Salary Reduction Simplified Employee Pension Plan

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Salary Reduction Simplified Employee Pension Plan (SARSEP)

A low-cost, no-frills version of a 401(k) employee savings plan available to companies with 25 or fewer employees. It allows employees to make pretax contributions to their IRAs through salary reduction each year. The Small Business Job Protection Act of 1996 replaced SARSEPs with SIMPLE (Savings Incentive Match Plan for Employees) plans. Existing SARSEPs were allowed to add new participants, but new plans could not be formed after December 31, 1996.

Salary Reduction Simplified Employee Pension Plan

A former 401(k) for small businesses, defined as those with fewer than 25 employees. This plan minimized costs for the employer, and employees could make contributions through paycheck deductions. It was replaced by the SIMPLE plan in 1996.
References in periodicals archive ?
The nondiscrimination provision of SARSEP and 401 (k) plans may further limit the elective deferral amounts allowed to highly-compensated employees.
Although employers generally are not required to make contributions on behalf of employees under a SARSEP or 401 (k) plan, they are required if the plans are top-heavy.
SARSEP plans are limited to businesses with 25 or fewer employees, at least half of whom must participate.
SIMPLE and SARSEP plans require immediate vesting of contributions.
A 401(k) plan must be adopted by the last day of the company's tax year, whereas a SARSEP can be adopted any time up to the due date (plus extensions) of the company's tax return.
The IRS reports that some SARSEP plans have been terminated as a result of their examinations.
No matching or QNECs: No matching contributions are allowed to a SARSEP, and excess deferrals cannot be corrected with qualified nonelective contributions (QNECs).
Note also that under the IRS SARSEP document (Form 5305ASEP), the plan is automatically deemed to be top-heavy, therefore requiring profit-sharing contributions whenever a key employee contributes.
15% individual limit: The maximum combined contribution for any one individual in a SEP or SARSEP is 15% of compensation, while in qualified plans the individual allocation limit is 25% of compensation (subject in all cases to a $30,000 maximum).
While there are certain similarities in the applicable rules, SEPs and SARSEPs are subject to special rules and limitations not applicable to qualified plans that are often misunderstood or misinter-preted by the person (usually not a professional adviser) "administering" the SEP program.