The specific IRS rules regarding Retirement Plans for Small Business are complex. If you are involved with Business Expenses we recommend you proceed with caution and consult with a tax professional.
Below is Retirement Plan information from the IRS:
56046574NRetirement Plans
for Small Business(SEP, SIMPLE, and
Qualified Plans)What's New for 20051What's New for 20062 Reminders2Introduction21. Definitions You Need To Know42. Simplified Employee Pension (SEP)5Setting Up a SEP6How Much Can I Contribute?6Deducting Contributions6Salary Reduction Simplified Employee Pension (SARSEP)7Distributions (Withdrawals)8Additional Taxes8Reporting and Disclosure Requirements83. SIMPLE Plans8SIMPLE IRA Plan9SIMPLE 401(k) Plan114. Qualified Plans11Kinds of Plans12Setting Up a Qualified Plan12Minimum Funding Requirement13Contributions13Employer Deduction13Elective Deferrals (401(k) Plans)15Distributions15Prohibited Transactions17Reporting Requirements18Qualification Rules195. Table and Worksheets for the Self-Employed206. How To Get Tax Help23Index25What's New
for 2005Katrina Emergency Tax Relief Act of 2005 and Gulf Opportunity Zone Act of 2005.
Both Acts provide for tax-favored withdrawals, repayments, and loans from certain retirement plans for taxpayers who suffered economic losses as a
result of Hurricane Katrina, Rita, or Wilma. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for more
information.
Compensation limit.
For 2005, the maximum compensation used for figuring contributions and benefits increases to $210,000. This amount increases to $220,000 in 2006.
Elective deferrals.
The limit on elective deferrals increases to $14,000 for tax years beginning in 2005 and then increases to $15,000 in 2006. These new limits will
apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), and deferred compensation plans of state or local governments and tax-exempt
organizations. The $15,000 figure is subject to cost-of-living increases after 2006.
Catch-up contributions. A 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 for 2005 is $4,000. This limit increases to $5,000 in 2006. The limit is subject to cost-of-living
increases after 2006. The catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.
The catch-up contribution limit.
The excess of the participant's compensation over the elective deferrals that are not catch-up contributions.
SIMPLE plan salary reduction contributions.
For 2005, the limit on salary reduction contributions to a SIMPLE plan increases to $10,000. The $10,000 figure is subject to adjustment after 2005
for cost-of-living increases.
Catch-up contributions. A SIMPLE plan can permit participants who are age 50 or over at the end of the calendar year to make catch-up
contributions. The catch-up contribution limit for 2005 is $2,000. This limit increases to $2,500 in 2006. The limit is subject to cost-of-living
increases after 2006. The catch-up contributions a participant can make for a year cannot exceed the lesser of the following amounts.
The catch-up contribution limit.
The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions.
Rollover distributions.
Final Department of Labor regulations were issued implementing rules on fiduciary responsibilities relating to automatic rollovers of certain
mandatory distributions to individual retirement plans. The final regulations apply to the rollover of mandatory distributions made on or after March
28, 2005. See Involuntary cash-out of benefits not more than dollar limit under Qualification Rules in Chapter 4.
What's New for 2006Qualified Roth Contribution Program.
For tax years beginning after December 31, 2005, your 401(k) plan may allow you to contribute to a qualified Roth contribution program. Under this
program, you can designate all or a portion of your 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 are not excluded
from your gross income but qualified distributions from a Roth account are excluded from your gross income.
Elective deferrals. Under a Roth contribution program, the amount of elective deferrals that you may designate as a Roth contribution is
limited to the maximum amount of your elective deferrals excludable from gross income for the year ($15,000 for 2006, $20,000 if age 50 or over) less
the total amount of your elective deferrals not designated as a Roth contribution.
Qualified distributions. A qualified distribution is a distribution that is made after the nonexclusion period and:
When you are 59 1/2 or over,
Because you are disabled, or
On or after your death.
The nonexclusion period is the 5-tax-year period beginning with the earlier of the following tax years.
The first tax year in which you made a designated Roth contribution to any designated Roth account under the same plan.
If a rollover contribution was made to your designated Roth account from a designated Roth account previously established for you under
another plan, then the first tax year you made a designated Roth contribution to your previously established account.
Rollovers. A distribution from your designated Roth account can only be rolled over to another designated Roth account of yours or a
Roth IRA of yours. Rollover amounts do not apply toward the annual deferral limit.
RemindersCredit for startup costs.
You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or qualified plan. The credit equals
50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years
of the plan. You can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.
You must have had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year. At least one participant
must be a non-highly compensated employee. The employees generally cannot be substantially the same employees for whom contributions were made or
benefits accrued under a plan of any of the following employers in the 3-tax-year period immediately before the first year to which the credit
applies.
You.
A member of a controlled group that includes you.
A predecessor of (1) or (2).
