Disqualification of SARSEP

[LIBERTYKID]

The IRS is threatening to disqualify a SARSEP as a result of the violation of the 50 percent particpation rule. How is the penalty calculated for disqualification?

[Bird]

I thought it would "just" mean that deferrals for that year must be returned; see IRS website below. It is very specific on that point. I'm not sure what happens when the are returned after 2 1/2 months though; maybe that's the question. I would think they would be telling you that, no?

IRS SARSEP page

[Gary Lesser]

Under the EPCRS (Rev. Proc. 2008-50), the excess contributions can be distributed or retained (and it's probably not too late to use this method).

Otherwise, they are just traditonal IRA "excess" contributions (and can be corrected after the due date without any problem, just a 6% tax).