SARSEP Frozen/401(k)Plan Set-up

[Guest Jean Blackwood]

An Employer had a SARSEP Plan in place for the first half of the plan year (PY=01/01/99-12/31/99). The Employer opted to freeze the SARSEP Plan effective 6/30/99. The Employer set-up a 401(k) Plan effective 01-01-99 and communicated the plan to all employees, however, eligible participants were not given the opportunity to make salary deferrals to the 401(k) Plan. Salary deferrals made by plan participants were automatically deposited into their SARSEP account. The Employer made a discretionary contribution and it was also deposited into the participants SARSEP account until 6/30/99. Effective 7/1/99 eligible Participants could make salary deferrals to the 401(k) Plan, and the Employer began making their discretionary contributions to the 401(k) Plan. Is there anything the ER can do to correct this action? Are there any problems with a SARSEP/401(k) Plan overlapping? For testing purposes under the 401(k) Plan would you include the salary deferrals/ER Discretionary contributions made to SARSEP plan when testing the limits on deductible contributions? Thanks much for your assistance.

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Jean Blackwood