Tax Exempt & Government Entities

EMPLOYEE PLANS

Salary Reduction Simplified 

Employee Pension (SARSEP)

Key Issues and Assistance

Retirement plans provide significant tax advantages to you and your employees. 

One such plan is the SARSEP plan. This brochure addresses key issues, 

solutions and resources for assistance with your SARSEP plan.

What Is a SARSEP Plan?

SARSEP retirement plans are written arrangements set up before 1997. Contributions consist of 

employer contributions and employee deferrals made directly to an eligible employee’s individual 

retirement arrangement (IRA). An eligible employee is an employee who is at least age 21, has 

worked for you in three out of the last five years and whose total compensation for the year is at 

least $600.

SARSEP Common Mistakes

Knowing the tax rules applicable to your business’s retirement plan can help you provide a 

better plan for you and your employees, and help keep you in compliance with the law. In a 

national sample of examined SARSEPs, the IRS found the following common mistakes:

Failure of Deferral Percentage Test

The amount each highly compensated employee (HCE) may defer is limited. The deferral 

percentage test for a SARSEP compares the deferral percentage of each HCE with the average 

of the deferral percentages of all other eligible employees. For details on how to perform this 

test, please refer to your plan document, the Instructions for Form 5305A-SEP, IRS Publication 

560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) or the SARSEP 

Plan Fix-It Guide.

Failure to Make the Required Top-Heavy Contribution

Most SARSEPs, including all model SARSEPs (Form 5305A-SEP), require top-heavy 

contributions. In general, the employer is required to make a 3% minimum top-heavy 

contribution for each eligible non-key employee. Non-key employees are generally employees 

who are not owners or high-paid officers.

Violation of the No More Than 25 Eligible Employees Rule

If you had more than 25 eligible employees at any time during the prior year, you cannot accept 

deferrals in the current year.

Violation of the 50% Rule

At least 50% of all eligible employees must elect to make deferrals to the plan in any year, or all 

deferrals in that year are disallowed.
2

Violation of Deductible Employer Contribution Limit

Employer contributions are limited to 25% of each eligible employee’s compensation.

Failure to Timely Amend Plan Document

SARSEPs generally must be amended to keep current with the latest tax law changes. For those 

employers that use the model Form 5305A-SEP as their SARSEP plan document, generally, the 

most current version of the form must be used. Note: The revision date is located in the upper 

left-hand corner of the form. 

Use the SARSEP Plan Fix-It Guide for more on these and other issues.

SARSEP Solutions

If your SARSEP has mistakes, take steps to bring your plan into compliance so you can continue 

to provide your employees with retirement benefits on a tax-favored basis. You may want to 

contact a tax professional for help.

You can correct plan mistakes through the Employee Plans Compliance Resolution System

(EPCRS). 

For information on SARSEPs and other retirement plans, refer to the following free publications:

 Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)

 Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) 

 Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)

 Publication 3998, Choosing a Retirement Solution for Your Small Business

 Publication 4224, Retirement Plan Correction Programs

 Publication 4286, SARSEP Checklist

 Publication 4336, SARSEPs for Small Businesses

 SARSEP Plan Fix-It Guide

Customer Assistance

For information about retirement plans, including SARSEPs, see Help with Choosing a Retirement Plan.

For technical and procedural answers to your retirement plan tax law inquiries, see Employee Plans 

Customer Account Services.

To stay informed, subscribe today to the Employee Plans News.

Publication 4407 (Rev. 12-2017) Catalog Number 38982P Department of the Treasury Internal Revenue Service www.irs.gov