October 26, 1990
TO: PENSION COMMITTEE NO. 26-90
RE: INSTITUTE REQUESTS IRS TO APPROVE PROTOTYPE SARSEPS
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The Institute understands that many eligible small
employers have expressed interest in adopting a simplified
employee pension ("SEP") with a salary reduction arrangement. (A
SEP with a salary reduction agreement is commonly referred to as
a "SARSEP".) However, these employers generally will not adopt
the plan because IRS Form 5305A-SEP, the IRS model SARSEP plan
form, requires adopting employers to make top-heavy minimum
contributions annually, regardless of whether the plan is top-
heavy as defined by Section 416 of the Code. These top-heavy
minimum contributions generally require the employer to
contribute 3 percent of each eligible employee's compensation to
the plan every year. The IRS has an indefinite moratorium on
providing opinion letters to individual sponsors of prototype
SARSEPs which, unlike Form 5305A-SEP, need not require SARSEPs to
be top-heavy every year.
In an effort to allow mutual fund organizations to offer
small employers a SARSEP which is not top-heavy, the Institute
urged the IRS to begin issuing opinion letters for prototype
SARSEPs. As an alternative, the Institute requested the IRS to
modify Form 5305A-SEP to provide a top-heavy determination
procedure in lieu of requiring annual top-heavy minimum
contributions. A copy of the Institute's letter to Martin Slate,
Director of the IRS Employee Plans and Actuarial Division, is
attached.
We will keep you informed of further developments.
W. Richard Mason
Assistant General Counsel
Attachment