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Home > Definitions & Designations > What is a SARSEP?

What is a SARSEP?

Money Manager | Friday, April 16th, 2010

A SARSEP was an employer-sponsored retirement plan limited to state and local governments.  Private businesses could not establish SARSEP, and SARSEPs can no longer be established.  1997 was the final year SARSEPs were able to be established.

Who could set up a SARSEP?

A state or local government, or one of their agencies, with fewer than 25 eligible participants, was able to set up a SARSEP plan.

Are SARSEPs still in existence?

Yes, if the SARSEP was established before 1997 and meets the three criteria each year to continue the SARSEP, then SARSEPs can still exist even though no new SARSEPs can be established.

How is a SARSEP maintained?

A SARSEP must meet the following requirements each year:

1.  25 or fewer employees were eligible to participate in the SARSEP in the previous year;

2.  50% or more of the eligible employees choose to make salary reduction contributions this year; and

3.  The elective deferrals of highly compensated employees meet the SARSEP deferral percentage limitation.

How much money may an employee defer under a SARSEP?

An employee may make an elective deferral up to the lesser of the following amounts:

1.  25% of compensation, or

2.  $16,500 for 2010.

The $16,500 limit applies to the total elective deferrals an employee makes for the year to the SARSEP and any 401(k) plan or 403(b) tax-sheltered annuity plan.

May an employer contribute to the SARSEP for its employees?

Yes, the employer may make non-elective contributions, but the contributions are subject to an annual addition limit.

What is the annual addition limit?

The annual addition limit is the lesser of:

  1. 100% of the employee’s compensation (limited to $245,000 2010)
  2. $49,000 for 2010.

Are employer matching contributions possible with a SARSEP?

No, matching contributions are not allowed with a SARSEP.

When can you withdraw money from a SARSEP?

Money contributed through a SARSEP is deposited in a SEP-IRA.  You can withdraw your money at any time. However, there are two rules to consider when withdrawing money from a SARSEP.

If you withdraw any money from your SARSEP within two years of the date you first made a contribution to your SARSEP, you will owe a 25% tax on the amount withdrawn.  For example, if Joe began participating in his company’s SARSEP plan on January 1, 2010, he will owe the 25% tax on any withdrawals made before January 1, 2012.

The second rule to consider is if you withdraw money before reaching age 59 ½, you will be subject to a 10% tax penalty on the money withdrawn. For example, if Joe withdraws $500 from your SARSEP when you are age 45, you will generally have to pay $50 to Uncle Sam as a tax penalty. You may not owe the 10% penalty if you qualify under the early distribution rules.
What are the early distribution rules?

An early distribution is any money you withdraw from your Traditional IRA before reaching age 59 ½. When you reach age 59 ½, withdrawals are automatically tax-free. Early distributions are subject to a 10% tax penalty, but if you withdraw money for any of the following situations, you will NOT owe the 10% tax:

  1. You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
  2. The distributions are not more than the cost of your medical insurance.
  3. You are disabled.
  4. You are the beneficiary of a deceased IRA owner.
  5. You are receiving distributions in the form of an annuity.
  6. The distributions are not more than your qualified higher education expenses.
  7. You use the distributions to buy, build, or rebuild a first home.
  8. The distribution is due to an IRS levy of the qualified plan.
  9. The distribution is a qualified reservist distribution.


Internal Revenue Service Publication 560, Retirement Plans for Small Businesses (SEP, SIMPLE, and Qualified Plans),

Retirement Plan FAQs Regarding SARSEPs,,id=112859,00.html

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