An IRS checklist summarizes the main compliance issues for a Salary Reduction Simplified Employee Pension (SARSEP). [SARSEP Checklist] The checklist can be used to guide annual review by a business that sponsors a SARSEP, but is not meant to substitute for a complete plan review nor is it to be submitted to the IRS.
- Basic Qualification – The SARSEP must be amended to reflect any relevant changes in law. Form 5305A-SEP provides a model SARSEP issued by the IRS.
- 25-Employee Ceiling – SARSEP contributions may not be made for the current year if more than 25 employees were eligible to participate at any time during the preceding year.
- Eligible Employees – All employees age 21 or over with at least 3 years of service in the preceding 5 years and at least $450 of compensation (subject to cost-of-living increases) during the year must be eligible to participate.
- Notice Requirements – Information about the SARSEP must be provided to employees within a reasonable time after employment. Contributions made to the SARSEP must be reported to the individual on a Form 5498.
- Deferral Limits – During 2006, the maximum elective deferral an employee may make to a SARSEP is the lesser of 100% of compensation (limited to $220,000) or $15,000. An employee age 50 or over by the end of 2006 may also make a catch-up contribution of $5,000 (or if less, the excess of the participant's compensation over the amount of elective deferrals that are not catch-up contributions).
- Participation Requirements – At least 50% of eligible employees must choose to make elective deferrals for the current year. If fewer employees choose to contribute to the SARSEP, then all deferrals made for that year are disallowed and must be withdrawn.
- Total Contribution Limits – The total of elective and non-elective contributions for a participant during 2006 cannot exceed the lesser of 25% of compensation (excluding deferrals) or $44,000.
- Timely Deposit – Employees' elective deferrals must be remitted to the financial institution as soon as can be reasonably segregated from the employer's general assets, but no later than 15 business days following the month in which amounts were withheld from employees' paychecks.
- ADP Test – Deferrals for highly compensated employees must satisfy an average deferral percentage test, restricting the
averagedeferral for the HCEs to 1.25 multiplied by the average deferrals for nonhighly compensated employees.
- Top-Heavy Minimum – A minimum contribution must be made for non-key employees if the SARSEP is top-heavy.