Options for terminated SARSEP

[Guest Brendan McKee]

Recent growth at my company resulted in highly compensated employees hitting ADP testing caps in our SARSEP for 2004. In 2005 we would likely have exceeded the 25 employee SARSEP limit as well. So the SARSEP was terminated early this year and replaced with a 401k Safe Harbor plan.

I cannot find many references on the BenefitsLink forums regarding options for terminated SARSEP plans. The only clear options are: 1) SARSEP and 401k accounts can be kept separate; or 2) the SARSEP can be rolled over into the new 401k account.

A) Can the terminated SARSEP be rolled over to an IRA? Or would this only be allowed after leaving the employment of the company sponsoring the plan?

B) The SARSEP was in place long enough that two brokerages were used for holding SARSEP accounts. First a full service brokerage and later a discount brokerage. Some employees hold accounts at both SARSEP account brokerages. Did the the termination of the SARSEP dissallow combining these accounts (ie. transferring from the full service brokerage to the discount broker)?

Thanks for any input.

[Bird]

Think of the SARSEP as a vehicle for getting money into IRAs - that's all these accounts really are now, IRA accounts. So the participants can do whatever they want with them - cash them in, roll them to another IRA, roll them into your 401(k) plan if that plan permits, which it probably does. The employer doesn't have to do anything about those accounts...and can't...because they are under participant control.

[Appleby]

Right…though when moving the assets from the SARSEP to a regular Traditional IRA, you may want to do so as a transfer, instead of as a rollover- law of averages says something will likely go wrong with the rollover, and may not with the transfer.

Also, most financial institutions charge higher fees for SARSEPs than for regular traditional IRAs (TIRA). That would be one good reason to transfer the assets.

[Santo Gold]

A related question regarding terminating a SARSEP. I understand the need for an amendment to terminate the SARSEP and an employee notice about the termination. Is there any advance notice needed for either of these? Can the employer take action on 12/31/2005 to terminate the SARSEP, notify the employees on that day, and start a 401(k) on 1/1/2006?

[Bird]

I'd say yes, that's OK.

[Appleby]

I agree