A SAR-SEP fails the 1.25% test for 2001 and must return money to the HCE. Does this return count against his 15% limit for 2001? Or can the employer make a contribution sufficient that the HCE would receive 15% (ER plus salary deferral)?

Anything contributed counts against the 15% limit. It creates an excess in the IRA that can ONLY be removed by the IRA owner. The e/er can not cause a distribution. If it only is an ADP violation (an not a 15% limit violation), special notice requirments must be satisfied. Either way the excess is reported in box 1 of Form W-2 (the full amount of the elective is reported in box 13).


The employer can contribute the difference (up to the 15% of net amount), but the allocation must be uniform in percentage (or integrated with social security). Can't just willy nilly up everyone to 15%.