Client interested in a DB plan, but has a SARSEP currently

[Guest smhjr]

I've only been in the pension industry for 7 years and besides knowing that there is such a thing as a SARSEP, I have no knowledge of them. The question is whether or not a company is even able to adopt a DB plan with a SARSEP currently in place.

[Effen]

If they already made contributions for the current year, then no, they can't do a db, or any other type of qualified plan, this year.

If they haven't, just ignore it.

[Belgarath]

I know there are some that advocate, in this situation, going ahead with the DB plan, and assuming this disqualifies the SEP but that the larger deduction under the DB may justify it. They take the attitude that disqualification of the SEP is no big deal, and that it's a small price to pay. (I'm not one of those people!)

But I do have a question that perhaps some of you have explored, or might have first-hand experience...

Under 1.415-9(b)(4) relating to disqualification of plans, it says that the SEP will not be disqualified until all of the other plans have been disqualified. So it would seem to me that perhaps the above is an even greater risk than some might think, as the DB could be disqualified first? Just curious as to any opinions on the whole argument.

[Blinky the 3-eyed Fish]

I have almost been in the business for 7 years and don't know much about SARSEP's either, but huh? Doesn't the exclusive plan rules apply to SIMPLE plans, not SARSEP's. I thought the SARSEP would be the same as a DC plan for this consideration.

[Belgarath]

Blinky - although I haven't seen anything to do with a SARSEP for years, I did scrounge up a copy of an old 5305A-SEP form (from 1994) for SARSEPS, and it's the same - you can't use it if you "currently maintain any other qualified retirement plan." (Other than a regular SEP)

[jevd]

My understanding is that restriction on the 5305 SEP applies only to the IRS model doc but if the SARSEP is on a Prototype or individually designed doc, you may coordinate with other QPs.

[mbozek]

A SEP is regarded as an employer sponsored DC plan and is aggregated with other DC plans of the same employer for 415 limit purposes. See IRC 415(k)(4). Maintaining a SEP has no impact on contributing to a DB plan for this year.

[AndyH]

Blinky, megga dittos. Reading this thread, I had the exact same reaction that you did.

[Guest Dalvarez01]

If the company has already made contributions to the SARSEP for 2004, but still wants to start a DB plan in 2004, what options are available?

Is there some way to reclassify the SARSEP contribution so that the SARSEP is not in the way of the DB plan anymore?

[JAY21]

As a practical matter I have seen a few investment companies that have been willing to reclassify the current SEP contribution as a DB contribution (i., open a new DB account and transfer the money in). You certainly don't want them treating it as a distribution and issuing a 1099, but if you can get them to reclassify the contribution and the client is comfortable with that it might work. I'm not making any judgements on this approach, and whether it would withstand an audit, just stating that I've seen it done a few times. Even if the client wants to do this the investment company may balk at it though.

[Lame Duck]

I don't know all that much about SARSEPs either, but I can see some additional issues that should be considered. The first is that a SARSEP is a salary reduction SEP, so if only salary deferrals have been made to the plan, I think they would be exempt from the combined plan limits under 404(n). Second, if employer contributions have been made, they are contributed to the individual SEPs of the participants and recovery or retitling as DB contributions would be difficult. Third, I'm not sure if a SARSEP can provide for a match but, if so, you may have a problem with state compensation laws if the match is not made. Fourth, the SARSEP could be amended onto a prototype or individually designed plan by year end to avoid the only plan requirement. And finally, the SARSEP is a dinosaur and should be in a museum someplace.

[SoCalActuary]

The SARSEP is a 401k type plan with restrictive discrimination tests, built on an IRA investment platform. I agree that it is a dinosaur. However, it does not require the forced match of SIMPLE, and it has the higher limits of a 401k.

You should ask for the document implementing the SARSEP, dated before 1996. In addition, does the payroll record show whether any salary deferrals were made?

If none were made, go forward with the DB since the SARSEP is not active.

If salary deferrals were made, check for discrimination under SARSEP rules, and limit the HCE contributions accordingly. Then, make no employer contributions and terminate the SARSEP agreement for future service. Then you might be able to start the DB plan.

Finally, the IRS has a new publication allowing the plan sponsor to check whether the SARSEP meets all the regulations. Print it off the IRS web site, and review it with the plan sponsor or their advisor. It might give you a better professional posture before your client.

[Guest Dalvarez01]

After looking through the regs a bit, I have been unable to locate the reg stating that an employer cannot maintain a SARSEP plan along with a DB plan. Has this been changed recently?

If the model form 5305-SEP was used to set up the plan, then it is exclusive. If that is the case, it can simply be restated, and THEN have the DB plan set up?

[Belgarath]

Is there such a thing as a prototype SAR-SEP? At one time, at least, the IRS was not accepting applications for prototypes on the SAR-SEPS, and the 5305A model SAR-SEP was the only option. And this prohibited maintaining another plan.

However, this may have changed long ago - has anybody ever seen a prototype SAR-SEP? Or if not, do you know if a prototype/custom SAR-SEP is an option?