The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current
year. However, the part of the general business credit attributable to the small employer pension plan startup cost credit cannot be carried back to a
tax year beginning before January 1, 2002. You cannot deduct the part of the startup costs equal to the credit claimed for a tax year, but you can
choose not to claim the allowable credit for a tax year.
To take the credit, get Form 8881, Credit for Small Employer Pension Plan Startup Costs, and the instructions.
User fee.
The user fee for requesting a determination letter does not apply to certain requests made by employers who have 100 or less employees, at least
one of whom is a non-highly compensated employee participating in the plan. See User fee under Setting Up a Qualified Plan in
chapter 4.
Retirement savings contributions credit.
Retirement plan participants (including self-employed individuals) who make contributions to their plan may qualify for the retirement savings
contributions credit. The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution
eligible for the credit is $2,000. The credit rate can be as low as 10% or as high as 50%, depending on the participant's adjusted gross income. The
credit also depends on the participant's filing status. Form 8880, Credit for Qualified Retirement Savings Contributions, and the instructions explain
how to claim the credit.
Photographs of missing children.
The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children
selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
This publication discusses retirement plans you can set up and maintain for yourself and your employees. In this publication, you refers to
the employer. See chapter 1 for the definition of the term employer and the definitions of other terms used in this publication. This publication
covers the following types of retirement plans.
SEP (simplified employee pension) plans.
SIMPLE (savings incentive match plan for employees) plans.
Qualified plans (also called H.R. 10 plans or Keogh plans when covering self-employed individuals).
SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. You can deduct contributions you make to
the plan for your employees. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. You can also deduct
trustees' fees if contributions to the plan do not cover them. Earnings on the contributions are generally tax free until you or your employees
receive distributions from the plan.
Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. These amounts (and earnings on them) are
generally tax free until your employees receive distributions from the plan.
What this publication covers.
This publication contains the information you need to understand the following topics.
What type of plan to set up.
How to set up a plan.
How much you can contribute to a plan.
How much of your contribution is deductible.
How to treat certain distributions.
How to report information about the plan to the IRS and your employees.
Basic features of retirement plans.
Basic features of SEP, SIMPLE, and qualified plans are discussed below. The key rules for SEP, SIMPLE, and qualified plans are outlined in
Table 1.
SEP plans.
SEPs provide a simplified method for you to make contributions to a retirement plan for your employees. Instead of setting up a profit-sharing or
money purchase plan with a trust, you can adopt a SEP agreement and make contributions directly to a traditional individual retirement account or a
traditional individual retirement annuity (SEP-IRA) set up for each eligible employee.
SIMPLE plans.
A SIMPLE plan can be set up by an employer who had 100 or fewer employees who received at least $5,000 in compensation from the employer for the
preceding calendar year and who meets certain other requirements. Under a SIMPLE plan, employees can choose to make salary reduction contributions
rather than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective contributions. The two
types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE 401(k) plan.
Qualified plans.
The qualified plan rules are more complex than the SEP plan and SIMPLE plan rules. However, there are advantages to qualified plans, such as
increased flexibility in designing plans and increased contribution and deduction limits in some cases.
<ROM>Table 1.</ROM> Key Retirement Plan Rules for 2005Type
of
PlanLast Date for ContributionMaximum ContributionMaximum DeductionWhen to Set Up PlanSEPDue date of employer's return (including extensions).Smaller of $42,000 or 25%
1 of participant's compensation.
225%
1 of all participants' compensation.
2Any time up to due date of employer's return (including extensions).SIMPLE
IRA
and
SIMPLE
401(k)Salary reduction contributions: 30 days after the end of the month for which the contributions are to be
made.
3Employee: Salary reduction contribution, up to $10,000.Same as maximum contribution.Any time between 1/1 and 10/1 of the calendar year.
For a new employer coming into existence after 10/1, as soon as administratively feasible.Matching contributions or nonelective contributions: Due date of employer's return (including extensions).Employer contribution:Either dollar-for-dollar matching contributions, up to 3% of employee's compensation,
4or fixed nonelective contributions of 2% of compensation.
2Same as maximum contribution.QualifiedDue date of employer's return (including extensions).Defined Contribution PlansDefined Contribution PlansBy the end of the tax year.Note: For a defined benefit plan subject to minimum funding requirements, contributions are due in
quarterly installments. See Minimum Funding Requirements in chapter 4.Money Purchase: Smaller of $42,000 or 100%
1 of participant's compensation.
2Profit-Sharing: Smaller of $42,000 or 100%
1 of participant's compensation.
2Money Purchase: 25%
1 of all participants' compensation.
2Profit-Sharing: 25%
1 of all participants' compensation.
2Defined Benefit PlansDefined Benefit PlansAmount needed to provide an annual benefit no larger than the smaller of $170,000 or 100% of the participant's average
compensation for his or her highest 3 consecutive calendar years.Based on actuarial assumptions and computations.1Net earnings from self-employment must take the contribution into account.
2Compensation is generally limited to $210,000.
3Does not apply to SIMPLE 401(k) plans. The deadline for qualified plans applies instead.
