Termination of SAR-SEP

[MarZDoates]

We are in the process of terminating a SAR-SEP and replacing it with a safe harbor 401(k). I've seen in prior posts that it's a fairly simple process. It is my understanding that we can prepare a simple amendment to the plan to terminate it. I understand that we have to notify the participants.

Does anyone have a sample notice to participants? Or can it be a simple memo explaining that we are terminating the plan and that salary reduction deferrals will cease. Do we have to give them advanced notice, or can we stop the deferrals immediately?

Is there any citation that backs this up?

Thanks in advance for the help!!

[mbozek]

I dont see a need to prepare an amendment for terminating a SARSEP because it is not a qualified plan and is not subject to IRS termination procedures. The employer can simply notify the employees that no further contributions will be accepted after [fill in the date]. All contributions are 100% vested, employees have investment control over the accounts and no final annual report is filed.

[Gary Lesser]

The termination of the plan is an amendment (even if contributions will continue to years' end). Participants should be so notified. Also, if contributions were made for CY that include the new QP's plan year, then they should also be informed that the amounts contributed will be included on their W-2 and that they all have excess SIMPLE contributions, how to remove them, and so on. Depending on the QP's definition of compensation, such amounts may have to be treated as compensation under the new plan [and may also be subject to FICA and FUTA -- and FIT withholding (since the amounts are not under a plan to which Code Section 408(p) applies regardless of whether it was reasonable at the time the contribution was made that the contribution would be excluded from income, see IRC 3121(B)(5)(H) and IRC 3401(a)(12)(D)]. Unfortunately, we have very little guidance on this and it is likely that the trustee/custodian may treat any distributions--if under age 59 1/2-- as subject to the 25% tax (althought the IRS says, very unofficially, that it isn't subject to the 25% tax)--which does not mean to say that isn't subject to the 10% tax (although it sdn't be subject to either, but try to convince the trustee of that.]

All this being said, employees may also have rights under state law.