A SARSEP plan is a Salary Reduction Simplified Employee Pension Plan, a retirement plan used by small businesses. SARSEP plans were discontinued under the Small Business Job Protection Act of 1996. However, employers who had active plans at that time were permitted to continue them.
A SARSEP is a Simplified Employee Pension (SEP) plan allowing employees to contribute to their IRA through salary reduction, according to the IRS
. Employers are also allowed to make contributions. Although a new SARSEP may not be formed as of Jan. 1, 1997, employees hired after that date into a company with an active SARSEP plan may participate in the company’s grandfathered SARSEP plan.
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For a SARSEP plan to maintain its active status it must meet several conditions:
- The plan was established no later than Dec. 31, 1996.
- The employer had 25 employees or fewer that were eligible to participate in the plan during the preceding year.
- At least 50 percent of the eligible employees contributed during the year.
The amount deferred by highly compensated employees cannot exceed 125 percent of the amount deferred by non-highly compensated employees, according to Retirement Dictionary
. The determination of who is highly compensated is made each year.
In 2015, the IRS considered employees who make $120,000 a year to be highly compensated. The highly compensated amount is reviewed, and possibly adjusted, by the IRS each year.
At least 50 percent of eligible employees must participate in salary deferral contributions each year for the SARSEP retirement plan to be active. If less than 50 percent, then all contributions made by other employees are no longer eligible and are returned to the employees.
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SARSEP plans work the same as traditional IRAs, according to Janus
. Employees and employers contribute pre-tax money through elective deferrals. The money is tax-deferred until the person withdraws it. Withdrawals prior to age 59 1/2 are usually subject to an additional 10-percent tax penalty. The annual contribution limit in 2015 was set at $18,000 with a catch-up contribution of an additional $6,000 for people age 50 or older. Employers can make contributions limited to 25 percent of the employee’s compensation or $53,000, whichever is less. Participants can make an additional IRA contribution of up to $5,500 in 2015 with a catch-up of $1,000.
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