SEP IRA - 3 out of 5 year rule

[JohnH]

This always throws me. I've seen it discussed before (maybe on the old board), but can't find it now.

When using a 3-year qualifying period for a SEP IRA contribution, does the year of the contribution count? For example, if the employee has earnings in 2006, can he be excluded if he had earnings in 2004 & 2005 but no earnings in 2001, 2002, & 2003? (This all assumes the employee was over the age limit and earnings exceeded the applicable amounts for all years in question)

[JohnH]

Cancel the question.

I found the answer.

I'm putting up the link so I can find it here if (or when) I forget again.

http://www.irs.gov/retirement/article/0,,id=111419,00.html#8

The year of the contribution does not count in the 5-year qualifying period.

It's 3 out of the 5 PRECEDING years.

In my example the employee is excluded unless the employer wants to shorten the qualifying period.