IRS Form 5305-A-SEP – In the world of retirement planning for small businesses, Simplified Employee Pensions (SEPs) offer a straightforward way to save for the future. Among these, the IRS Form 5305-A-SEP stands out as a specialized tool for establishing a Salary Reduction Simplified Employee Pension (SARSEP). This form allows employers to set up a plan where employees can make elective deferrals from their salaries directly into individual retirement accounts (IRAs). While SARSEPs are no longer available for new setups, they remain relevant for grandfathered plans established before 1997. In this SEO-optimized article, we’ll explore the purpose, eligibility, contribution limits, and more, drawing from official IRS sources to ensure accuracy and relevance for 2026.
What is IRS Form 5305-A-SEP?
IRS Form 5305-A-SEP, officially titled “Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement,” is a model document provided by the Internal Revenue Service (IRS). It enables employers to create a SEP that includes salary reduction features, meaning employees can elect to defer a portion of their compensation into a traditional IRA on a pre-tax basis. This setup combines the simplicity of a standard SEP with elements of employee choice similar to a 401(k) plan.
Unlike the more common Form 5305-SEP, which is for employer-only contributions, Form 5305-A-SEP incorporates elective deferrals. However, it’s important to note that new SARSEPs cannot be established after 1996, as per IRS rules. Existing plans can continue, and employers must adhere to the form’s guidelines to maintain compliance. The form is not filed with the IRS but kept in the employer’s records, serving as the agreement between the employer and employees.
This form is particularly useful for small businesses with fewer than 25 employees, as it was designed to meet specific participation and non-discrimination requirements. It references key IRS publications like Pub. 560 (Retirement Plans for Small Business) and Pub. 590 (Individual Retirement Arrangements) for additional guidance.
History and Availability of SARSEPs
SARSEPs were introduced as a flexible retirement option for small employers but were phased out for new establishments starting in 1997 due to changes in tax laws. The Small Business Job Protection Act of 1996 ended the ability to create new salary reduction SEPs, shifting focus to options like SIMPLE IRAs. Despite this, grandfathered SARSEPs—those set up before January 1, 1997—can still operate and accept contributions.
If your business has an existing SARSEP using Form 5305-A-SEP, you can continue making elective deferrals and employer contributions. For new retirement plans, consider alternatives like a standard SEP IRA (using Form 5305-SEP) or a SIMPLE IRA. The IRS emphasizes that employers with grandfathered plans must monitor participation to ensure at least 50% of eligible employees make deferrals; otherwise, contributions may be treated as disallowed.
Eligibility Requirements for SARSEP Participation
To qualify for a SARSEP under Form 5305-A-SEP, employers and employees must meet specific criteria outlined in the form.
Employer Eligibility
- The employer must have had 25 or fewer eligible employees in the prior year.
- Cannot maintain other qualified retirement plans except another SEP.
- Must not be part of a controlled group or affiliated service group that would violate the employee count limit.
Employee Eligibility
Eligible employees are those who:
- Are at least 21 years old.
- Have performed services for the employer in at least three of the last five years.
- Have received at least $750 in compensation in 2026 (adjusted for cost-of-living; the 2006 form referenced $450, but current IRS adjustments apply).
Excludable employees include those covered by collective bargaining agreements (if retirement benefits were negotiated in good faith), nonresident aliens without U.S.-sourced income, and certain others. Highly compensated employees (HCEs)—defined as 5% owners or those earning over $155,000 in 2026 (adjusted annually)—are subject to additional deferral percentage limitations to prevent discrimination.
The form requires employers to check boxes for eligibility options, ensuring non-discriminatory coverage.
How to Set Up and Fill Out Form 5305-A-SEP?
Although new SARSEPs can’t be created, understanding the setup process is crucial for maintaining existing ones. Here’s a step-by-step guide based on IRS instructions.
- Complete the Form: Enter the employer’s name and effective date. Check eligibility boxes in Article I (e.g., age and service requirements). Specify contribution details in Articles II and III, including deferral limits and IRA setup requirements.
