SEP and SIMPLE IRA Plans for Minors
Michelle Freiholtz, MBA, QPA, QKC, QKA®, CIP
Can an employer establish a SEP or SIMPLE IRA for a minor child employee?
Short answer, yes. Proposed Treas. Reg. 1.408-7(d)(2) and IRS Notice 98-4 allow an employer to establish an IRA and execute any other necessary documents for an employee who is not able or is unwilling to do so.
An employer may decide to limit employees in the retirement plan to avoid potential complications with employing a minor child. An employer with a SEP plan may exclude employees under the age of 21, employees who have not worked three out of the preceding five years, and/or who have less than $750 in compensation for 2024 (adjusted for COLAs). An employer with a SIMPLE IRA plan cannot limit participation by age but may exclude employees who did not have at least $5,000 in compensation during any two preceding years and/or an employee who is not expected to have at least $5,000 in compensation during the current year.
Conversely, a small business may prefer to design its SEP or SIMPLE IRA plan without limitations. This may be preferrable in a company where the owner’s minor children are also working for the company.
May an employer make contributions for a minor child employee?
SEP plan contributions are discretionary, but if an employer does make a SEP contribution, then all eligible employees must receive a contribution. SIMPLE IRA plans have a mandatory contribution; either a nonelective contribution or a matching contribution based on elective deferrals must be given to all eligible employees.
If the employer does not have employee eligibility restrictions, or if it employs a minor child who has satisfied the elected eligibility requirements, the employer would be obligated to make an employer contribution to the child as applicable.
May a minor child make deferrals to a SIMPLE IRA plan?
Maybe. Outside of the requirement that the minor child has earned income, the bulk of the answer would fall under state law. Each state has its own laws regarding child labor. Most states require parental consent for a minor child to work, sometimes with additional restrictions based on the minor’s age. Also, minor children generally cannot execute contracts on their own behalf. The combination of these rules may require parental involvement for a minor child to defer into the plan.
