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SARSEP Fix-It Guide - You have more than 25 eligible employees

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2) You have more than 25 eligible employees.

Review payroll and plan document eligibility requirements for the prior year. If more than 25 employees were eligible to participate in the plan, no employee elective deferrals may be accepted in the current year.

 

Stop employee elective deferral contributions to the SEP-IRAs. If more than 25 employees became eligible during any year, stop withholding employee elective deferrals in the first pay period of the subsequent year and notify all employees.

Employees can’t make elective deferrals to a SARSEP for a year if the sponsoring employer had more than 25 employees who were eligible to participate (see Question 3) at any time during the preceding year.

The 25-employee rule is a look-back rule and it’s a year-by-year rule. For example, if you had 23 eligible employees in 2013, but 27 eligible employees in 2014, the 27 employees may make elective deferrals to their SEP-IRAs for 2014. However, in 2015, employees can’t make elective deferrals.

How to find the mistake:

Review payroll records and the plan eligibility and participation requirements for the prior year. If more than 25 employees were eligible to participate, you may not accept any employee elective deferrals in the current year.

  • Make a list of all employees who are eligible to participate in the plan.
  • If you had 26 or more eligible employees in any prior year, then you must suspend all elective deferrals until the year after the number of eligible employees drops below 26.
  • Review payroll records to ensure that no participant made salary deferrals in any of the pay periods of the suspended years.

How to fix the mistake:

Corrective action:

Stop making employee elective contributions to the plan. If the plan is not under audit by the IRS, you can file a VCP submission requesting that contributions made for previous years in which you had more than 25 employees remain in the employees’ SEP-IRAs.

Correction programs available:

Self-Correction Program:
This mistake cannot be corrected under SCP.

Voluntary Correction Program:
File a VCP submission to the IRS under Revenue Procedure 2013-12 identifying the failure, using the model documents, including Schedule 3 and Forms 8950 and 8951.The fee for the VCP submission is $250.

Audit CAP:
Under Audit CAP, correction of the mistake should be very similar to correction under VCP. The sanction under Audit CAP is a percentage of the maximum payment amount.

How to avoid the mistake:

Review the participation status of all employees at the end of each year to determine whether you had more than 25 eligible employees during the year. If more than 25 employees were eligible, you should cease withholding employee elective deferrals in the first pay period of the subsequent year and notify all employees of the situation.

SARSEP Fix-It Guide
SARSEP Plan Overview
EPCRS Overview
IRA-Based Plans Additional Resources

IRS.gov / Retirement Plans / Correcting Plan Errors / Fix-It Guides / SARSEP Plan Fix-It Guide / Potential Mistake

Page Last Reviewed or Updated: 04-Nov-2014