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.

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

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