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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Employee Plans’ examinations of Salary Reduction SEPs (SARSEPs) have revealed error trends that could have adverse tax consequences for both the employer/plan sponsor and the employee, according to the IRS’ Retirement News for Employers. The IRS advises plan sponsors to perform diligent reviews of their SARSEP plans in order to avoid these errors.
Because SARSEPs were grandfathered in 1996 by the Small Business Job Protection Act, plans in existence prior to 1997 may continue, but no new SARSEPs could be established after December 31, 1996. Currently, there are an estimated 30,000 SARSEPs, according to the IRS.
SARSEPs must pass a number of tests each year in order for them to maintain their eligibility for contributions. These tests include:
- 25-or-fewer employees test. If the employer had more than 25 eligible employees at any time during the prior year, the plan cannot accept employee salary deferrals during the current year.
- 50% deferral test. At least 50% of all eligible employees must elect to make deferrals to the plan in any year. Otherwise all deferrals in that year are disallowed.
- Deferral percentage test. Under the deferral percentage test for SARSEPs, the deferral percentage of each highly compensated employee (HCE) is limited to no more than 125 percent of the average deferral percentages of all other employees.
- Top-heavy minimum contribution test. Most SARSEPs, including all model SARSEPs, require top-heavy contributions. In general, the employer is required to make a 3% minimum top-heavy contribution for each eligible non-key employee.
According to the IRS, examination findings show that some employers are not running the annual tests. As a consequence, many SARSEPs are not eligible plans. When a SARSEP loses its eligibility and employees made deferrals to these ineligible plans, those employees with salary deferrals must include them in income. Also, employers who made discretionary contributions and deducted them, lose the deduction.
Some SARSEPs have been terminated as a result of EP examinations and employers are replacing them with other types of arrangements, such as SIMPLE IRAs.
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