Engineering SARSEP Plan

[ERISA-Bubs]

We have an engineering client who operates a SARSEP -- a type of plan with which I am not very familiar.  The SARSEP requires a new employee to satisfy the 3/5 rule for eligibility.  This is not attractive new prospective employees with years of experience.  Two questions:

1) Can an employer amend the SARSEP to allow earlier eligibility and, if so, do the eligibility requirements have to be the same for all non-excludible employees?

2) Is there any sort of industry standard for eligibility under a SARSEP?

Thank you!

 

[Bird]

New SARSEPs couldn't be established after...1996?...but they can be amended so an eligibility change is permitted.  "Standard" is probably "keep everyone out as long as possible" so that's the 3/5 rule.  Odds are pretty good though that it's messed up - are they running the ADP test properly?  Do they know about top-heavy contributions if it is top-heavy?  The few of these that are left would probably not exist if they were actually run properly.

[ERISA-Bubs]

Why do you say most SARSEPs wouldn't exist if run properly?  My understanding is SARSEPs are much easier to run than traditional qualified plans, so wouldn't it make sense for a small non-profit to keep a SARSEP that is already established?

[Bird]

Probably fine for a small non-profit, but you specifically referenced an engineering firm.  They are fairly easy, but there are pitfalls for the unwary.  The last one I saw was probably not atypical - owner contributing the max, and when I discussed the SARSEP DP test I was told that another employee was contributing the max on very low income.  Fantastic!  Except that the other employee was his wife.  And 3% minimum top heavy - "what's that?"

Sorry but I've been doing this too long to be anything other than jaded and cynical.

[Loves401(k)]

And the IRS is auditing SARSEPs now.  I have been hired to calculate the "fixes" on 2 of them. 

 

[Larry Starr]

I have NEVER seen a SARSEP that was done properly. And I do mean NEVER.  They were advertised like the text book: BRAIN SURGERY: SELF TAUGHT!

 

[Alex]

When I used to do SARSEP presentations, I would start out by saying "you show me an in-house administered SARSEP and I will show you a Disqualified Plan".  In addition to the reasons listed in the other responses, most do not understand how to determine the date when an  employee first becomes a participant when other than 0 years is selected when using the 5305A-SEP.

[NonProfit GC]

My nonprofit utilizes a SARSEP. IRS says that non-profits cannot have a SARSEP. I see in the Code where a nonprofit cannot create a SARSEP, but if organization creates SARSEP and then becomes a nonprofit, can they not keep the SARSEP?

 

 

[QDROphile]

Perhaps incorporation breaks what you perceive to be continuity of existence.

[Suzanne85]

This seems to work, QRDOphile