A retirement plan for small business owners that is a simplified employee pension (SEP), set up before 1997, that permits employee elective deferrals in addition to employer contributions. Employees choose to have the employer contribute part of their pay to an individual retirement account (IRA) set up for each employee. A SARSEP may not be established after 1996, but new employees hired may participate in an existing SARSEP. Taxation is deferred until distribution.

For more information, see Practice Note, Simplified Employee Pensions (SEP) and Salary Reduction Simplified Employee Pensions (SARSEPs).