IRS Releases Publication 560 (2016), Retirement Plans for Small Business

 

a. Commissions and tips.

b. Fringe benefits.

c. Bonuses.

 

a. Immediate participation. (This requirement doesn't apply to any individual whose compensation from the leasing organization in each plan year during the 4-year period ending with the plan year is less than $1,000.)

b. Full and immediate vesting.

c. A nonintegrated employer contribution rate of at least 10% of compensation for each participant.

 

• Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.

• Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you. For more information about nonresident aliens, see Publication 519, U.S. Tax Guide for Aliens.

 

1. You must execute a formal written agreement to provide benefits to all eligible employees.

2. You must give each eligible employee certain information about the SEP.

3. A SEP-IRA must be set up by or for each eligible employee.

 

1. You currently maintain any other qualified retirement plan other than another SEP.

2. You have any eligible employees for whom IRAs haven't been set up.

3. You use the services of leased employees, who aren't your common-law employees (as described in chapter 1).

4. You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP.

 

5. You don't pay the cost of the SEP contributions.

 

• 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment).

• $53,000.

 

1. Your contributions (including any excess contributions carryover).

2. 25% of the compensation (limited to $265,000 per participant) paid to the participants during 2016 from the business that has the plan, not to exceed $53,000 per participant.

 

• The deduction for the deductible part of your self-employment tax.

• The deduction for contributions to your own SEP-IRA.

 

• If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends.

• If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year.

 

• At least 50% of your employees eligible to participate choose to make elective deferrals.

• You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year.

• The elective deferrals of your highly compensated employees meet the SARSEP ADP test.

 

1. 25% of the participant's compensation (limited to $265,000 of the participant's compensation).

2. $18,000.

 

• Cash or deferred arrangement (section 401(k) plan).

• Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan).

• SIMPLE IRA plan.

 

• The catch-up contribution limit.

• The excess of the participant's compensation over the elective deferrals that aren't catch-up contributions.

 

• Making excess contributions.

• Making early withdrawals.

• Not making required withdrawals.

 

• SIMPLE IRA plan

• SIMPLE 401(k) plan

 

• Publication 590-A Contributions to Individual Retirement Arrangements (IRAs)

• Publication 590-B Distributions from Individual Retirement Arrangements (IRAs)

• Publication 3998 Choosing A Retirement Solution for Your Small Business

• Publication 4334 SIMPLE IRA Plans for Small Businesses

 

• Form W-2 Wage and Tax Statement

• Form 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)--Not for Use With a Designated Financial Institution

• Form 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)--for Use With a Designated Financial Institution

• Form 8880 Credit for Qualified Retirement Savings Contributions

• Form 8881 Credit for Small Employer Pension Plan Startup Costs

 

• Using SIMPLE IRAs (SIMPLE IRA plan).

• As part of a 401(k) plan (SIMPLE 401(k) plan).

 

• You meet the employee limit.

• You don't maintain another qualified plan unless the other plan is for collective bargaining employees.

 

• Coverage under the plan hasn't significantly changed during the grace period.

• The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer.

 

• Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.

• Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you.

 

• Meeting employer notification requirements for the SIMPLE IRA plan. Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee.

• Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees.

 

1. The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan.

2. Your decision to make either matching contributions or nonelective contributions (discussed later).

3. A summary description provided by the financial institution.

4. Written notice that his or her balance can be transferred without cost or penalty if they use a designated financial institution.

 

• The catch-up contribution limit.

• The excess of the participant's compensation over the salary reduction contributions that aren't catch-up contributions.

 

1. Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $12,500 for 2016 and 2017. If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $3,000 for 2016 and 2017. See Catch-up contributions, earlier under Contribution Limits.

2. You must make either:

 

3. No other contributions can be made to the trust.

4. No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan.

5. The employee's rights to any contributions are nonforfeitable.

 

• Kinds of plans

• Qualification rules

• Setting up a qualified plan

• Minimum funding requirement

• Contributions

• Employer deduction

• Elective deferrals (401(k) plans)

• Qualified Roth contribution program

• Distributions

• Prohibited transactions

• Reporting requirements

 

• Publication 575 Pension and Annuity Income

• Publication 590-A Contributions to Individual Retirement Arrangements (IRAs)

• Publication 590-B Distributions from Individual Retirement Arrangements (IRAs)

• Publication 3998 Choosing A Retirement Solution for Your Small Business

• Publication 4222 401(k) Plans for Small Businesses

• Publication 4531 401(k) Plan Checklist

• Publication 4674 Automatic Enrollment 401(k) Plans for Small Businesses

•  

Forms (and Instructions)

 

• Form W-2 Wage and Tax Statement

• Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc.

• Form 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

• Form 1040 U.S. Individual Income Tax Return

• Schedule C (Form 1040) Profit or Loss From Business

• Schedule F (Form 1040) Profit or Loss From Farming

• Form 5300 Application for Determination for Employee Benefit Plan

• Form 5310 Application for Determination for Terminating Plan

• Form 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

• Form 5330 Return of Excise Taxes Related to Employee Benefit Plans

• Form 5500 Annual Return/Report of Employee Benefit Plan.

• Form 5500-EZ Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan

• Form 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan.

• Form 8717 User Fee for Employee Plan Determination Letter Request

• Form 8880 Credit for Qualified Retirement Savings Contributions

• Form 8881 Credit for Small Employer Pension Plan Startup Costs

• Form 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits

 

These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H.R.10 plans. A sole proprietor or a partnership can set up one of these plans. A common-law employee or a partner can't set up one of these plans. The plans described here can also be set up and maintained by employers that are corporations. All the rules discussed here apply to corporations except where specifically limited to the self-employed.

The plan must be for the exclusive benefit of employees or their beneficiaries. These qualified plans can include coverage for a self-employed individual.

As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Kinds of Plans

There are two basic kinds of qualified plans--defined contribution plans and defined benefit plans--and different rules apply to each. You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction, later.

Defined Contribution Plan

A defined contribution plan provides an individual account for each participant in the plan. It provides benefits to a participant largely based on the amount contributed to that participant's account. Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan.