4Under a SIMPLE 401(k) plan, compensation is generally limited to $210,000.
What this publication does not cover.
Although the purpose of this publication is to provide general information about retirement plans you can set up for your employees, it does not
contain all the rules and exceptions that apply to these plans. You may also need professional help and guidance.
Also, this publication does not cover all the rules that may be of interest to employees. For example, it does not cover the following topics.
The comprehensive IRA rules an employee needs to know. These rules are covered in Publication 590, Individual Retirement Arrangements
(IRAs).
The comprehensive rules that apply to distributions from retirement plans. These rules are covered in Publication 575, Pension and Annuity
Income.
Comments and suggestions.Comments on publicationSuggestions for publication
We welcome your comments about this publication and your suggestions for future editions.
You can write to us at the following address:
Internal Revenue Service
TE/GE and Specialty Forms and Publications Branch
SE:W:CAR:MP:T:T
1111 Constitution Ave. NW, IR-6406
Washington, DC 20224
We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in
your correspondence.
You can email us at
*taxforms@irs.gov. (The asterisk must be included in the
address.) Please put Publications Comment on the subject line. Although we cannot respond individually to each email, we do appreciate your
feedback and will consider your comments as we revise our tax products.
Tax questions.
If you own a business and have questions about starting a pension plan, an existing plan, or filing Form 5500, visit
www.irs.gov or call our Tax Exempt/Government Entities Customer Account
Services at 1-877-829-5500. Assistance is available Monday through Friday. If you have questions about a traditional or Roth IRA or any individual
income tax issues, you should call 1-800-829-1040. We cannot answer tax questions at either of the addresses listed above.
Ordering forms and publications.
Visit
www.irs.gov/formspubs
to download forms and publications, call 1-800-829-3676, or write to the National Distribution Center at the address shown under How To Get Tax
Help in the back of this publication.
Note.
All references to section in the following discussions are to sections of the Internal Revenue Code (which can be found at most libraries)
unless otherwise indicated.
Definitions
You Need To KnowDefinitions you need to know
Certain terms used in this publication are defined below. The same term used in another publication may have a slightly different meaning.
Annual additions.Annual additions
Annual additions are the total of all your contributions in a year, employee contributions (not including rollovers), and forfeitures allocated to
a participant's account.
Annual benefits.Annual benefits
Annual benefits are the benefits to be paid yearly in the form of a straight life annuity (with no extra benefits) under a plan to which employees
do not contribute and under which no rollover contributions are made.
Business.Business, definition
A business is an activity in which a profit motive is present and economic activity is involved. Service as a newspaper carrier under age 18 is not
a business, but service as a newspaper dealer is. Service as a sharecropper under an owner-tenant arrangement is a business. Service as a public
official is not.
Common-law employee.Common-law employee
A common-law employee is any individual who, under common law, would have the status of an employee. A leased employee can also be a common-law
employee.
A common-law employee is a person who performs services for an employer who has the right to control and direct the results of the work and the way
in which it is done. For example, the employer:
Provides the employee's tools, materials, and workplace, and
Can fire the employee.
Common-law employees are not self-employed and cannot set up retirement plans for income from their work, even if that income is self-employment
income for social security tax purposes. For example, common-law employees who are ministers, members of religious orders, full-time insurance
salespeople, and U.S. citizens employed in the United States by foreign governments cannot set up retirement plans for their earnings from those
employments, even though their earnings are treated as self-employment income.
However, an individual may be a common-law employee and a self-employed person as well. For example, an attorney can be a corporate common-law
employee during regular working hours and also practice law in the evening as a self-employed person. In another example, a minister employed by a
congregation for a salary is a common-law employee even though the salary is treated as self-employment income for social security tax purposes.
However, fees reported on Schedule C (Form 1040), Profit or Loss From Business, for performing marriages, baptisms, and other personal services are
self-employment earnings for qualified plan purposes.
Compensation.Compensation
Compensation for plan allocations is the pay a participant received from you for personal services for a year. You can generally define
compensation as including all the following payments.
Wages and salaries.
Fees for professional services.
Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to, the
following items.
Commissions and tips.
Fringe benefits.
Bonuses.
For a self-employed individual, compensation means the earned income, discussed later, of that individual.
Compensation generally includes amounts deferred in the following employee benefit plans. These amounts are elective deferrals.
Qualified cash or deferred arrangement (section 401(k) plan).
Salary reduction agreement to contribute to a tax-sheltered annuity (section 403(b) plan), a SIMPLE IRA plan, or a SARSEP.
However, an employer can choose to exclude elective deferrals under the above plans from the definition of compensation. The limit on elective
deferrals is discussed in chapter 2 under Salary Reduction Simplified Employee Pension (SARSEP) and in chapter 4.
Other options.
In figuring the compensation of a participant, you can treat any of the following amounts as the employee's compensation.
The employee's wages as defined for income tax withholding purposes.
