New SARSEP Plans can not be established after January 1, 1997. Plans in operation before that date may be continued. A safe harbor 401(k) plan has replaced the SARSEP, as a low cost salary deferral program.
A SARSEP is an IRA that works like a 401(k) plan. The plan allows an employee to contribute up to 15% of their salary or $11,500, whichever is less. The company can make a regular SEP contribution as long as the combined SARSEP and SEP contributions do not exceed 15% of an individual's salary or $30,000 per year, whichever is less.
Like the 401 (k) plan, a SARSEP is subject to the nondiscrimination test limiting the amount highly compensated employees can contribute from their salary. This test is more restrictive for a SARSEP than it is for a 401 (k) plan. Like the SEP plan, a SARSEP is considered an IRA and therefore does not offer many of the advantages of a qualified retirement plan such as loans, vesting, and favorable tax treatments for distribution.
After 1/1/97, these plans may no longer be established. A safe harbor 401(k) plan has replaced the SARSEP, as a low cost salary deferral program.