Profit-sharing plan. Although it is called a "profit-sharing plan," you don't actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed as discussed under Self-employed Individual, later). A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan isn't fixed. An employer may even make no contribution to the plan for a given year.

The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences.

In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later).

Money purchase pension plan. Contributions to a money purchase pension plan are fixed and aren't based on your business profits. For example, a money purchase pension plan may require that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income).

Defined Benefit Plan

A defined benefit plan is any plan that isn't a defined contribution plan. Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions. Generally, you will need continuing professional help to have a defined benefit plan.

Qualification Rules

To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. The following is a brief overview of important qualification rules that generally haven't yet been discussed. It isn't intended to be all-inclusive. See Setting Up a Qualified Plan, later.

TIP: Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. A SIMPLE 401(k) plan is, however, not subject to the top-heavy plan rules and nondiscrimination rules if the plan satisfies the provisions discussed in chapter 3 under SIMPLE 401(k) Plan.

Plan assets must not be diverted. Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the benefit of employees and their beneficiaries. As a general rule, the assets can't be diverted to the employer.

Minimum coverage requirement must be met. To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following.

 

1. 50 employees, or

2. The greater of:

 

a. 40% of all employees, or

b. Two employees.

If there is only one employee, the plan must benefit that employee.

Contributions or benefits must not discriminate. Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees.

Contributions and benefits must not be more than certain limits. Your plan must not provide for contributions or benefits that are more than certain limits. The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. These limits are discussed later in this chapter under Contributions.

Minimum vesting standard must be met. Your plan must satisfy certain requirements regarding when benefits vest. A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. A benefit is nonforfeitable if it can't be lost upon the happening, or failure to happen, of any event. Special rules apply to forfeited benefit amounts. In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions.

Forfeitures under a defined benefit plan can't be used to increase the benefits any employee would otherwise receive under the plan. Forfeitures must be used instead to reduce employer contributions.

Participation. In general, an employee must be allowed to participate in your plan if he or she meets both the following requirements.

 

• Has reached age 21.

• Has at least 1 year of service (2 years if the plan isn't a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all his or her accrued benefit).

 

CAUTION: A plan can't exclude an employee because he or she has reached a specified age.

Leased employee. A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. These rules include those in all the following areas.

 

• Nondiscrimination in coverage, contributions, and benefits.

• Minimum age and service requirements.

• Vesting.

• Limits on contributions and benefits.

• Top-heavy plan requirements.

 

Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you.

Benefit payment must begin when required. Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods.

 

• The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan.

• The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs.

• The plan year in which the participant separates from service.

 

Early retirement. Your plan can provide for payment of retirement benefits before the normal retirement age. If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if he or she meets both the following requirements.

 

• Satisfies the service requirement for the early retirement benefit.

• Separates from service with a nonforfeitable right to an accrued benefit. The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met.

 

Required minimum distributions. Special rules require minimum annual distributions from qualified plans, generally beginning after age 70 1/2. See Required Distributions, under Distributions, later.

Survivor benefits. Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms.

 

• A qualified joint and survivor annuity for a vested participant who doesn't die before the annuity starting date.

• A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse.

 

The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met.

 

• The participant doesn't choose benefits in the form of a life annuity.

• The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies.

• The plan isn't a direct or indirect transferee of a plan that must provide automatic survivor benefits.

 

Loan secured by benefits. If automatic survivor benefits are required for a spouse under a plan, he or she must consent to a loan that uses as security the accrued benefits in the plan.

Waiver of survivor benefits. Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. The plan also must allow the participant to withdraw the waiver. The spouse's consent must be witnessed by a plan representative or notary public.

Involuntary cash-out of benefits not more than dollar limit. A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit isn't greater than $5,000.

However, the distribution can't be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. If the present value is greater than $5,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit.

Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits.

A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. See Section 402(f) Notice under Distributions, later, for more details.

Consolidation, merger, or transfer of assets or liabilities. Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit he or she would have been entitled to just before the merger, etc. (if the plan had then terminated).

Benefits must not be assigned or alienated. Your plan must provide that a participant's or beneficiary's benefits under the plan can't be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgements or settlements against the participant for violations of plan rules.

Exception for certain loans. A loan from the plan (not from a third party) to a participant or beneficiary isn't treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. A disqualified person is defined later in this chapter under Prohibited Transactions.

Exception for QDRO. Compliance with a QDRO (qualified domestic relations order) doesn't result in a prohibited assignment or alienation of benefits.

Payments to an alternate payee under a QDRO before the participant attains age 59 1/2 aren't subject to the 10% additional tax that would otherwise apply under certain circumstances. Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity.

No benefit reduction for social security increases. Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. This rule also applies to plans supplementing the benefits provided by other federal or state laws.

Elective deferrals must be limited. If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. See Limit on Elective Deferrals later in this chapter.

Top-heavy plan requirements. A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees.

A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan.

Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. These qualification requirements for top-heavy plans are explained in section 416 and its regulations.

SIMPLE and safe harbor 401(k) plan exception. The top-heavy plan requirements don't apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. QACAs (discussed later) also aren't subject to top-heavy requirements.

Setting Up a Qualified Plan

There are two basic steps in setting up a qualified plan. First you adopt a written plan. Then you invest the plan assets.

You, the employer, are responsible for setting up and maintaining the plan.

TIP: If you are self-employed, it isn't necessary to have employees besides yourself to sponsor and set up a qualified plan. If you have employees, see Participation, under Qualification Rules, earlier.

Set-up deadline. To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar-year employers).

Credit for startup costs. You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a qualified plan that first became effective in 2016. For more information, see Credit for startup costs under Reminders, earlier.

Adopting a Written Plan

You must adopt a written plan. The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. Or it can be an individually designed plan.

Written plan requirement. To qualify, the plan you set up must be in writing and must be communicated to your employees. The plan's provisions must be stated in the plan. It isn't sufficient for the plan to merely refer to a requirement of the Internal Revenue Code.

Master or prototype plans. Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. Master and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals). Under a master plan, a single trust or custodial account is established, as part of the plan, for the joint use of all adopting employers. Under a prototype plan, a separate trust or custodial account is established for each employer.

