What is a salary reduction simplified pension plan (SARSEP) and how does it work?
A salary reduction simplified employee pension plan is sort of a cross between a simplified employee pension (SEP) plan and a 401(k) retirement plan. New SARSEPs may not be established after Dec 31, 1996. They re found most often at small businesses. Unlike a traditional SEP, a SARSEP allows voluntary employee pre-tax contributions. The money employees contribute is usually taken right out of their paychecks, lowering their gross pay and thus reducing their annual taxes. Money in the SARSEP grows tax-deferred until withdrawals begin, usually after the employee retires and turns 59 1/2. SARSEPs are limited to businesses with no more than 25 workers, and at least half of the eligible employees must contribute on a salary reduction basis.
