Don't overlook these!
Updated for 2012
Salary Reduction Simplified Employee Pension (SARSEP plans):
A SARSEP is a SEP set up before 1997.
Form W-2 Reporting for SARSEPs:
May contribute the lesser of 25% of each employee’s compensation or $49,000 in 2011 (for 2012 the contribution limit will be the lesser of 25% of each employee's compensation or $50,000).
Employee elective deferrals cannot exceed $16,500 for 2011 (or $22,000 if age 50 or over in 2011).
Catch-up Contributions for SARSEPs:
Subject to certain limits, for tax year 2011, a participant age 50 or over at the end of the calendar year can contribute an additional $5,500.
Who Cannot Have a SARSEP?
If you haven’t already chosen and established a SARSEP, you can’t choose one now.
That’s because a change in law prohibited new SARSEPs from being established after 1996. Also, a state or local government, any of its political subdivisions, agencies, or instrumentalities, or a tax-exempt organization cannot have a SARSEP.
By establishing a SARSEP, you, the employer, have adopted a plan that requires an IRA to hold the contributions made on behalf of each of your employees. A SARSEP is designed to be funded mainly by money that employees elect to defer from their salaries.
Employer “nonelective contributions” are also allowed. Employer nonelective contributions are employer contributions made to each eligible employee’s SEP-IRA - regardless of whether or how much the employee deferred into the SEP-IRA.
Total contributions to each employee’s SEP-IRA cannot exceed the lesser of $49,000 for 2011 or 25% of pay.
Each employee is always 100% vested in (or, has ownership of) all contributions - both employee elective deferrals and employer nonelective contributions - in his or her SEP-IRA.
Publication 560 helps self-employed individuals determine the amount of their maximum deduction.
To Establish a SARSEP, You...
Employee and employer contributions allowed.
An employer generally has no filing requirements. The annual reporting required for qualified plans (Form 5500 series) is normally not required for SARSEPs. The financial institution handles most of the paperwork.
Employees must receive notice of the adoption of a SARSEP, any subsequent amendment to it, the requirements for receiving contributions, and the amounts of excess deferrals if the ADP test was not satisfied (see SARSEP ADP Test.
Permitted, but includible in income and subject to a 10% additional tax if under age 59 1/2.
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