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SARSEP Plan Audits Reveal Common Failures

Ten years of audits of  SARSEP IRA plans by the Employee Plans examination program has shown that plan sponsors are making common operational errors.  If a plan failure is significant:

  • the plan will be ineligible for salary deferrals, and
  • employer plan contributions will be nondeductible

Common SARSEP plan failures found on audit

Plan sponsors:

  • didn't perform the annual deferral percentage test for eligible salary deferral contributions, or had failed in several tax years (IRC section 408(k)(6)(A)(iii))
  • didn’t update the plan for EGTRRA, or adopt the IRS model plan Form 5305A-SEP, Salary Reduction Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement, with the June 2006 or later revision date but used the higher contribution limitations from EGTRRA (Revenue Procedure 2002-10)
  • failed the 50% participation rule because at least 50% of the eligible employees in the plan didn’t make salary deferrals (IRC section 408(k)(6)(A)(ii))
  • didn’t provide top-heavy minimum benefits required by the IRS model SARSEP plan or IRC section 416
  • didn’t deposit salary deferrals on time – as soon as the amounts can reasonably be segregated from the employer’s general assets but no later than 15 business days following the month in which the employee would’ve otherwise received the money. The Dept. of Labor provides a 7-business day safe harbor rule for depositing salary deferrals for plans with fewer than 100 employees. Note: this failure can also be considered a prohibited transaction
  • didn’t have a signed SARSEP plan document
  • weren’t eligible to sponsor a SARSEP plan because they:
    • exceeded the maximum number of 25 employees (IRC section 408(k))
    • had another IRC 401(a) plan
    • were an IRC section 501(c) tax-exempt organization, which isn't allowed to sponsor a SARSEP plan
  • didn’t allow employees who met the eligibility requirements (age 21, up to 3 of any prior 5 years service with $550 in compensation or as elected in the plan document) to timely participate in the plan
  • made ineligible matching contributions
  • allowed highly compensated employees to make salary deferrals in excess of the annual limits

Tips to prevent errors

SARSEP plan sponsors can prevent these common errors by knowing their plan’s requirements and:

  • following the basic steps in operating a SARSEP plan
  • reviewing the IRS SARSEP Fix-It Guide
  • updating their plan for the EGTRRA provisions
  • keeping a copy of their plan document on hand to refer to the key plan provisions
  • performing all required annual testing for the plan

Use our tips to review your plan. If you find errors, you can correct them by using our Employee Plans Compliance Resolution System (EPCRS) to avoid these consequences.

The Small Business Jobs Protection Act of 1996 replaced SARSEP plans with SIMPLE IRA plans. No new SARSEP plans could have been started after December 31, 1996, but existing SARSEP plans were allowed to continue operating after this date. The IRS estimates there are currently 25,000 to 30,000 active SARSEP plans.

Additional Resources:

Page Last Reviewed or Updated: 02-Apr-2014