What action may be taken by an employer that has a SARSEP but now his employees exceed 25. Can he keep the plan?

Employee elective deferrals to the SEP can only be made if the employer had 25 or fewer employees "eligible" to participate at all times during the "prior" calendar year. Based on your question, you did not identify if you had more than 25 eligible and when they exceeded 25. If you had less than 25 eligibles in 1997 and you exceeded 25 in 1998, then the deferrals would not be allowed to continue in 1999. Just having more than 25 employees is not critical. It is the number who are eligible to participate!

Basically you get to complete the calendar year you are in (assumes using the IRS form) when your number of eligibles exceeds 25. Then you have to look into another program for the following year.

Thanks for the info, the SARSEP will exceed 25 eligible in 1998. So if I am understanding this correctly, in 1999 they have to go with another retirement plan. Can this plan be a SEP? SIMPLE IRA?

If they wish to continue with an employee deferral program of some sort they should terminate the SARSEP by 12/31/98 and then they could adopt a SIMPLE IRA (60 Day Notice, etc.) or look into a 401(k) (Traditional, SIMPLE 401(k), or Safe-Harbor). Instead, they could do a SEP using the same IRA's, but this would be an employer contribution only arrangement. Or they could adopt another form of qualified plan. Need to evaluate what will meet their objectives in the best manner.