SARSEP eligibility and correction.

[Guest Thornton]

A SARSEP's eligibility is age 19 and $400 earnings during the plan year. An employee is 19 when hired. Does he participate as soon as $400 is earned? Must he be included in discrimination testing?

Also, a SARSEP fails ADP in 1997 and 1998. In 1998, 50% of eligible employees do not defer. Are there any correction methods available other than withdrawal from the IRA's and inclusion of the excess deferrals in income? (Such as QNEC's, etc.) Thanks.

[Guest Thornton]

One more thing. It does not appear that the Top-heavy minimum has been made for 1997 or 1998. Plan was adopted 12/23/96, apparently to get in under the elimination of SARSEP's wire. Of course, we were just brought in to review the plan, and we see major problems. That's why we wonder if any correction methods are available.

[Gary Lesser]

The plan is no longer a SEP because of the failure to notify employees of the 1997 excess by December 31, 1998. See, generally, Revenue Procedure 91-44; Treas Reg 54.4979-1(a)(4)(iii). The employer also owes a 10 percent penalty by not notifying employees by 3/15/98. Employees MAY owe 6 percent penalties _at the time_ the amounts are treated as IRA contributions. The 1998 contributions made to the nonSARSEP are disallowed deferrals. None of the amounts deferred by any of the employees are any good! See Page 4 of Form 5305A-SEP or a good book on SEPs and SARSEPs ).

If he is 19 and the plan has a 0 service requirment, yes (upon earning $400), retroactive to first day of employment.

After correction, the plan would no longer would appear to be top-heavy!!

There is nothing to correct. The ADP failure can't be cured, the 50% failure can't be cured; your concern is how to unwind, pay penalties, give notices (and so on). Clearly, several hours of research and work--hope this jump-starts you. Gary Lesser

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[Guest Thornton]

Gary, does the failure in 1997 taint all contributions in 1998, or can 1998 stand alone assuming requirements are met?

[Guest Heide]

Originally posted by Thornton

A SARSEP's eligibility is age 19 and $400 earnings during the plan year.  An employee is 19 when hired.  Does he participate as soon as $400 is earned? Must he be included in discrimination testing?  

Also, a SARSEP fails ADP in 1997 and 1998.  In 1998, 50% of eligible employees do not defer.  Are there any correction methods available other than withdrawal from the IRA's and inclusion of the excess deferrals in income? (Such as QNEC's, etc.)  Thanks.  

What is your code (or other) cite for your statement that 50% of eligible employees have to defer? I am most interested in the "have to defer" part. The IRS regulation doesn't have those 3 words, and the only cite I have found that does use those 3 words is my ASPA ERISA Outline book. This issue is directly on point with a plan I have, and I will appreciate your assistance in finding an answer to my question. Thanks!

[Guest Andrew Ciapalo]

Instructions for the Employee - IRS Form 5305A-SEP

Disallowed Deferrals

"However, if more than 50% of your employer's eligible employees choose not to make elective deferrals in a calendar year, then no employee may participate for that calendar year. If you make elective deferrals during a year in which this happens, then your deferrals for that year will be 'disallowed,' and the deferrals will be treated as ordinary IRA contributions..."

[Gary Lesser]

The 50% participation rate test can be found in Code Section 408(k)(6)(A)(ii).