What happens if less than 50% of my eligible employees make salary reduction contributions under the SARSEP?
If less than 50% of your eligible employees choose to make salary deferrals to the SARSEP for a year, all salary deferral contributions made by other eligible employees for that year are disallowed and must be withdrawn from the employees’ SEP-IRAs. You must notify each affected employee within 2 ½ months following the end of the plan year to which the disallowed deferrals relate (by March 15 th of the following year for all Model and other calendar year SARSEPs), telling them (a) the amount of the disallowed deferrals to their SEP-IRA for the preceding calendar year, (b) the calendar year in which the disallowed deferrals and earnings are includible in gross income, (c) information stating that the employee must withdraw the excess contributions (and earnings), and (d) an explanation of the tax consequences if the employee does not withdraw such amounts. See the Instructions for Form 5305A-SEP for a detailed description of correcting disallowed deferrals. This is a year-by-year rule.