Plan providers. The following organizations generally can provide IRS-approved master or prototype plans.

 

Individually designed plan. If you prefer, you can set up an individually designed plan to meet specific needs. Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. You may need professional help for this. See Rev. Proc. 2017-4, 2017-1 I.R.B. 146, available at IRS.gov/irb/2017-01_IRB/ar10.html, as annually updated, that may help you decide whether to apply for approval.

User fee. The fee mentioned earlier for requesting a determination letter doesn't apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. At least one of them must be a non-highly compensated employee participating in the plan. The fee doesn't apply to requests made by the later of the following dates.

 

The request can't be made by the sponsor of a prototype or similar plan the sponsor intends to market to participating employers.

For more information about whether the user fee applies, see Rev. Proc. 2017-4, 2017-1 I.R.B. 146, available at IRS.gov/irb/ 2017-01_IRB/ar10.html, as may be annually updated; Notice 2017-1, 2017-2 I.R.B. 367, available at IRS.gov/pub/irs-irbs/irb17-02.pdf and Form 8717.

Investing Plan Assets

In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets.

 

You set up a trust by a legal instrument (written document). You may need professional help to do this.

You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee.

You don't need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. If anyone other than a trustee holds them, however, the contracts or certificates must state they aren't transferable.

Other plan requirements. For information on other important plan requirements, see Qualification Rules, earlier in this chapter.

Minimum Funding Requirement

In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. For information on this funding requirement, see section 412 and its regulations.

Quarterly installments of required contributions. If your plan is a defined benefit plan subject to the minimum funding requirements, you generally must make quarterly installment payments of the required contributions. If you don't pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment.

Due dates. The due dates for the installments are 15 days after the end of each quarter. For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year).

Installment percentage. Each quarterly installment must be 25% of the required annual payment.

Extended period for making contributions. Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8 1/2 months after the end of that year.

Contributions

A qualified plan is generally funded by your contributions. However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. See Employee Contributions and Elective Deferrals later.

Contributions deadline. You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year.

Self-employed individual. You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. Your net earnings must be from your personal services, not from your investments. If you have a net loss from self-employment, you can't make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation.

Employer Contributions

There are certain limits on the contributions and other annual additions you can make each year for plan participants. There are also limits on the amount you can deduct. See Deduction Limits, later.

Limits on Contributions and Benefits

Your plan must provide that contributions or benefits can't exceed certain limits. The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan.

Defined benefit plan. For 2016, the annual benefit for a participant under a defined benefit plan can't exceed the lesser of the following amounts.

 

Defined contribution plan. For 2016, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant can't exceed the lesser of the following amounts.

 

Catch-up contributions (discussed later under Limit on Elective Deferrals) aren't subject to the above limit.

Employee Contributions

Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Even though these employee contributions aren't deductible, the earnings on them are tax free until distributed in later years. Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).

When Contributions Are Considered Made

You generally apply your plan contributions to the year in which you make them. But you can apply them to the previous year if all the following requirements are met.

Employer's promissory note. Your promissory note made out to the plan isn't a payment that qualifies for the deduction. Also, issuing this note is a prohibited transaction subject to tax. See Prohibited Transactions, later.

Employer Deduction

You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Deduction Limits

The deduction limit for your contributions to a qualified plan depends on the kind of plan you have.

Defined contribution plans. The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) can't be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. See Deduction Limit for Self-Employed Individuals, later.

When figuring the deduction limit, the following rules apply.

 

Defined benefit plans. The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Consequently, an actuary must figure your deduction limit.

CAUTION: In figuring the deduction for contributions, you can't take into account any contributions or benefits that are more than the limits discussed earlier under Limits on Contributions and Benefits.

Deduction Limit for Self-Employed Individuals

If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Compensation is your net earnings from self-employment, defined in chapter 1. This definition takes into account both the following items.

 

The deduction for your own contributions and your net earnings depend on each other. For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

Where To Deduct Contributions

Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120 or Form 1120S.

Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership.)

Carryover of Excess Contributions

If you contribute more to a plan than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. See Deduction Limit for Self-Employed Individuals, earlier. The amount you carry over and deduct may be subject to the excise tax discussed next.

Table 4-1, earlier, illustrates the carryover of excess contributions to a profit-sharing plan.

Table 4-1. Carryover of Excess Contributions Illustrated--Profit-Sharing Plan (000's omitted)

 -------------------------------------------------------------------

 

                                                   Deductible

 

          Participants'        Employer       limit for current year

 

 Year     compensation      Contribution       (25% of compensation)

 

 -------------------------------------------------------------------

 

 2013        $1,000              $100                  $250

 

 2014           400               165                   100

 

 2015           500               100                   125

 

 2016           600               100                   150

 

 -------------------------------------------------------------------

 

 [Table Continued]

 

 ---------------------------------------------------------

 

                                                 Excess

 

                Excess           Total        contribution

 

             contribution      deduction       carryover

 

               carryover       including      available at

 

 Year            used¹         carryovers     end of year

 

 ---------------------------------------------------------

 

 2013            $0               $100            $0

 

 2014             0                100            65

 

 2015            25                125            40

 

 2016            40                140             0

 

 ---------------------------------------------------------

 

 ¹ There were no carryovers from years before 2013.

 

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 Excise Tax for Nondeductible (Excess) Contributions

 

 

If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs.

Special rule for self-employed individuals. The 10% excise tax doesn't apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference isn't subject to this excise tax. See Minimum Funding Requirement, earlier.

Reporting the tax. You must report the tax on your nondeductible contributions on Form 5330. Form 5330 includes a computation of the tax. See the separate instructions for completing the form.

Elective Deferrals (401(k) Plans)

Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. A plan with this type of arrangement is popularly known as a "401(k) plan." (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business.) This contribution is called an "elective deferral" because participants choose (elect) to defer receipt of the money.

In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans.

 

Partnership. A partnership can have a 401(k) plan.

Restriction on conditions of participation. The plan can't require, as a condition of participation, that an employee complete more than 1 year of service.

