Salary Reduction Simplified Employee Pension Plan (SARSEP or SAR-SEP)

Definition

A simple employee pension plan (SEP), to which employees may make salary deferral contributions.

SARSEPs were repealed under the Small Business Job Protection Act of 1996 (SBJPA). However, employers that adopted a SARSEP by December 31, 1996 may continue maintaining those SARSEPs, as they were grandfathered under SBJPA.

An employer may maintain a SARSEP for a year, only if :

• The plan was established by December 31, 1996
• The employer had 25 or fewer employees who were eligible to participate in the plan in the preceding year.
• The employer uses the IRS model Form 5305A-SEP , a prototype  SEP or individually designed SARSEP plan document to adopt the plan

Salary deferral contributions to SARSEPs must satisfy the ADP test.  Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee, as a percentage of pay (the deferral percentage), cannot be more than 125% of the ADP of all eligible non-highly compensated employees.

The deferral percentage limitation must be computed each year.

The instructions for Form 5305A-SEP includes a worksheet that can be used to determine whether the elective deferrals of HCE employees meet the SARSEP ADP test.

A SARSEP is top-heavy when more than 60% of all contributions go to key employees. But since many SARSEPs are always top-heavy, SARSEPs are often drafted to operate as if they were always top-heavy, thereby eliminating the need to make the annual 60% determination.  When a SARSEP is top-heavy, non-key employees must receive a minimum employer contribution of up to 3% of pay. 

At least 50% of all eligible employees must salary deferral contributions to the SARSEP each year.  If less than 50% of eligible employees choose to make salary deferral contributions to the SARSEP for a year, all salary deferral contributions made by other eligible employees for that year are disallowed and must be withdrawn from the employees’ SEP-IRAs.

Referring Cite

IRC §408(k)(1)

Additional Helpful Information

• The nemployer must provide employees with notification of the adoption of a SARSEP, any subsequent amendment to it, the requirements for receiving contributions, and the amounts of excess deferrals if the ADP test was not satisfied

• The salary deferral limits for a SARSEP for 2002 to 2008 are as follows:

• The aggregate/total contributions to a participant’s SARSEP account cannot exceed the annual addition limit that is in effect for the year. The limits are :

• Individuals who are at least age 50 by the end of the year may make catch-up contributions in addition to the annual addition limit,
• The employer is not required to file Form 5500 returns for the SARSEP.

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