The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement.
The employee's social security wages (including elective deferrals).
Compensation generally cannot include either of the following items.
Reimbursements or other expense allowances (unless paid under a nonaccountable plan).
Deferred compensation (either amounts going in or amounts coming out) other than certain elective deferrals unless you choose not to include
those elective deferrals in compensation.
Contribution.Contribution:Defined
A contribution is an amount you pay into a plan for all those participating in the plan, including self-employed individuals. Limits apply to how
much, under the contribution formula of the plan, can be contributed each year for a participant.
Deduction.Deduction
A deduction is the plan contributions you can subtract from gross income on your federal income tax return. Limits apply to the amount deductible.
Earned income.Earned income
Earned income is net earnings from self-employment, discussed later, from a business in which your services materially helped to produce the
income.
You can also have earned income from property your personal efforts helped create, such as royalties from your books or inventions. Earned income
includes net earnings from selling or otherwise disposing of the property, but it does not include capital gains. It includes income from licensing
the use of property other than goodwill.
Earned income includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who
are exempt from self-employment tax.
If you have more than one business, but only one has a retirement plan, only the earned income from that business is considered for that plan.
Employer.Employer
An employer is generally any person for whom an individual performs or did perform any service, of whatever nature, as an employee. A sole
proprietor is treated as his or her own employer for retirement plan purposes. However, a partner is not an employer for retirement plan purposes. The
partnership is treated as the employer of each partner.
A highly compensated employee is an individual who:
Owned more than 5% of the interest in your business at any time during the year or the preceding year, or
For the preceding year, received compensation from you of more than $95,000 and, if you so choose, was in the top 20% of employees when
ranked by compensation. This $95,000 amount increases to $100,000 in 2006.
Leased employee.Leased employeeEmployees:Leased
A leased employee who is not your common-law employee must generally be treated as your employee for retirement plan purposes if he or she does all
the following.
Provides services to you under an agreement between you and a leasing organization.
Has performed services for you (or for you and related persons) substantially full time for at least 1 year.
Performs services under your primary direction or control.
Exception.
A leased employee is not treated as your employee if all the following conditions are met.
Leased employees are not more than 20% of your non-highly compensated work force.
The employee is covered under the leasing organization's qualified pension plan.
The leasing organization's plan is a money purchase pension plan that has all the following provisions.
Immediate participation. (This requirement does not 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.)
Full and immediate vesting.
A nonintegrated employer contribution rate of at least 10% of compensation for each participant.
However, if the leased employee is your common-law employee, that employee will be your employee for all purposes, regardless of any pension
plan of the leasing organization.
Net earnings from self-employment.Net earnings from self-employment
For SEP and qualified plans, net earnings from self-employment is your gross income from your trade or business (provided your personal services
are a material income-producing factor) minus allowable business deductions. Allowable deductions include contributions to SEP and qualified plans for
common-law employees and the deduction allowed for one-half of your self-employment tax.
Net earnings from self-employment do not include items excluded from gross income (or their related deductions) other than foreign earned income
and foreign housing cost amounts.
For the deduction limits, earned income is net earnings for personal services actually rendered to the business. You take into account the income
tax deduction for one-half of self-employment tax and the deduction for contributions to the plan made on your behalf when figuring net earnings.
Net earnings include a partner's distributive share of partnership income or loss (other than separately stated items, such as capital gains and
losses). It does not include income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net earnings from
self-employment if they are paid for services to or for the partnership. Distributions of other income or loss to limited partners are not net
earnings from self-employment.
For SIMPLE plans, net earnings from self-employment is the amount on line 4 of Short Schedule SE (Form 1040), Self-Employment Tax, before
subtracting any contributions made to the SIMPLE plan for yourself.
Participant.Participant
A participant is an eligible employee who is covered by your retirement plan. See the discussions of the different types of plans for the
definition of an employee eligible to participate in each type of plan.
Partner.Partner
A partner is an individual who shares ownership of an unincorporated trade or business with one or more persons. For retirement plans, a partner is
treated as an employee of the partnership.
Self-employed individual.Self-employed individual
An individual in business for himself or herself is self-employed. Sole proprietors and partners are self-employed. Self-employment can include
part-time work.
Not everyone who has net earnings from self-employment for social security tax purposes is self-employed for qualified plan purposes. See
Common-law employee, earlier. Also see Net earnings from self-employment.
In addition, certain fishermen may be considered self-employed for setting up a qualified plan. See Publication 595, Tax Highlights for Commercial
Fishermen, for the special rules used to determine whether fishermen are self-employed.
Sole proprietor.Sole proprietor
A sole proprietor is an individual who owns an unincorporated business by himself or herself. For retirement plans, a sole proprietor is treated as
both an employer and an employee.
A simplified employee pension (SEP) is a written plan that allows you to make contributions toward your own retirement (if you are self-employed)
and your employees' retirement without getting involved in a more complex qualified plan.
Under a SEP, you make the contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible
employee. A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained.
