An IRS review of salary reduction simplified employee pension (SARSEP) plans has uncovered errors that could affect plan sponsors and employees.
SARSEP plan sponsors must meet certain requirements each year to maintain a SARSEP's eligibility for contributions (Sec. 408(k)(6)). The requirements for eligibility include:
- The employer (plan sponsor) must have fewer than 25 eligible employees at all times during the year;
- At least 50% of all eligible employees must elect to make deferrals to the plan in any year;
- The deferral percentage for each highly compensated employee must be compared with the average of the deferral percentages of all other employees; and
- The plan must meet certain top-heavy minimum contribution requirements for eligible non-key employees.
The IRS reports that some SARSEP plans have been terminated as a result of their examinations. The Service estimates that around 30,000 SARSEP plans still exist (no new plans have been established since the end of 1996).