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.
Employer matching contributions, whether to a 401 (k), a SARSEP, or SIMPLE plan must be made by the due date (plus extensions) of the company s tax return.
The need to constantly monitor the SARSEP for ADP compliance diminishes the attractiveness of a SARSEP as a simplified 401(k), and makes self-administration of the SARSEP for the small business difficult.
The nondiscrimination rules can limit the attractiveness of a SARSEP to small businesses by making it more expensive for the owners to make contributions on their own behalf.
In SARSEPs, deferrals by highly compensated employees, as a percentage of pay, cannot exceed 125% of the average deferral percentage of all non-highly compensated employees eligible to participate in the plan.
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.
SEPs and SARSEPs are all too often "administered" by the client's payroll department or by a financial adviser who lacks the training and experience to monitor the program's compliance with the many nuances related to SEPs and SARSEPs.