Matching contributions. If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions.

Nonelective contributions. You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. These are called nonelective contributions.

Employee compensation limit. No more than $265,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2016. This limit is $270,000 in 2017.

SIMPLE 401(k) plan. If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. A SIMPLE 401(k) plan isn't subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3.

Distributions. Certain rules apply to distributions from 401(k) plans. See Distributions From 401(k) Plans, later.

Limit on Elective Deferrals

There is a limit on the amount an employee can defer each year under these plans. This limit applies without regard to community property laws. Your plan must provide that your employees can't defer more than the limit that applies for a particular year. The basic limit on elective deferrals is $18,000 for 2016 and 2017. This limit applies to all salary reduction contributions and elective deferrals. If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income.

Catch-up contributions. A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit is $6,000 for 2016 and 2017. Elective deferrals aren't treated as catch-up contributions for 2016 or 2017 until they exceed the $18,000 limit, the actual deferral percentage (ADP) test limit of section 401(k)(3), or the plan limit (if any). However, the catch-up contribution a participant can make for a year can't exceed the lesser of the following amounts.

 

Treatment of contributions. Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax.

Forfeiture. Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals.

Reporting on Form W-2. Don't include elective deferrals in the "Wages, tips, other compensation" box of Form W-2. You must, however, include them in the "Social security wages" and "Medicare wages and tips" boxes. You must also include them in box 12. Mark the "Retirement plan" checkbox in box 13. For more information, see the Form W-2 instructions.

Automatic Enrollment

Your 401(k) plan can have an automatic enrollment feature. Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage. These contributions are elective deferrals. An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). For more information, see Publication 4674.

Eligible automatic contribution arrangement. Under an eligible automatic contribution arrangement (EACA), a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). There is no required deferral percentage.

Withdrawals. Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met.

 

If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. The additional 10% tax on early distributions won't apply to the distribution.

Notice requirement. Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of his or her rights and obligations under the EACA. The notice must include an explanation of the employee's right to elect not to have elective contributions made on his or her behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. The notice also must explain how contributions will be invested in the absence of an investment election by the employee.

Qualified automatic contribution arrangement. A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. It contains an automatic enrollment feature, and mandatory employer contributions are required. If your plan includes a QACA, it won't be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). Additionally, your plan won't be subject to the actual contribution percentage test if certain additional requirements are met. Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). If an employee doesn't make an affirmative election, the default deferral percentage must meet the following conditions.

 

Matching or nonelective contributions. Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms.

 

Treatment of Excess Deferrals

If the total of an employee's deferrals is more than the limit for 2016, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. He or she must notify the plan by April 15, 2017 (or an earlier date specified in the plan), of the amount to be paid from each plan. The plan must then pay the employee that amount, plus earnings on the amount through the end of 2016, by April 15, 2017.

Excess withdrawn by April 15. If the employee takes out the excess deferral by April 15, 2017, it isn't reported again by including it in the employee's gross income for 2017. However, any income earned in 2016 on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution isn't subject to the additional 10% tax on early distributions.

If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income.

Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans.

Excess not withdrawn by April 15. If the employee doesn't take out the excess deferral by April 15, 2017, the excess, though taxable in 2016, isn't included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified.

Reporting corrective distributions on Form 1099-R. Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498.

Tax on excess contributions of highly compensated employees. The law provides tests to detect discrimination in a plan. If tests, such as the actual deferral percentage test (ADP test) (see section 401(k)(3)) and the actual contribution percentage test (see section 401(m) (2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Report the tax on Form 5330. The ADP test doesn't apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. Also, the ACP test doesn't apply to these plans if certain additional requirements are met.

The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test.

See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).

CAUTION: If the plan fails the ADP or ACP testing, and the failure isn't corrected by the end of the next plan year, the plan can be disqualified.

Safe harbor 401(k) plan.

If you meet the requirements for a safe harbor 401(k) plan, you don't have to satisfy the ADP test, nor the ACP test, if certain additional requirements are met. For your plan to be a safe harbor plan, you must meet the following conditions.

The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan.

Qualified Roth Contribution Program

Under this program, an eligible employee can designate all or a portion of his or her elective deferrals as after-tax Roth contributions. Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. However, unlike other elective deferrals, designated Roth contributions aren't excluded from employees' gross income, but qualified distributions from a Roth account are excluded from employees' gross income.

Elective Deferrals

Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2016 and 2017, $18,000 if under age 50 and $24,000 if age 50 or over) less the total amount of the employee's elective deferrals not designated as Roth contributions.

Designated Roth contributions are treated the same as pre-tax elective deferrals for most purposes, including:

 

Qualified Distributions

A qualified distribution is a distribution that is made after the employee's nonexclusion period and:

 

An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years.

 

Rollover. A rollover from another account can be made to a designated Roth account in the same plan. For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I.R.B. 872, available at IRS.gov/irb/2010-51_IRB/ar11.html, and Notice 2013-74, 2013-52 I.R.B. 819, available at IRS.gov/pub/irs-irbs/irb13-52.pdf. A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. Rollover amounts don't apply toward the annual deferral limit.

Reporting Requirements

You must report a contribution to a Roth account on Form W-2 and a distribution from a Roth account on Form 1099-R. See the Form W-2 and 1099-R instructions for detailed information.

Distributions

Amounts paid to plan participants from a qualified plan are called distributions. Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Also, certain loans may be treated as distributions. See Loans Treated as Distributions in Publication 575.

Required Distributions

A qualified plan must provide that each participant will either:

 

These distribution rules apply individually to each qualified plan. You can't satisfy the requirement for one plan by taking a distribution from another. The plan must provide that these rules override any inconsistent distribution options previously offered.

Minimum distribution. If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. This minimum is figured by dividing the account balance by the applicable life expectancy. The plan administrator can use the life expectancy tables in Publication 590-B for this purpose. For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575.

Required beginning date. Generally, each participant must receive his or her entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date.

A participant must begin to receive distributions from his or her qualified retirement plan by April 1 of the first year after the later of the following years.

