SARSEP over 25 employees accepted deferrals

[Guest Todd Lehmann]

I have a client who was eligible to establish a SARSEP in 1995. The client exceeded 25 employees in 1998 and continued to accept salary deferrals into the plan from 1999 through 2003. I cannot find any guidance on how to correct this error. How do we properly correct this SARSEP? Do we need to use VCP? What do we do with the ineligible deferrals? Any thoughts would be appreciated. Thank you.

[Gary Lesser]

VCP--assuming you want to keep the contributions in the accounts without the 6 percent cummulative penalty on participants. The employer will probably have to pay a 10 percent penalty (plus other fees) for it's nondeductible contribution, but probably escape the additional 10 percent fee for the Service allowing retention of the excess amounts, assuming the employer has no control of the IRA assets (which I doubt it would have).

Keep in mind that the SEP portion "may be" okay (or worst case partially bad). So essentially, the correction (a "qualification defect") only involves the elective portion of the plan. Hope this helps.

[Guest Todd Lehmann]

Thank you Gary, your response is appreciated and is very helpfull......Todd