SEP-IRAs are set up for, at a minimum, each eligible employee (defined later). A SEP-IRA may have to be set up for a leased employee (defined in
chapter 1), but does not need to be set up for excludable employees (defined later).
The following employees can be excluded from coverage under a SEP.
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.
Setting Up a SEPSimplified employee pension (SEP):Setting up a SEP
There are three basic steps in setting up a SEP.
You must execute a formal written agreement to provide benefits to all eligible employees.
You must give each eligible employee certain information about the SEP.
A SEP-IRA must be set up by or for each eligible employee.
Many financial institutions will help you set up a SEP.
Formal written agreement.Form:5305–SEP
You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. You can satisfy the written agreement
requirement by adopting an IRS model SEP using Form 5305-SEP. However, see When not to use Form 5305-SEP, later.
If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Keep the original form. Do not file
it with the IRS. Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the
Department of Labor. See the Form 5305-SEP instructions for details.
When not to use Form 5305-SEP.
You cannot use Form 5305-SEP if any of the following apply.
You currently maintain any other qualified retirement plan. This does not prevent you from maintaining another SEP.
You have any eligible employees for whom IRAs have not been set up.
You use the services of leased employees (as described in chapter 1).
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.
An affiliated service group described in section 414(m).
A controlled group of corporations described in section 414(b).
Trades or businesses under common control described in section 414(c).
You do not pay the cost of the SEP contributions.
Information you must give to employees.
You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions.
An IRS model SEP is not considered adopted until you give each employee this information.
Setting up the employee's SEP-IRA.
A SEP-IRA must be set up by or for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial
institutions. You send SEP contributions to the financial institution where the SEP-IRA is maintained.
Deadline for setting up a SEP.
You can set up a SEP for a year as late as the due date (including extensions) of your income tax return for that year.
Credit for startup costs.
You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2005. For more
information, see Credit for startup costs under Reminders, earlier.
How Much
Can I Contribute?Simplified employee pension (SEP):SEP-IRA contributions
The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. If you are self-employed, you can contribute
to your own SEP-IRA. Contributions must be in the form of money (cash, check, or money order). You cannot contribute property. However, participants
may be able to transfer or roll over certain property from one retirement plan to another. See Publication 590 for more information about rollovers.
You do not have to make contributions every year. But if you make contributions, they must be based on a written allocation formula and must not
discriminate in favor of highly compensated employees (defined in chapter 1). When you contribute, you must contribute to the SEP-IRAs of all
participants who actually performed personal services during the year for which the contributions are made, even employees who die or terminate
employment before the contributions are made.
The contributions you make under a SEP are treated as if made to a qualified pension, stock bonus, profit-sharing, or annuity plan. Consequently,
contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants.
A SEP-IRA cannot be designated as a Roth IRA. Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth
IRA.
Time limit for making contributions.
To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year.
Contribution LimitsContribution:Limits:SEP-IRAs
Contributions you make for 2005 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $42,000
($44,000 for 2006). Compensation generally does not include your contributions to the SEP.
Example.
Your employee, Mary Plant, earned $21,000 for 2005. The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000).
Contributions for yourself.SEP-IRAs:Contributions
The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. However,
special rules apply when figuring your maximum deductible contribution. See Deduction Limit for Self-Employed Individuals, later.
Annual compensation limit.
You cannot consider the part of an employee's compensation over $210,000 when figuring your contribution limit for that employee. However, $42,000
is the maximum contribution for an eligible employee. The annual compensation limit of $210,000 increases to $220,000 for 2006.)
More than one plan.
If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $42,000 or
100% of the participant's compensation. When you figure this limit, you must add your contributions to all defined contribution plans. Because a SEP
is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined
contribution plans.
Tax treatment of excess contributions.
Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2005 that exceed the lesser of the following
amounts.
25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment).
$42,000.
Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA.
For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590.
Reporting on Form W-2.
Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later).
Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. If you are self-employed, you can deduct the
contributions you make each year to your own SEP-IRA.
Deduction Limit for
Contributions for ParticipantsSEP-IRAs:Deductible contributions:Deduction limits
The most you can deduct for your contributions (other than elective deferrals) for participants is the lesser of the following amounts.
Your contributions (including any excess contributions carryover).
25% of the compensation (limited to $210,000 per participant) paid to the participants during 2005 from the business that has the plan, not
to exceed $42,000 per participant.
In 2006, the $210,000 and $42,000 amounts in (2) above increase to $220,000 and $44,000.
Compensation in (2) above includes elective deferrals (explained, later, under Salary Reduction Simplified Employee Pension (SARSEP)).
Elective deferrals are no longer subject to this deduction limit. However, the combined deduction for a participant's elective deferrals and other SEP
contributions cannot exceed $42,000.
Your SEP document may limit contributions to lower amounts because of elective deferrals.
Deduction Limit for
Self-Employed IndividualsSEP-IRAs:Deductible contributions:Limits for self-employed
If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring
the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes
into account both the following deductions.
