SARSEPs

April 13, 2006

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Salary reduction simplified employee pension plans (SARSEPs) are a type of pension plan that, as of 1997, are no longer available. Those who already have such plans can continue to contribute to them, and add accounts for new employees, but no new SARSEPs can be set up.

SARSEPs are SEPs that act like 401(k) plans in the sense that employees who participate in the SARSEP can elect to have salary-reduction contributions made to the SEP, just as they can in a 401(k) plan.

Basic rules. The amount that can be deferred in a SARSEP is the lesser of 25 percent of compensation up to $225,000 or $45,000 for 2007 (the lesser of 25 percent of compensation up to $220,000 or $44,000 in 2006; this amount may be adjusted for inflation). To participate, an employee must be at least 21, must have worked for you in at least three of the preceding five years, and must have received at least $500 in compensation for the year in which the contribution was made. The $500 amount is for 2007 ($450 for 2006) and may be adjusted for inflation. The election to use a SARSEP is available only if (1) at least 50 percent of the employees who are eligible to participate elect to have amounts contributed to the SEP and (2) you have no more than 25 eligible employees.

Among the Business Tools is a SARSEP checklist intended to aid in keeping SARSEP plans in compliance with tax rules. It is in Adobe Portable Document Format (.pdf), and you will need the free Acrobat Reader to view and print the file.