First of all, you should know that SARSEPs are a type of pension plan that, as of 1997, are no longer available. Those who already have such plans can continue to contribute to them, and add accounts for new employees, but no new SARSEPs can be set up.

SARSEPs are SEPs that act like 401(k) plans in the sense that employees who participate in the SARSEP can elect to have salary-reduction contributions made to the SEP, just as they can in a 401(k) plan.

Basic rules. The amount that can be deferred in a SARSEP is the lesser of 15 percent of compensation up to $200,000 or $11,000 for 2002 (the lesser of 15 percent of compensation up to $170,000 or $10,500 in 2001; this amount is adjusted annually for inflation). Those who are age 50 or over in 2002, can contribute an additional $1,000 for the year. To participate, an employee must be at least 21, must have worked for you in at least three of the preceding five years, and must have received at least $450 in compensation for the year in which the contribution was made. The $450 amount is for 2001 and 2002 and may be adjusted for inflation. The election to use a SARSEP is available only if (1) at least 50 percent of the employees who are eligible to participate elect to have amounts contributed to the SEP and (2) you have no more than 25 eligible employees