 

However, the plan may require the participant to begin receiving distributions by April 1 of the year after the participant reaches age 70 1/2 even if the participant has not retired.

If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 70 1/2. For more information, see Tax on Excess Accumulation in Publication 575.

Distributions after the starting year. The distribution required to be made by April 1 is treated as a distribution for the starting year. (The starting year is the year in which the participant meets (1) or (2) above, whichever applies.) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31).

Distributions after participant's death. See Publication 575 for the special rules covering distributions made after the death of a participant.

Distributions From 401(k) Plans

Generally, distributions can't be made until one of the following occurs.

 

CAUTION: Certain distributions listed above may be subject to the tax on early distributions discussed later.

Qualified reservist distributions. A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. All or part of a qualified reservist distribution can be recontributed to an IRA. The additional 10% tax on early distributions doesn't apply to a qualified reservist distribution.

Tax Treatment of Distributions

Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. Since most recipients have no cost basis, a distribution is generally fully taxable. An exception is a distribution that is properly rolled over as discussed under Rollover, next.

The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Publication 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution.

Note. A recipient of a distribution from a designated Roth account will have a cost basis since designated Roth contributions are made on an after-tax basis. Also, a distribution from a designated Roth account is entirely tax-free if certain conditions are met. See Qualified distributions under Qualified Roth Contribution Program, earlier.

Rollover. The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. However, it may be subject to withholding as discussed under Withholding requirement, later. A rollover can also be made to a Roth IRA, in which case, any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account.

Eligible rollover distribution. This is a distribution of all or any part of an employee's balance in a qualified retirement plan that isn't any of the following.

 

Rollover of nontaxable amounts. You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. If the rollover is to an IRA, the transfer can be made by any rollover method.

Note. A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee).

More information. For more information about rollovers, see Rollovers in Publications 590-A. For rules on rolling over distributions that contain nontaxable amounts, see Notice 2014-54, 2014-41 I.R.B. 670, available at IRS.gov/irb/2014-41_IRB/ar11.html. For guidance on rolling money into a qualified plan, see Rev. Rul. 2014-9, 2014-17 I.R.B. 975, available at IRS.gov/irb/2014-17_IRB/ar05.html.

Withholding requirement. If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax.

Exceptions. If, instead of having the distribution paid to him or her, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover), no withholding is required.

If the distribution isn't an eligible rollover distribution, defined earlier, the 20% withholding requirement doesn't apply. Other withholding rules apply to distributions that aren't eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). However, the participant can choose not to have tax withheld from these distributions. If the participant doesn't make this choice, the following withholding rules apply.

 

Estimated tax payments. If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. For more information, see Withholding Tax and Estimated Tax in Publication 575.

Section 402(f) Notice. If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions.

 

Notice 2014-74, 2014-50 I.R.B 937, available at IRS.gov/irb/2014-50_IRB/ar09.html, contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions.

Timing of notice. The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution.

Method of notice. The written notice must be provided individually to each distributee of an eligible rollover distribution. Posting of the notice isn't sufficient. However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. See Regulations section 1.401(a)-21.

Tax on failure to give notice. Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. The tax won't be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect.

Tax on Early Distributions

If a distribution is made to an employee under the plan before he or she reaches age 59 1/2, the employee may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that the employee must include in income.

Exceptions. The 10% tax won't apply if distributions before age 59 1/2 are made in any of the following circumstances.

 

Reporting the tax. To report the tax on early distributions, file Form 5329. See the form instructions for additional information about this tax.

Tax on Excess Benefits

If you are or have been a 5% owner of the business maintaining the plan, amounts you receive at any age that are more than the benefits provided for you under the plan formula are subject to an additional tax. This tax also applies to amounts received by your successor. The tax is 10% of the excess benefit includible in income.

To determine whether or not you are a 5% owner, see section 416.

Reporting the tax. Include on Form 1040, line 62, any tax you owe for an excess benefit. On the dotted line next to the total, write "Sec. 72(m)(5)" and write in the amount.

Lump-sum distribution. The amount subject to the additional tax isn't eligible for the optional methods of figuring income tax on a lump-sum distribution. The optional methods are discussed under Lump-Sum Distributions in Publication 575.

Excise Tax on Reversion of Plan Assets

A 20% or 50% excise tax is generally imposed on the cash and fair market value of other property an employer receives directly or indirectly from a qualified plan. If you owe this tax, report it on Schedule I of Form 5330. See the form instructions for more information.

Notification of Significant Benefit Accrual Reduction

An employer or the plan will have to pay an excise tax if both the following occur.

 

A plan amendment that eliminates or reduces any early retirement benefit or retirement-type subsidy reduces the rate of future benefit accrual.

The notice must be written in a manner calculated to be understood by the average plan participant and must provide enough information to allow each individual to understand the effect of the plan amendment. It must be provided within a reasonable time before the amendment takes effect.

The tax is $100 per participant or alternate payee for each day the notice is late, the total tax can't be more than $500,000 during the tax year. It is imposed on the employer, or, in the case of a multi-employer plan, on the plan.

Prohibited Transactions

Prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law. (However, see Exemption, next.) If you are a disqualified person who takes part in a prohibited transaction, you must pay a tax (discussed later).

Prohibited transactions generally include the following transactions.

Exemption. Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction doesn't take place if you are a disqualified person and receive any benefit to which you are entitled as a plan participant or beneficiary. However, the benefit must be figured and paid under the same terms as for all other participants and beneficiaries. For other transactions that are exempt, see section 4975 and the related regulations.

Disqualified person. You are a disqualified person if you are any of the following.

 

Tax on Prohibited Transactions

The initial tax on a prohibited transaction is 15% of the amount involved for each year (or part of a year) in the taxable period. If the transaction isn't corrected within the taxable period, an additional tax of 100% of the amount involved is imposed. For information on correcting the transaction, see Correcting a prohibited transaction, later.

Both taxes are payable by any disqualified person who participated in the transaction (other than a fiduciary acting only as such). If more than one person takes part in the transaction, each person can be jointly and severally liable for the entire tax.

