February 22, 1991
TO: PENSION COMMITTEE NO. 4-91
RE: INSTITUTE RECOMMENDS SARSEP REVISIONS
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Last year, Senator David Pryor introduced the Employee
Benefits Simplification Act which included a provision to expand
the availability of SEPs with salary reduction features
("SARSEPs") to employers with 100 or fewer employers. (See
Institute Memorandum to Pension Committee No. 18-90, dated July
31, 1990.) The bill also eliminated the 50 percent participation
requirement now applicable to SARSEPs and provided that SARSEP
discrimination tests would be deemed satisfied if the employer
made a mandatory 3 percent contribution to all eligible
employees.
The 3 percent non-elective contribution provision
represents one of two alternative discrimination tests provided
for 401(k) plans under the bill. The second 401(k) test allows
the employer to make mandatory matching contributions only on
behalf of participating employees in order to satisfy the
discrimination rules. The matching contribution is required to
equal (a) 100 percent of the employee’s elective contributions up
to 3 percent of compensation and (b) 50 percent of the employee’s
elective contributions from 3 to 5 percent of compensation.
Senator Pryor is expected to reintroduce his bill next
month. The Institute proposed that the new bill should allow
SARSEP discrimination rules to be satisfied if the arrangement
meets either of the two 401(k) plan discrimination test
alternatives. This change would make the SARSEP similar to the
Packwood PRIME account, except that existing IRAs would be used
to fund the program and the salary reduction limit would not be
capped at $3,000. (See Institute Memorandum to Pension
Committee No. 2-91, dated February 4, 1991.) The Institute also
recommended that the bill specifically mandate, within 90 days
after the bill is enacted, the establishment of a SARSEP
prototype procedure which does not require a SARSEP to be top-
heavy at all times.
A copy of the Institute’s proposal is attached. We will
keep you informed of further developments.
W. Richard Mason
Assistant Counsel--Pension
Attachment