Mistake Find the mistake Fix the mistake Avoid the mistake 1. You haven’t updated your SARSEP plan document for current law. (More about mistake 1) Determine if your Form 5305A-SEP or SARSEP prototype plan document is the current revision PDF. Adopt a current IRS Model Form 5305A-SEP or IRS-approved SARSEP prototype plan document. Maintain regular contact with the company that sold you the plan. 2. You have more than 25 eligible employees. (More about mistake 2) 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 all employee elective deferral contributions to the IRAs associated with the SARSEP. If more than 25 employees become eligible during any year, stop 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 about mistake 3) Review eligibility and participation plan document sections. Check when employees are entering the plan. Make a corrective contribution that would place affected employees in the position they would have been in if they were correctly included in the plan. Review the participation status of all employees at least once a year. 4. Contributions to participants' IRAs associated with the SARSEP were miscalculated because you used the wrong definition of compensation. (More about mistake 4) Review the SARSEP plan document to determine if you’re using the correct compensation amount for allocations. Correct the failure by following the terms of the SARSEP plan in effect at the time of the mistake. 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 ($23,000 in 2024; $22,500 in 2023; $20,500 in 2022; $19,500 in 2021 and in 2020; $19,000 in 2019; and $18,500 in 2018) and excess deferrals haven’t been distributed (More about mistake 5) Inspect deferral amounts for plan participants to ensure that they haven’t exceeded the limits. Two possible correction methods: Distribution method 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 about mistake 6) Review payroll records and ensure that 50% of eligible employees are actually making employee elective deferrals annually. Stop all employee elective deferral contributions to the IRAs associated with the SARSEP. Annually review plan document for eligibility requirements and payroll records. If less than 50% of eligible employees made elective deferrals during any year, stop withholding employee elective deferrals and notify all employees. 7. Total contributions (employee elective deferrals and nonelective employer contributions) exceeded the maximum legal limits. (More about mistake 7) 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 ($69,000 in 2024; $66,000 in 2023, $61,000 in 2022, $58,000 in 2021, $57,000 in 2020, $56,000 in 2019 and $55,000 in 2018). Two possible correction methods: a. Distribution method b. Retention method Calculate the allocations based on the plan terms and then check to make sure none of the proposed allocations violate the Internal Revenue Code. 8. Employee elective deferrals weren’t deposited by the required date. (More about mistake 8) Review employee data and payroll remittances to ensure that elective deferrals were properly withheld and deposited by the due date. Make a contribution for each participant. Review the SARSEP plan rules on the timing of employer contributions and adopt administrative procedures to ensure that you contribute them on time. 9. You didn’t pass the annual deferral percentage test. (More about mistake 9) 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 about mistake 10) Review the rules and definitions for top-heavy in your plan document. Determine whether your plan is top-heavy for each plan year. Contribute and allocate the required top-heavy minimum contribution, 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 checklist PDF IRA-based plans additional resources