Amount involved. The amount involved in a prohibited transaction is the greater of the following amounts.

 

If services are performed, the amount involved is any excess compensation given or received.

Taxable period. The taxable period starts on the transaction date and ends on the earliest of the following days.

 

Payment of the 15% tax. Pay the 15% tax with Form 5330.

Correcting a prohibited transaction. If you are a disqualified person who participated in a prohibited transaction, you can avoid the 100% tax by correcting the transaction as soon as possible. Correcting the transaction means undoing it as much as you can without putting the plan in a worse financial position than if you had acted under the highest fiduciary standards.

Correction period. If the prohibited transaction isn't corrected during the taxable period, you usually have an additional 90 days after the day the IRS mails a notice of deficiency for the 100% tax to correct the transaction. This correction period (the taxable period plus the 90 days) can be extended if either of the following occurs.

 

If you correct the transaction within this period, the IRS will abate, credit, or refund the 100% tax.

Reporting Requirements

You may have to file an annual return/report form by the last day of the 7th month after the plan year ends. See the following list of forms to choose the right form for your plan.

Form 5500-SF. Form 5500-SF is a simplified annual reporting form. You can use Form 5500-SF if the plan meets all the following conditions.

 

If your plan is required to file an annual return/report but isn't eligible to file Form 5500-SF, the plan must file Form 5500 or Form 5500-EZ, as appropriate. For more details, see the Instructions for Form 5500-SF.

Form 5500-EZ. You may be able to use Form 5500-EZ if the plan is a one-participant plan, as defined below.

One-participant plan. Your plan is a one-participant plan if either of the following is true.

 

CAUTION: A one-participant plan may not file an annual return on Form 5500 for 2016. Every one-participant plan required to file an annual return for 2016 must file either Form 5500-EZ or Form 5500-SF. See the Instructions for Form 5500-EZ.

Form 5500-EZ not required. If your one-participant plan (or plans) had total assets of $250,000 or less at the end of the plan year, then you don't have to file Form 5500-EZ for that plan year. All plans should file a Form 5500-EZ for the final plan year to show that all plan assets have been distributed.

Example. You are a sole proprietor and your plan meets all the conditions for filing Form 5500-EZ. The total plan assets are more than $250,000. You must file Form 5500-EZ or Form 5500-SF.

CAUTION: All one-participant plans should file Form 5500-EZ for their final plan year. The final plan year is the year in which distribution of all plan assets is completed.

Form 5500. If you don't meet the requirements for filing Form 5500-EZ or Form 5500-SF and a return/report is required, you must file Form 5500.

Electronic filing of Forms 5500 and 5500-SF. All Forms 5500 and 5500-SF are required to be filed electronically with the Department of Labor through EFAST2. "One-participant" plans have the option of filing Form 5500-SF electronically rather than filing a Form 5500-EZ on paper with the IRS. For more information, see the Instructions for Forms 5500 and 5500-SF available at efast.dol.gov.

Form 5310. If you terminate your plan and are the plan sponsor or plan administrator, you can file Form 5310. Your application must be accompanied by the appropriate user fee and Form 8717.

Form 8955-SSA. Form 8955-SSA is used to report participants who are no longer covered by the plan but have a deferred vested benefit under the plan.

Form 8955-SSA is filed with the IRS and can be filed electronically through the FIRE (Filing Information Returns Electronically) system.

More information. For more information about reporting requirements, see the forms and their instructions.

5. Table and Worksheets for the Self-Employed

As discussed in chapters 2 and 4, if you are self-employed, you must use the rate table or rate worksheet and deduction worksheet to figure your deduction for contributions you made for yourself to a SEP-IRA or qualified plan.

First, use either the rate table or rate worksheet to find your reduced contribution rate. Then complete the deduction worksheet to figure your deduction for contributions.

CAUTION: The table and the worksheets in chapter 5 apply only to self-employed individuals who have only one defined contribution plan, such as a profit-sharing plan. A SEP plan is treated as a profit-sharing plan. However, don't use this worksheet for SAR-SEPs.

Rate table for self-employed. If your plan's contribution rate is a whole percentage (for example, 12% rather than 12 1/2%), you can use the Rate Table for Self-Employed on the next page to find your reduced contribution rate. Otherwise, use the Rate Worksheet for Self-Employed provided below.

First, find your plan contribution rate (the contribution rate stated in your plan) in Column A of the table. Then read across to the rate under Column B. Enter the rate from Column B in step 4 of the Deduction Worksheet for Self-Employed on this page.

Example. You are a sole proprietor with no employees. If your plan's contribution rate is 10% of a participant's compensation, your rate is 0.090909. Enter this rate in step 4 of the Deduction Worksheet for Self-Employed on this page.

Rate worksheet for self-employed. If your plan's contribution rate isn't a whole percentage (for example, 10 1/2%), you can't use the Rate Table for Self-Employed. Use the following worksheet instead.

Rate Worksheet for Self-Employed

 1) Plan contribution rate as a decimal (for

 

    example, 10 1/2% = 0.105)                 ______

 

 2) Rate in line 1 plus 1 (for example,

 

    0.105 + 1 = 1.105)                        ______

 

 3) Self-employed rate as a decimal

 

    rounded to at least 3 decimal places

 

    (line 1 ÷ line 2) (for example, 0.105 ÷

 

    1.105 = 0.095)                            ======

 

 

Deduction Worksheet for Self-Employed

 ----------------------------------------------------------------------

 

 Step 1

 

      Enter your net profit from line 31,

 

      Schedule C (Form 1040); line 3,

 

      Schedule C-EZ (Form 1040); line 34,

 

      Schedule F (Form 1040)*; or box 14, code A**,

 

      Schedule K-1 (Form 1065)*. For information on other

 

      income included in net profit from self-employment,

 

      see the Instructions for Schedule SE, Form 1040           _______

 

      * Reduce this amount by any amount reported on

 

      Schedule SE (Form 1040), line 1b.

 

      ** General partners should reduce this amount by the

 

      same additional expenses subtracted from box 14, code A

 

      to determine the amount on line 1 or 2 of Schedule SE.

