|Mistake||Find the Mistake||Fix the Mistake||Avoid the Mistake|
|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 all employee elective deferral contributions to the IRAs associated with the SARSEP.||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 2016, but 27 eligible employees in 2017, the 27 employees may make elective deferrals to their SEP-IRAs for 2017. However, in 2018, 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:
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:
This mistake cannot be corrected under SCP.
Voluntary Correction Program:
File a VCP submission to the IRS under Revenue Procedure 2019-19 identifying the failure, using Form 14568, Model VCP Compliance Statement, and Form 14568-C, Model VCP Compliance Statement - Schedule 3: SEPs and SARSEPs. The user fee for VCP submissions is based upon the current value of all IRAs that are associated with the SARSEP plan. For example, if the value is between $0 and $500,000, the user fee is $1,500. If the value of all IRAs exceeds $500,000, the user fee will be higher.
Under Audit CAP, correction of the mistake should be very similar to correction under VCP. The plan sponsor and the IRS enter into a closing agreement outlining the corrective action and negotiate a sanction that is not excessive, considers facts and circumstances, and bears a reasonable relationship to the nature, extent and severity of the failures, based upon all relevant factors described in section 14 of Rev. Proc. 2019-19.
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.