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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
SARSEP and 401 (k) plans represent options previously available to the employers in which their employees could decide to make elective deferrals.
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.
The IRS reports that some SARSEP plans have been terminated as a result of their examinations.
To be eligible to use a SARSEP, an employer may not have employed more than 25 eligible employees during the tax year, and at least 50% of these employees must choose to participate in the plan.
"Highly compensated employees" are defined for SARSEP purposes as an employee who, during the year was:
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.
* No matching or QNECs: No matching contributions are allowed to a SARSEP, and excess deferrals cannot be corrected with qualified nonelective contributions (QNECs).
* 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).
Likewise, salary reduction SEPs (SARSEPs) are promoted as "no cost" alternatives to Sec.