|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 SARSEP prototype plan document is the current revision.||Adopt a current IRS Model Form 5305A-SEP or IRS-approved SARSEP prototype plan document.||Maintain regular contact with the company that sold you the plan.|
Employers can’t establish new SARSEPs after December 31, 1996 (the Small Business Jobs Protection Act of 1996 prospectively repealed SARSEPs). However, employers that had already established a SARSEP before January 1, 1997, can continue to maintain it and new employees hired after December 31, 1996, can participate in the existing SARSEP. The introduction of SIMPLE IRA plans is intended to fill the need for retirement plans like SARSEPs.
Retirement plan 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. For example, employers needed to have updated the SARSEP plan document for tax law changes in 2002. Refer to the detailed example below in “How to fix the mistake”.
How to find the mistake:
A financial institution, third-party administrator, plan service provider, or the IRS during an audit may ask you to demonstrate your plan has complied with current and prior law.
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 document is the current version (June 2006) of Form 5305A-SEP, 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 to the IRS for a determination letter. You must update individually designed SARSEPs for law changes. If you have this situation, consult your tax advisor. If your SARSEP plan document is out of date (i.e. pre-2002), you likely have a problem that requires fixing.
How to fix the mistake:
If you find your plan document hasn’t been amended on time for law changes, you should adopt the latest revision of Form 5305A-SEP (June 2006) or adopt the latest revised document (approved for EGTRRA) given to you by your financial institution. You'll need to confirm that you’ve operated your plan consistently with the plan terms.
Employer Y established a SARSEP in 1995 using a prototype plan and never amended for any law changes.
The Economic Growth and Tax Relief Reconciliation Act of 2001 changed many of the Internal Revenue Code 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. The instructions for the Form 5305A-SEP (with a June 2006 revision date) provide that if you used the March 2002 version of the form to amend the plan, you aren’t required to use the June 2006 form).
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). Individually designed SARSEPs that have received a ruling from the IRS should use the procedures listed in Revenue Procedure 2002-10, section 4.07. Any other SARSEP outside of the correction periods discussed above should have amended their plan back in 2002 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 failing to keep the plan language up to date. To retain plan qualification, the employer must correct this mistake under VCP.
Voluntary Correction Program:
Employer Y would make a VCP submission to the IRS under Revenue Procedure 2018-52, 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.
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 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. 2018-52.
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 the IRS website to see if you’re using 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, make certain you timely execute the amendments per their instructions. Keep signed and dated copies of your plan document and any amendments for your records.