Salary Reduction Simplified Employee Pension Plan (SARSEP)

What Is the Salary Reduction Simplified Employee Pension Plan?

Salary Reduction Simplified Employee Pension Plan (SARSEP) was a type of retirement plan once offered by small companies that permitted employees to make pretax contributions to individual retirement accounts (IRAs) through salary reduction. Presently not issued, these plans originated before the broad utilization of 401(k) retirement plans.

Understanding the Salary Reduction Simplified Employee Pension Plan (SARSEP)

Salary Reduction Simplified Employee Pension Plan (SARSEP) retirement plans were offered by small companies, normally, with 25 or less employees, that considered pretax contributions to individual retirement accounts through paycheck deductions. SARSEP plans were a valuable benefit of employment, especially for employees of small businesses prior to the broad implementation of 401(k) retirement plans. After the passage of the Small Business Job Protection Act of 1996, SARSEPs were discontinued and replaced by another type of plan, known as a Savings Incentive Match Plan for Employees, or SIMPLE plan.

SIMPLE plans give more options to the two employers and employees. For example, small companies with up to 100 employees are able to partake in SIMPLE plans. Employers are required to make an annual matching contribution to these plans, and employee contributions are adjusted for inflation.

While no new SARSEPs were made after January 1, 1997, existing plans were permitted to stay in place, and companies with active SARSEPs had the option to grandfather new employees into their existing plans after that date inasmuch as they keep on gathering certain requirements.

Over the long haul, a few employers which kept up with SARSEPs after 1997 could run into confusions particularly as they move accounts between financial service suppliers, requiring a few employees to decide alternate pathways to coordinating income into their IRAs.

Beginnings of Simplified Employee Pensions

For a long time, simplified employee pensions (SEPs) have been included as an employment benefit, allowing employees to channel income straightforwardly from their paycheck into a tax-deductible retirement plan. By and large, employers would give an extra contribution to an employee's SEP as an additional incentive.

In early implementations, SEPs would pay into the recipient's individual retirement account. When 401(k) plans opened up in the late 1970s, these accounts turned out to be more well known options for employers.

Named after the tax code regulation that characterizes the retirement plan, a 401(k) capabilities as tax-deferred income, implying that taxes will be due on the income when it is removed. This retirement plan operates under the assumption that when the 401(k) fund is paid out to the employee, they will have arrived at retirement age and position in which their overall taxable income might be lower. While an employee may ordinarily have the option to cash out their 401(k) account at a previous date, this practice is disincentivized as the employee is then responsible for taxes at the current rate.

Features

• SARSEPs are not generally issued.
• SARSEPs were offered by small companies to their employees to make pretax contributions to IRAs through salary reduction.
• Salary Reduction Simplified Employee Pension Plan (SARSEP) was a type of retirement plan that originated before 401(k) plans.