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SARSEP to 401(k) - new deferral election required?


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Due to growth (ie now over 25 employees), the client is no longer able to allow contributions to their SARSEP. They are working towards establishing a 401(k).

Q1 - Can deferral elections for the SARSEP be automatically carried over to the 401(k) or must the client get each employee to make a new election?

Q2 - If the 401(k) is retroactively established (say in April) back to January 1st, can amounts already withheld from 2007 payrolls (ie Jan & Feb) be treated as contributions to the 401(k)? Does the answer change if Jan contribs have been funded to the SARSEP but Feb contribs have not?

Q3 - Can amounts already withheld (and funded) from 2007 payrolls be treated by the employees as contributions to a traditional IRA (treating them similar to "disallowed deferrals" (see form 5305A-SEP pg 4)), subject to the limits on traditional IRA contributions?

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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On your points 1 and 2 - the 401(k) is a new program; you need a plan document, new election forms, etc. Deferrals can only be made to the plan from the point that they are elected by the employees going forward (i.e. can't retroactively change from SARSEP to 401(k)). It might seem like a "continuation" or "conversion" of the SARSEP but it is not.

If you are saying that due to the 25 'ee limit, the SARSEP is not permitted at all in 2007, then I think you are correct in your approach in point 3.

Ed Snyder

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Thanks for the response Bird! And yes, on #3, it's due to the 25 ee limit, and that's what I was leaning towards (versus #2, trying to put them into the 401(k)) as long I felt I could stand by it.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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