SARSEP Fix-It Guide - You haven’t updated your SARSEP plan document for current law
|Mistake||Find the Mistake||Fix the Mistake||Avoid the Mistake|
|1) You haven’t updated your SARSEP plan document for current law.||Determine if your Form 5305A-SEP or prototype is the current revision.||Adopt a current IRS Model Form 5305A-SEP or IRS-approved SARSEP prototype.||Maintain regular contact with the company that sold you the plan.|
The Small Business Jobs Protection Act of 1996 prospectively repealed SARSEPs. Therefore, employers cannot establish new SARSEPs after December 31, 1996. However, employers that established SARSEPs prior to January 1, 1997, can continue to maintain them and new employees hired after December 31, 1996, can participate in the existing SARSEP. The introduction of SIMPLE IRA plans under Internal Revenue Code Section 408(p) is intended to fill the need for retirement plans like SARSEPs.
Retirement plans law changes frequently. There are statutory deadlines for which many provisions must become effective. The IRS generally establishes a firm deadline for adopting these changes. These law changes might mean employers can simplify some areas of plan administration or improve benefits. You’ll need to change plan language and operation to keep the plan within the law and to take advantage of increased benefit limits.
How to find the mistake:
At some point, you may be asked to demonstrate your plan has complied with current and prior law. This request may come from a financial institution, third-party administrator or other plan service provider, or it may come from the IRS during an audit.
You may have a written plan document that is a model SARSEP (Form 5305A-SEP, Salary Reduction Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement) or a pre-approved plan. The IRS has already favorably reviewed both model SARSEPs and pre-approved plans.
If your plan is a Form 5305A-SEP that is the current revision (June 2006), you can be assured that it complies with the law. If your plan is a pre-approved plan, you have a level of assurance that the plan is written in compliance with the law even if you don’t apply for a determination letter. You must update individually designed SARSEPs for law changes. If you have this situation, consult your tax advisor.
How to fix the mistake:
If you find your plan hasn’t been amended timely for law changes, you should adopt the latest revision of Form 5305A-SEP (dated June 2006) or adopt the latest revised document (approved for EGTRRA) provided by your financial institution. You'll need to confirm that the operation of the plan is consistent with the terms of the plan.
Employer Y established a SARSEP in 1995 using a prototype plan and never subsequently amended for any law changes.
The Economic Growth and Tax Relief Reconciliation Act of 2001 changed many of the Internal Revenue Code’s requirements and limits for qualified plans and IRAs. To benefit under these new provisions, employers must amend their SARSEP prototype and individually designed plans for current law. For employers with model SARSEP plans to avail themselves of the latest law changes, they must adopt the latest model Form 5305A-SEP (for EGTRRA it must have a revision date of March 2002 or later).
Employers had to notify employees who participate in these plans of the increased EGTRRA contribution limits no later than October 1, 2002. See Revenue Procedure 2002-10 (as modified by Announcement 2002-49) for details. Individually designed SARSEPs that have received a ruling from the IRS should use the procedures listed in Section 4.07 of Revenue Procedure 2002-10. Any other SARSEP outside of the correction periods discussed above should have amended their plan and given proper notice to participants before the new limits were used.
Correction programs available:
Employer Y cannot correct this mistake under SCP, which is limited to insignificant operational problems. This mistake is the result of the failure to keep the plan language up to date. To retain plan qualification, this mistake must be corrected under VCP.
Voluntary Correction Program:
Employer Y would make a VCP submission to the IRS under Revenue Procedure 2013-12, using the model document in Appendix C Part I, including Forms 8950 and 8951. The fee for this mistake is $250.
Audit Closing Agreement Program:
If this mistake is discovered on audit, it may be corrected under Audit CAP. Correction of the mistake under Audit CAP 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:
Knowing your plan is up to date may not be a simple process. If you use a Form 5305A-SEP, annually check to determine the most recent version of the form. Certain plans must be individually amended for each change, while others may have a prototype document that is amended. We recommend you maintain contact, on at least a yearly basis, with the company that sold you the plan. If the company sends you a set of amendments to formally adopt, make certain you timely execute the documents per their instructions. Keep signed and dated copies of your plan document and any amendments for your records.