so a loss year means no contribution. Nothing is owed and nothing is contributed, which is part of the plan's flexibility.
Do I need to include a spouse who works in the business?
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If they meet the eligibility tests, yes. For many couples that is an advantage rather than a cost, since it doubles the household's tax-deferred contribution capacity.
What form establishes the plan?
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Most providers use IRS Form 5305-SEP, a one-page document you complete and keep rather than file. A prototype plan from a financial institution is the alternative where more flexibility is needed.
Do I have to file anything to set one up?
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Usually not. Form 5305-SEP is completed and retained rather than filed with the IRS, and employees receive a copy plus notice of the contribution made. A prototype plan from a financial institution is the alternative where the standard form is too restrictive.
What counts as the minimum compensation?
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A low threshold set by the IRS and adjusted for inflation, which most part-time workers clear. Because any work in a year also counts as a year of service, the compensation test rarely excludes anyone the service test has already included.