The deduction for one-half of your self-employment tax.
The deduction for contributions to your own SEP-IRA.
The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. For this reason, you determine the deduction for
contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. To do this, use the Rate Table for
Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Then
figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.
Deduction Limits
for Multiple PlansSEP-IRAs:Deductible contributions:Multiple plan limits
For the deduction limits, treat all your qualified defined contribution plans as a single plan and all your qualified defined benefit plans as a
single plan. See Kinds of Plans in chapter 4 for the definitions of defined contribution plans and defined benefit plans. If you have both
kinds of plans, a SEP is treated as a separate profit-sharing (defined contribution) plan. A qualified plan is a plan that meets the requirements
discussed under Qualification Rules in chapter 4. For information about the special deduction limits, see Deduction limit for multiple
plans under Employer Deduction in chapter 4.
SEP and defined contribution plan.
If you also contribute to a qualified defined contribution plan, you must reduce the 25% deduction limit for that plan by the allowable deduction
for contributions to the SEP-IRAs of those participating in both the SEP plan and the defined contribution plan.
Carryover of
Excess SEP ContributionsSEP-IRAs:Deductible contributions:Carryover of excess contributions
If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in
later years. However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. If you
also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer
Deduction in chapter 4 for the carryover limit.
If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. For information about the excise tax, see
Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4.
When To Deduct ContributionsSEP-IRAs:Deductible contributions:When to deduct
When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained.
If the SEP is maintained on a calendar year basis, you deduct contributions made for a year on your tax return for the year with or 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.
Example.
You are a fiscal year taxpayer whose tax year ends June 30. You maintain a SEP on a calendar year basis. You deduct SEP contributions made for
calendar year 2005 on your tax return for your tax year ending June 30, 2006.
Where To Deduct ContributionsSEP-IRAs:Deductible contributions:Where to deduct
Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form
1040), Profit or Loss From Business, or Schedule F (Form 1040), Profit or Loss From Farming, partnerships deduct them on Form 1065, U.S. Return of
Partnership Income, and corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, Form 1120-A, U.S. Corporation Short-Form Income Tax
Return, or Form 1120S, U.S. Income Tax Return for an S Corporation.
Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040, U.S. Individual Income Tax Return. (If you are a
partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., you get from the
partnership.)
A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. (See the Caution, next.) Under a SARSEP, your
employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. This contribution is called an
elective deferral because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them.
You are not allowed to set up a SARSEP after 1996. However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can
continue to have you contribute part of their pay to the plan. If you are interested in setting up a retirement plan that includes a salary reduction
arrangement, see chapter 3.
Who can have a SARSEP?Simplified employee pension (SEP):Salary reduction arrangementWho can have a SARSEP
A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met.
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.
SARSEP ADP test.SARSEP ADP test
Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral
percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. A
highly compensated employee is defined in chapter 1.
Deferral percentage.Salary reduction
arrangement
The deferral percentage for an employee for a year is figured as follows.
The elective employer contributions
(excluding certain catch-up contributions)
paid to the SEP for the employee for the yearThe employee's compensation
(limited to $210,000)
The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees
meet the SARSEP ADP test.
For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Compensation includes the elective
deferral and other amounts deferred in certain employee benefit plans. See Compensation in chapter 1. Elective deferrals under the SARSEP
are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax
purposes.
Compensation of self-employed individuals.Simplified employee pension (SEP):Salary reduction arrangementCompensation of self-employed individuals
If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1.
Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts.
Choice not to treat deferrals as compensation.
You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your
SARSEP.
Limit on Elective DeferralsSalary reduction
arrangement
The most a participant can choose to defer for calendar year 2005 is the lesser of the following amounts.
25% of the participant's compensation (limited to $210,000 of the participant's compensation).
$14,000.
In 2006, the compensation limit in (1) of $210,000 increases to $220,000. The amount in (2) increases to $15,000.
The $14,000 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following.
Cash or deferred arrangement (section 401(k) plan).
Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan).
SIMPLE IRA plan.
Catch-up contributions.
A SARSEP 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 for 2005 is $4,000 ($5,000 for 2006). Elective deferrals are not treated as catch-up contributions for 2005 until they exceed the
elective deferral limit (the lesser of 25% of compensation or $14,000), the SARSEP ADP test limit discussed earlier, or the plan limit (if any).
However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.
The catch-up contribution limit.
The excess of the participant's compensation over the elective deferrals that are not catch-up contributions.
Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $14,000).
Overall limit on SEP contributions.
If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the
lesser of 25% of the employee's compensation or $42,000 ($44,000 for 2006). The same rule applies to contributions you make to your own SEP-IRA. See
Contribution Limits, earlier.
Figuring the elective deferral.
For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts
deferred in certain employee benefit plans.
Tax Treatment of Deferrals
Elective deferrals are no longer subject to the deduction limits discussed earlier under Deducting Contributions. However, the combined
deduction for a participant's elective deferrals and other SEP contributions cannot exceed $42,000.
Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your
employees' wages subject to federal income tax in the year of deferral. However, these deferrals are included in wages for social security, Medicare,
and federal unemployment (FUTA) tax.
Excess deferrals.
For 2005, excess deferrals are the elective deferrals for the year that are more than the $14,000 limit discussed earlier. For a participant who is
eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $18,000. The treatment of excess deferrals
made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. See Treatment of Excess Deferrals under
Elective Deferrals (401(k) Plans) in chapter 4.
Excess SEP contributions.
Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test.
You must notify your highly compensated employees within 2 months after the end of the plan year of their excess SEP contributions. If
you do not notify them within this time period, you must pay a 10% tax on the excess. For an explanation of the notification requirements, see Revenue
Procedure 91-44 in Cumulative Bulletin 1991-2. If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the
instructions for that form.
Reporting on Form W-2.
Do not 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.
As an employer, you cannot prohibit distributions from a SEP-IRA. Also, you cannot make your contributions on the condition that any part of them
must be kept in the account.
Distributions are subject to IRA rules. For information about IRA rules, including the tax treatment of distributions, rollovers, required
distributions, and income tax withholding, see Publication 590.
Additional Taxes
The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes. There are additional taxes for all the following
actions.
Making excess contributions.
Making early withdrawals.
Not making required withdrawals.
For information about these taxes, see chapter 1 in Publication 590. Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the
account is involved in a prohibited transaction, discussed next.
Prohibited transaction.
If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. In
that case, the SEP-IRA will no longer qualify as an IRA. For a list of prohibited transactions, see Prohibited Transactions in chapter 4.
Effects on employee.
If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the
employee on the first day of the year in which the transaction occurred. The employee must include in income the fair market value of the assets (on
the first day of the year) that is more than any cost basis in the account. Also, the employee may have to pay the additional tax for making early
withdrawals.
Reporting and
Disclosure Requirements
If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. See
Setting Up a SEP, earlier. Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs.
You must also give them notice of any excess contributions. For details about other information you must give them, see the instructions for Form
5305-SEP or 5305A-SEP (for a salary reduction SEP).
Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described
above. For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP.
SIMPLE Plans
SIMPLE IRA plan
SIMPLE 401(k) plan
Forms (and Instructions)Wage and Tax StatementSavings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial InstitutionSavings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution
A savings incentive match plan for employees (SIMPLE plan) is a written arrangement that provides you and your employees with a simplified way to
make contributions to provide retirement income. Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather
than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective contributions.
SIMPLE plans can only be maintained on a calendar-year basis.
A SIMPLE plan can be set up in either of the following ways.
Using SIMPLE IRAs (SIMPLE IRA plan).
As part of a 401(k) plan (SIMPLE 401(k) plan).
Many financial institutions will help you set up a SIMPLE plan.
SIMPLE IRA PlanSIMPLE plans:SIMPLE IRA plan
A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for
each eligible employee. For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan, later.
Who Can Set Up
a SIMPLE IRA Plan?SIMPLE plans:
You can set up a SIMPLE IRA plan if you meet both the following requirements.
You meet the employee limit.
You do not maintain another qualified plan unless the other plan is for collective bargaining employees.
Employee limit.
You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding
year. Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible
to participate. Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1).
Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan.
Grace period for employers who cease to meet the 100-employee limit.
If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as
meeting it for the 2 calendar years immediately following the calendar year for which you last met it.
A different rule applies if you do not meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Under this rule,
the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following
conditions are satisfied.
Coverage under the plan has not 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.
The grace period for acquisitions, dispositions, and similar transactions also applies if, because of these types of transactions, you do not meet
the rules explained under Other qualified plan or Who Can Participate in a SIMPLE IRA Plan, below.
Other qualified plan.
The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any
year beginning with the year the SIMPLE IRA plan becomes effective.
Exception.
If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees.
Who Can Participate
in a SIMPLE IRA Plan?
Eligible employee.Employees:Eligible
Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to
receive at least $5,000 during the current calendar year is eligible to participate. The term employee includes a self-employed individual who
received earned income.
You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation
requirements, the current year compensation requirements, or both. For example, you can allow participation for employees who received at least $3,000
in compensation during any preceding calendar year. However, you cannot impose any other conditions for participating in a SIMPLE IRA plan.
Excludable employees.Excludable employeesSIMPLE IRA plan:Excludable employees
The following employees do not need to be covered under a SIMPLE IRA plan.
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.
Compensation.CompensationSIMPLE IRA plan:Compensation
Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the
amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Compensation also
includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a
SARSEP, or section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. If
you are self-employed, compensation is your net earnings from self-employment (line 4, Section A, or line 6, Section B, of Schedule SE (Form 1040))
before subtracting any contributions made to the SIMPLE IRA plan for yourself.