 

 Step 2

 

      Enter your deduction for self-employment tax from

 

      Form 1040, line 27                                        _______

 

 Step 3

 

      Net earnings from self-employment. Subtract step 2 from

 

      step 1                                                    _______

 

 Step 4

 

      Enter your rate from the Rate Table for Self-Employed

 

      or Rate Worksheet for Self-Employed                       _______

 

 Step 5

 

      Multiply step 3 by step 4                                 _______

 

 Step 6

 

      Multiply $265,000 by your plan contribution rate (not

 

      the reduced rate)                                         _______

 

 Step 7

 

      Enter the smaller of step 5 or step 6                     _______

 

 Step 8

 

      Contribution dollar limit                                 $53,000

 

      • If you made any elective deferrals to your

 

        self-employed plan, go to step 9.

 

      • Otherwise, skip steps 9 through 20 and enter the

 

        smaller of step 7 or step 8 on step 21.

 

 Step 9

 

      Enter your allowable elective deferrals (including

 

      designated Roth contributions) made to your

 

      self-employed plan for the 2016 plan year. Don't

 

      enter more than $18,000                                   _______

 

 Step 10

 

      Subtract step 9 from step 8                               _______

 

 Step 11

 

      Subtract step 9 from step 3                      _______

 

 Step 12

 

      Enter one-half of step 11                                 _______

 

 Step 13

 

      Enter the smallest of step 7, 10, or 12                   _______

 

 Step 14

 

      Subtract step 13 from step 3                              _______

 

 Step 15

 

      Enter the smaller of step 9 or step 14                    _______

 

      • If you made catch-up contributions, go to step 16.

 

      • Otherwise, skip steps 16 through 18 and go to step 19.

 

 Step 16

 

      Subtract step 15 from step 14                             _______

 

 Step 17

 

      Enter your catch-up contributions (including designated

 

      Roth contributions), if any. Don't enter more than

 

      $6,000                                                    _______

 

 Step 18

 

      Enter the smaller of step 16 or step 17                   _______

 

 Step 19

 

      Add steps 13, 15, and 18.                                 _______

 

 Step 20

 

      Enter the amount of designated Roth contributions

 

      included on lines 9 and 17.                               _______

 

 Step 21

 

      Subtract step 20 from step 19. This is your maximum

 

      deductible contribution.                                  _______

 

 Next: Enter your actual contribution, not to exceed your

 

 maximum deductible contribution, on Form 1040, line 28.

 

 ----------------------------------------------------------------------

 

 

Figuring your deduction. Now that you have your self-employed rate from either the rate table or rate worksheet, you can figure your maximum deduction for contributions for yourself by completing the Deduction Worksheet for Self-Employed.

Community property laws. If you reside in a community property state and you are married and filing a separate return, disregard community property laws for step 1 of the Deduction Worksheet for Self-Employed. Enter on step 1 the total net profit you actually earned.

Rate Table for Self-Employed

        Column A                  Column B

 

 If the plan contribution           Your

 

        rate is:                  rate is:

 

      (shown as %)            (shown as decimal)

 

 1                                .009901

 

 2                                .019608

 

 3                                .029126

 

 4                                .038462

 

 5                                .047619

 

 6                                .056604

 

 7                                .065421

 

 8                                .074074

 

 9                                .082569

 

 10                               .090909

 

 11                               .099099

 

 12                               .107143

 

 13                               .115044

 

 14                               .122807

 

 15                               .130435

 

 16                               .137931

 

 17                               .145299

 

 18                               .152542

 

 19                               .159664

 

 20                               .166667

 

 21                               .173554

 

 22                               .180328

 

 23                               .186992

 

 24                               .193548

 

 25*                              .200000*

 

 * The deduction for annual employer

 

 contributions (other than elective

 

 deferrals) to a SEP plan, a profit-sharing

 

 plan, or a money purchase plan can't be

 

 more than 20% of your net earnings

 

 (figured without deducting contributions

 

 for yourself) from the business that has

 

 the plan.

 

 ==========================================

 

 

Example. You are a sole proprietor with no employees. The terms of your plan provide that you contribute 8 1/2% (.085) of your compensation to your plan. Your net profit from line 31, Schedule C (Form 1040) is $200,000. You have no elective deferrals or catch-up contributions. Your self-employment tax deduction on line 27 of Form 1040 is $10,025. See the filled-in portions of both Schedule SE (Form 1040), Self-Employment Income, and Form 1040, later.

You figure your self-employed rate and maximum deduction for employer contributions you made for yourself as follows.

See the filled-in Deduction Worksheet for Self-Employed on this page.

Rate Worksheet for Self-Employed

 1) Plan contribution rate as a decimal (for

 

    example, 10 1/2% = 0.105)                       0.085

 

 2) Rate in line 1 plus 1 (for example,

 

    0.105 + 1 = 1.105)                              1.085

 

 3) Self-employed rate as a decimal

 

    rounded to at least 3 decimal places

 

    (line 1 ÷ line 2) (for example, 0.105 ÷

 

    1.105 = 0.095)                                  0.078

 

                                                    =====

 

 

Deduction Worksheet for Self-Employed

 ----------------------------------------------------------------------

 

 Step 1

 

      Enter your net profit from line 31,

 

      Schedule C (Form 1040); line 3,

 

      Schedule C-EZ (Form 1040); line 34,

 

      Schedule F (Form 1040)*; or box 14, code A**,

 

      Schedule K-1 (Form 1065)*. For information on other

 

      income included in net profit from self-employment,

 

      see the Instructions for Schedule SE, Form 1040          $200,000

 

      * Reduce this amount by any amount reported on

 

      Schedule SE (Form 1040), line 1b.

 

      ** General partners should reduce this amount

 

      by the same additional expenses subtracted

 

      from box 14, code A to determine the amount

 

      on line 1 or 2 of Schedule SE.

