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SARSEPs plus other plans combined.


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I don't work much with SARSEPs, so.....

Company has a grandfathered SARSEP covering all employees. They decide that either a new comparability profit sharing plan or a DB plan (covering the same employees) would better meet their needs. The plan year would be the calendar year.

#1. Are they prevented from having an additional plan for 1999 since they currently have a SARSEP? (I know they would be prevented if they have a "simple" 401k.)

#2a. Assuming they can have a profit sharing plan for 1999, is the maximum aggregage contribution of 15% of payroll for 1999 determined based on the sum of the SARSEP deferrals and contributions, plus the profit sharing contribution?

#2b. Assuming they can have a DB plan for 1999, is the 25% of pay maximum contribution determined based on the sum of the SARSEP deferrals and contributions plus the DB contribution?


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Guest Paul McDonald

The answers to your questions will depend on what plan document is being used by the SARSEP. If the plan is on the model forms from the IRS (Form 5305A-SEP) then the Company cannot maintain any other qualified retirement plan other than a model SEP plan using Form 5305-SEP.

If they are under a SEP prototype, you will have to research whether or not the prototype has language that would coordinate benefits under another plan with the SARSEP.

#2a The maximum tax deduction is 15% of NET payroll (after deferrals). The tax deduction includes elective deferrals and contributions made by the employer (which would only be Top-Heavy minimums under a SARSEP as there is NO MATCHING allowed under a SARSEP. If you are able to have a PSP, the balance of the 15% limit could go there or to a SEP plan.

#2b It is unlikely that you can have a DB plan in addition to the SARSEP. Some prototype SARSEPs do allow an active DB plan to exist, you'll have to read the SARSEP document. If they can have a DB plan, you are faced with the combined plan limit of 25% of NET payroll as the maximum tax deduction for the two plans. The maximum deduction includes the employee salary deferrals and any employer contributions to the DB plan.

Your message keeps repeating the line "sum of the SARSEP deferrals and contributions". This statement concerns me as the only contributions to a SARSEP plan are generally employee deferrals ONLY. Matching contributions are NOT a part of a SARSEP plan. The only employer contributions are those required by Top-Heavy minimums OR if a SARSEP is combined with a SEP plan via using Forms 5305-SEP and 5305A-SEP OR a prototype plan that combines both in one document.

You are most likely faced with having to discontinue the SARSEP program to take complete advantage of either the New Comp PSP or DB plan.

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Paul, a complete answer; thanks.

One additional thought, if the SARSEP is terminated it may not be able to be resurected. Why not keep the SARSEP because of its cheap elective features and, in general, almost instant Roth convertability. Employer should of course seek a PLR on the SARSEP or sleep with one eye open. If the plan is not approved, then the short "alternate" DOL disclosure requirments do not apply (and results in a rather large rattlesnake pit).

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  • 2 years later...

I'm not sure what kind of language that we need to be looking for in the prototype that provides for coordination of benefits. I do see in the Plan definitions something that says "the employer must use this Plan only in conjunction with an individual retirement account or individual retirement annuity for which the Internal Revenue Service has issued a favorable opinion or ruling letter or in conjunction with the model individual retirement accounts issued by the IRS."

Does this mean no qualified Plan in the same year as a SARSEP?

Are there are citings in the code or regs that I can point to to say we can do this? Everything I see says we can't.:confused:

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