Ever heard of a SARSEP? Probably not, and that's actually pretty normal. These Salary Reduction Simplified Employee Pension Plans are basically dinosaurs in the retirement planning world at this point.

Here's the thing: SARSEPs used to be a solid option for small business employees back in the day. They let workers make pretax contributions to retirement accounts through payroll deductions, kind of like a proto-401(k). But the government stopped allowing new SARSEPs after 1996 when the Small Business Job Protection Act passed. If your company has one grandfathered in from before 1997, you might still be able to participate, though it's becoming increasingly rare.

So how does a SARSEP actually work? Employers set up individual accounts for eligible employees at banks, insurance companies, or other financial institutions. You contribute pretax money, and here's the good part: everything is 100% vested immediately. You also get to control how your money is invested if your SARSEP uses IRAs instead of annuities. The contribution limits are tied to the standard 401(k) limits - in 2023 that was $22,500 for employees - with total contributions capped at either 100% of your compensation (up to $330,000) or $66,000, whichever is lower.

Now, there are specific rules to maintain a SARSEP. The company needs 25 or fewer employees, and at least 50% of eligible workers have to actually participate. Employers can set eligibility requirements like tenure (say, three of the last five years employed) but can't discriminate based on gender or race.

Eventually, the SARSEP got replaced by SIMPLE IRAs, which are basically improved versions. SIMPLE plans allow up to 100 employees instead of just 25, and employers are required to make matching contributions. That's why you rarely encounter an active SARSEP anymore.

If you're stuck with one or just inherited one from a previous job, you don't have to do anything. You can leave your money there if you're happy with the fees and investment options. But if you want out, you can roll over your SARSEP contributions tax-free into other IRAs or retirement accounts. The money follows traditional IRA rules, so you'll need to start taking required minimum distributions at age 73.

Bottom line: SARSEPs are relics. Chances are slim you'll encounter one, but if a small business offers you a SARSEP position, at least now you know what you're getting into. It's a legitimate option, just outdated compared to what's available today.