SARSEP Plan Fix-It Guide
| Mistake | Find the Mistake | Fix the Mistake | Avoid the Mistake |
| 1) You haven’t updated your SARSEP plan document for current law. (More) |
Determine if your Form 5305A-SEP or prototype is the current revision. | Adopt a current IRS Model Form 5305A-SEP or IRS-approved SARSEP prototype. | Maintain regular contact with the company that sold you the plan. |
| 2) You have more than 25 eligible employees. (More) |
Review payroll and plan document eligibility requirements for the prior year. If more than 25 employees were eligible to participate in the plan, no employee elective deferrals may be accepted in the current year. | Stop employee elective deferral contributions to the SEP-IRAs. | If more than 25 employees become eligible during any year, cease withholding employee elective deferrals in the first pay period of the subsequent year and notify all employees. |
| 3) Eligible employees were excluded from participating in the plan. (More) |
Review eligibility and participation plan document sections. Check when employees are entering the plan. | Corrective contribution that would place affected employees in the position they would have been in if there were no plan operational mistakes. | Review the participation status of all employees at least once a year. |
| 4) Contributions to participants’ SEP-IRAs were miscalculated because you used the wrong definition of compensation. (More) |
Review the plan document to determine if you’re using the proper compensation amount for allocations. |
Correction of the failure is based on the terms of the plan at the time of the mistake.
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Review the SARSEP plan terms to ensure that you are considering the correct amount of compensation when calculating contributions. |
| 5) Employee elective deferrals exceed the IRC Section 402(g) limit for the calendar year ($17,500 in 2013) and excess deferrals haven’t been distributed (More) |
Inspect deferral amounts for plan participants to ensure that you haven’t exceeded the limits. | Two possible correction methods: a. Distribution method b. Retention method |
Have sufficient payroll information to verify that the deferral limitations of IRC Section 402(g) were satisfied. |
| 6) Less than 50% of eligible employees made employee elective deferrals. (More) |
Review payroll records and ensure that 50% of eligible employees are actually making employee elective deferrals annually. | Stop employee elective deferral contributions to the SEP-IRAs. | Annually review plan document for eligibility requirements and payroll records. If less than 50% of eligible employees made elective deferrals during any year, cease withholding employee elective deferrals and notify all employees. |
| 7) Total contributions (employee elective deferrals and nonelective employer contributions) exceeded the maximum legal limits. (More) |
Calculate 25% of each employee’s compensation and compare the total contribution made for the employee to the lesser of that amount or the dollar limitation for that year ($51,000 in 2013). | Two possible correction methods: a. Distribution method b. Retention method |
After the initial calculation of allocations based on the terms of the plan, check to make sure none of the proposed allocations would violate the Internal Revenue Code. |
| 8) Employee elective deferrals weren’t deposited timely. (More) |
Review employee data and payroll remittances to ensure that amounts were properly withheld and timely deposited. |
Make a contribution for each participant. |
Review the SARSEP plan rules concerning the timing of employer contributions and adopt administrative procedures to implement proper timing. |
| 9) You didn’t pass the annual deferral percentage test. (More) |
Perform and review the test for each year in which deferrals were made. | Two possible correction methods: a. Distribution method b. Retention method |
Communicate with plan administrator to ensure proper employee classification. Ensure that both you and the plan administrator are familiar with the terms of the plan. Consider converting to a SIMPLE IRA plan |
| 10) You didn’t make required top-heavy minimum contributions to the SARSEP. (More) |
Review the rules and definitions for top-heavy found in your plan document. Make a determination whether your plan is top-heavy or not for each plan year. | Properly contribute and allocate the required top-heavy minimum, adjusted for earnings, to affected non-key employees. | Perform a top-heavy test each year. If your plan is top-heavy or deemed top-heavy, ensure that you’ve made all top-heavy minimum contributions. |
SARSEP Plan Overview
EPCRS Overview
SARSEP Plan Fix-It Guide (pdf)
SARSEP Plan Checklist (pdf)
IRA-Based Plans Additional Resources
IRS.gov / Retirement Plans / Correcting Plan Errors / Fix-It Guides / SARSEP Plan Fix-It Guide
Page Last Reviewed or Updated: 2013-04-04