 

 Step 2

 

      Enter your deduction for self-employment tax from

 

      Form 1040, line 27                                         10,025

 

 Step 3

 

      Net earnings from self-employment. Subtract step 2

 

      from step 1                                               189,975

 

 Step 4

 

      Enter your rate from the Rate Table for Self-Employed

 

      or Rate Worksheet for Self-Employed                         0.078

 

 Step 5

 

      Multiply step 3 by step 4                                  14,818

 

 Step 6

 

      Multiply $265,000 by your plan contribution rate

 

      (not the reduced rate)                                     22,525

 

 Step 7

 

      Enter the smaller of step 5 or step 6                      14,818

 

 Step 8

 

      Contribution dollar limit                                 $53,000

 

      • If you made any elective deferrals to your

 

        self-employed plan, go to step 9.

 

      • Otherwise, skip steps 9 through 20 and enter

 

        the smaller of step 7 or step 8 on step 21.

 

 Step 9

 

      Enter your allowable elective deferrals (including

 

      designated Roth contributions) made to your

 

      self-employed plan for the 2016 plan year. Don't

 

      enter more than $18,000                                       N/A

 

 Step 10

 

      Subtract step 9 from step 8                              ________

 

 Step 11

 

      Subtract step 9 from step 3                    ________

 

 Step 12

 

      Enter one-half of step 11                                ________

 

 Step 13

 

      Enter the smallest of step 7, 10, or 12                  ________

 

 Step 14

 

      Subtract step 13 from step 3                             ________

 

 Step 15

 

      Enter the smaller of step 9 or step 14                   ________

 

      • If you made catch-up contributions, go to step 16.

 

      • Otherwise, skip steps 16 through 18 and go to step

 

        19.

 

 Step 16

 

      Subtract step 15 from step 14                            ________

 

 Step 17

 

      Enter your catch-up contributions (including

 

      designated Roth contributions), if any. Don't

 

      enter more than $6,000                                   ________

 

 Step 18

 

      Enter the smaller of step 16 or step 17                  ________

 

 Step 19

 

      Add steps 13, 15, and 18                                 ________

 

 Step 20

 

      Enter the amount of designated Roth contributions

 

      included on lines 9 and 17                               ________

 

 Step 21

 

      Subtract step 20 from step 19. This is your

 

      maximum deductible contribution                           $14,818

 

      Next: Enter your actual contribution, not to exceed

 

      your maximum deductible contribution, on Form 1040,

 

      line 28.

 

 ----------------------------------------------------------------------

 

 

6. How To Get Tax Help

If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.

Preparing and filing your tax return. Find free options to prepare and file your return on IRS.gov or in your local community if you qualify.

The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities, the elderly, and limited-English-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors.

You can go to IRS.gov and click on the Filing tab to see your options for preparing and filing your return which include the following.

 

Getting answers to your tax law questions. On IRS.gov get answers to your tax questions anytime, anywhere.

 

Getting tax forms and publications. Go to IRS.gov/forms to view, download, or print all of the forms and publications you may need. You can also download and view popular tax publications and instructions (including the 1040 instructions) on mobile devices as an eBook at no charge. Or, you can go to IRS.gov/orderforms to place an order and have forms mailed to you within 10 business days.

Using direct deposit. The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund. IRS issues more than 90% of refunds in less than 21 days.

Delayed refund for returns claiming certain credits. Due to changes in the law, the IRS can't issue refunds before February 15, 2017, for returns that claim the earned income credit (EIC) or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.

Getting a transcript or copy of a return. The quickest way to get a copy of your tax transcript is to go to IRS.gov/transcripts. Click on either "Get Transcript Online" or "Get Transcript by Mail" to order a copy of your transcript. If you prefer, you can:

 

Using online tools to help prepare your return. Go to IRS.gov/tools for the following.

 

Resolving tax-related identity theft issues.

 

Checking on the status of your refund.

 

Making a tax payment. The IRS uses the latest encryption technology to ensure your electronic payments are safe and secure. You can make electronic payments online, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. Go to IRS.gov/payments to make a payment using any of the following options.

 

What if I can't pay now? Go to IRS.gov/payments for more information about your options.

 

Checking the status of an amended return. Go to IRS.gov and click on Where's My Amended Return? (IRS.gov/wmar) under the "Tools" bar to track the status of Form 1040X amended returns. Please note that it can take up to 3 weeks from the date you mailed your amended return for it show up in our system and processing it can take up to 16 weeks.

Understanding an IRS notice or letter. Go to IRS.gov/notices to find additional information about responding to an IRS notice or letter.

Contacting your local IRS office. Keep in mind, many questions can be resolved on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/letushelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can't be handled online or by phone. All TACs now provide service by appointment so you'll know in advance that you can get the service you need without waiting. Before you visit, go to IRS.gov/taclocator to find the nearest TAC, check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on "Local Offices."

Watching IRS videos. The IRS Video portal (IRSvideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.

Getting tax information in other languages. For taxpayers whose native language isn't English, we have the following resources available. Taxpayers can find information on IRS.gov in the following languages.

 

The IRS TACs provide over-the-phone interpreter service in over 170 languages, and the service is available free to taxpayers.

The Taxpayer Advocate Service Is Here To Help You

What is the Taxpayer Advocate Service? The Taxpayer Advocate Service (TAS) is an independent organization within the Internal Revenue Service that helps taxpayers and protects taxpayer rights. Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.

What Can the Taxpayer Advocate Service Do For You? We can help you resolve problems that you can't resolve with the IRS. And our service is free. If you qualify for our assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

 

How Can You Reach Us? We have offices in every state, the District of Columbia, and Puerto Rico. Your local advocate's number is in your local directory and at taxpayeradvocate.irs.gov. You can also call us at 1-877-777-4778.

How Can You Learn About Your Taxpayer Rights? The Taxpayer Bill of Rights describes ten basic rights that all taxpayers have when dealing with the IRS. Our Tax Toolkit at taxpayeradvocate.irs.gov can help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

How Else Does the Taxpayer Advocate Service Help Taxpayers? TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to us at irs.gov/sams.

Low Income Taxpayer Clinics

Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals, and tax collection disputes. Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. To find a clinic near you, visit IRS.gov/litc or see IRS Publication 4134, Low Income Taxpayer Clinic List.