April 1, 2021

If you have a SARSEP (Salary Reduction Simplified Employee Pension) IRA plan that was established prior to January 1, 1997, you can continue to operate the plan. However, no new SARSEPs can be established after 1996. A SARSEP allows for both employer contributions and employee salary deferrals.

The IRS examinations of SARSEPs indicate a very high rate of noncompliance. If you have a SARSEP, take extra care and watch out for some of the most common mistakes.

Mistakes common in a SARSEP

  • Plan has more than 25 eligible employees
  • Eligible employees are excluded
  • At least 50% of eligible employees don't make salary deferrals
  • Deferrals and contributions aren't properly limited
  • Failed (or didn't run) the Deferral Percentage (DP) test
  • Top heavy contributions aren't made