SARSEP SNAFU

[Christine Roberts]

An employer purchases a professional practice in an asset sale and inherits two employees from the old practice, with the promise that they would continue to benefit under the SARSEP established by the old practice (prior to 1997). After the asset sale is complete the employer forwards salary deferrals to the "inherited" employees' IRAs, AND continues to match the deferrals under the old practice's generous matching formula. However the employer never formally adopts or executes anything in relation to the SARSEP, nor do the asset sale documents address the SARSEP. Is it necessary to "unwind" all of the new employer's contributions (and the post-asset sale deferrals)?

[Gary Lesser]

Is the new employer only benefiting "old" employees under the SARSEP? If so, how are they excluding the other employees from the SARSEP?

I am of the opinion that the SARSEP DIED unless the old business is the legal predecessor under state law. Assuming only the assets were purchased, I think the SARSEP to be undone in respect to the "new" contributions and a 10% penalty paid by the new employer. However, we don;t have any regs on the definition of sucessor employer under section 414(a). Grey area! Conservatively I think the SARSEP did in fact die!

Also, see my reply to message entitled "Excess matching contribution in SIMPLE IRA."