- Establish SEP-IRAs: Each eligible employee must have a traditional IRA (using Form 5305 or 5305-A) at a qualified financial institution. Roth or SIMPLE IRAs are not permitted.
- Provide Disclosures: Give employees a copy of the completed Form 5305-A-SEP, instructions, and details on how to make elections. Employees submit written deferral elections (percentage or dollar amount per pay period).
- Monitor Compliance: Ensure at least 50% participation. Calculate average deferral percentages (ADP) for non-HCEs and limit HCE deferrals to 1.25 times that average.
- Handle Top-Heavy Rules: If the plan is top-heavy (key employees’ balances exceed 60% of total), make minimum 3% contributions to non-key employees’ IRAs (Article VI).
The form includes a model employee election section and worksheets for ADP testing. Contributions are made on a calendar-year basis, and excesses must be withdrawn by April 15 of the following year to avoid penalties.
For the PDF version, download it from the IRS website: https://www.irs.gov/pub/irs-pdf/f5305ase.pdf.
2026 Contribution Limits for SARSEPs
Contribution rules for grandfathered SARSEPs blend elective deferrals and employer contributions.
- Elective Deferrals: Limited to the lesser of 25% of compensation or $24,500 in 2026. Catch-up contributions for those 50+ are an additional $3,500 (totaling up to $28,000), though not subject to the 25% limit.
- Employer Contributions: Up to 25% of compensation (first $360,000 in 2026), with a maximum of $72,000. Total contributions (elective + employer) cannot exceed section 415 limits.
- Overall SEP Limit: Employer contributions across all SEPs are capped at $72,000 or 25% of compensation.
Deferrals are excluded from gross income but subject to FICA taxes. Excesses incur a 6% excise tax (Form 5329) and potential 10% early withdrawal penalty if under age 59½.
| Contribution Type | 2026 Limit | Notes |
|---|---|---|
| Elective Deferrals | Lesser of 25% compensation or $24,500 | Plus $3,500 catch-up for age 50+ |
| Employer Contributions | 25% of compensation (up to $360,000) or $72,000 | Must be uniform for all eligible employees |
| Total Annual Additions | $72,000 | Subject to section 415(c) |
These limits are adjusted annually for cost-of-living; check IRS announcements for updates.
Benefits and Drawbacks of Using Form 5305-A-SEP
Benefits
- Tax Advantages: Deferrals reduce taxable income, and growth is tax-deferred.
- Simplicity: No annual Form 5500 filing if conditions are met.
- Flexibility: Contributions can vary yearly, and employees choose deferral amounts.
- Low Costs: Minimal administrative burden compared to 401(k) plans.
Drawbacks
- Limited Availability: Only for pre-1997 plans; new businesses can’t use it.
- Participation Requirements: Must have 50% employee election rate, or deferrals become disallowed.
- No Loans or Hardships: Withdrawals are taxable and penalized if early.
- Discrimination Testing: ADP tests can limit HCE contributions.
Alternatives to SARSEP
For businesses unable to use Form 5305-A-SEP, consider:
- Standard SEP IRA: Use Form 5305-SEP for employer-only contributions up to $72,000 in 2026.
- SIMPLE IRA: Allows employee deferrals up to $16,500 in 2026 (plus catch-up), with employer matching.
- Solo 401(k): Ideal for self-employed individuals, with higher limits.
Consult a tax professional to choose the best fit.
Conclusion
IRS Form 5305-A-SEP remains a valuable tool for managing grandfathered Salary Reduction SEPs, offering tax-deferred savings through elective contributions. While new plans aren’t possible, existing ones provide significant benefits for small businesses. Always refer to the latest IRS guidelines, as limits and rules evolve. For the most current details, visit IRS.gov or download the form PDF. If you’re maintaining a SARSEP, regular compliance checks ensure penalty-free operation. Retirement planning starts with informed choices—consider consulting a financial advisor today.