A SARSEP IRA is a Salary Reduction Simplified Employee Pension plan that is used in companies with fewer than 25 employees. In order to set up such an account, the employer must have at least 50% of the eligible employees contribute to this plan. Employees may make contributions in pre-tax dollars and deduct these amounts from their current income through salary reduction, thus reducing their current tax burden while saving for their retirement. After 1996, these plans were replaced by Simple IRAs. Some employers still use pre-1996 plans.