How To Set Up a
SIMPLE IRA Plan
You can use Form 5304-SIMPLE
Form:5304–SIMPLEor Form 5305-SIMPLE
Form:5305–SIMPLEto set up a SIMPLE IRA plan. Each form is a model savings incentive match plan for employees (SIMPLE) plan
document. Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the
contributions.
Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions.
Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution.
The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial
institution, if any) have signed it. Keep the original form. Do not file it with the IRS.
Other uses of the forms.
If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the
following.
Meeting employer notification requirements for the SIMPLE IRA plan. Page 3 of Form 5304-SIMPLE and Page 3 of 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.
Deadline for setting up a SIMPLE IRA plan.
You can set up a SIMPLE IRA plan effective on any date from January 1 thru October 1 of a year, provided you did not previously maintain a SIMPLE
IRA plan. This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set
up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. If you previously maintained a
SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. A SIMPLE IRA plan cannot have an effective date that is
before the date you actually adopt the plan.
Setting up a SIMPLE IRA.
SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. A SIMPLE IRA must be set up for each
eligible employee. Forms 5305-S,
Form:5305–SSIMPLE Individual Retirement Trust Account, and 5305-SA,
Form:5305–SASIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the
participant and the trustee (or custodian) can use for this purpose.
A SIMPLE IRA cannot be designated as a Roth IRA. Contributions to a SIMPLE IRA will not affect the amount an individual can contribute to a Roth
IRA.
Deadline for setting up a SIMPLE IRA.
A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. See
Time limits for contributing funds, later, under Contribution Limits.
Credit for startup costs.
You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan that first became effective in
2005. For more information, see Credit for startup costs under Reminders, earlier.
Notification RequirementNotification requirementsSIMPLE IRA plan:Notification requirements
If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period.
The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan.
Your choice to make either matching contributions or nonelective contributions (discussed later).
A summary description provided by the financial institution.
Written notice that his or her balance can be transferred without cost or penalty if you use a designated financial institution.
Election period.Sixty-day employee election periodSIMPLE IRA plan:Employee election period
The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding
calendar year). However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year (for example, on July 1) or if the 60-day
period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.
A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. For
example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. Similarly, in addition to the 60-day period, a SIMPLE
IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year.
Contribution LimitsContribution:Limits:SIMPLE IRA planSIMPLE IRA plan:Contributions
Contributions are made up of salary reduction contributions and employer contributions. You, as the employer, must make either matching
contributions or nonelective contributions, defined later. No other contributions can be made to the SIMPLE IRA plan. These contributions, which you
can deduct, must be made timely. See Time limits for contributing funds, later.
Salary reduction contributions.
The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf cannot be more than $10,000 for 2005. These
contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar
amount. You cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $10,000
limit.
If an employee is a participant in any other employer plan during the year and has elective salary reductions or deferred compensation under those
plans, the salary reduction contributions under a SIMPLE IRA plan also are elective deferrals that count toward the overall annual limit ($14,000 for
2005) on exclusion of salary reduction contributions and other elective deferrals.
Catch-up contributions.
A SIMPLE IRA 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 for 2005 is $2,000 ($2,500 for 2006). Salary reduction contributions are not treated as catch-up contributions for 2005 until they
exceed $10,000. However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.
The catch-up contribution limit.
The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions.
Employer matching contributions.SIMPLE IRA plan:Employer matching contributions
You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's
compensation. This requirement does not apply if you make nonelective contributions as discussed later.
Example.
In 2005, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. Your net earnings from self-employment are $40,000, and you
choose to contribute 10% of your earnings to your SIMPLE IRA. You make 3% matching contributions. The total contribution you can make for John is
$2,000, figured as follows.
If you choose a matching contribution less than 3%, the percentage must be at least 1%. You must notify the employees of the lower match within a
reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. You cannot choose a percentage less than 3% for
more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective.
Nonelective contributions.SIMPLE IRA plan:Deductions
Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who
has at least $5,000 (or some lower amount you select) of compensation from you for the year. If you make this choice, you must make nonelective
contributions whether or not the employee chooses to make salary reduction contributions. Only $210,000 of the employee's compensation can be taken
into account to figure the contribution limit.
If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period
(discussed earlier) for the calendar year.
Example 1.
In 2005, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Your net earnings from self-employment are
$50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make a 2% nonelective contribution. Both of you are under age 50.
The total contribution you can make for Jane is $4,320, figured as follows.
Using the same facts as in Example 1, above, the maximum contribution you can make for Jane or for yourself if you each earned $75,000 is $11,500,
figured as follows.
You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise
have been payable to the employee in cash. You must make matching contributions or nonelective contributions by the due date (including extensions)
for filing your federal income tax return for the year.
When To Deduct ContributionsSIMPLE IRA plan:When to deduct contributions
You can deduct SIMPLE IRA contributions in the tax year with or within which the calendar year for which contributions were made ends. You can
deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal
income tax return for that year.
Example 1.
Your tax year is the fiscal year ending June 30. Contributions under a SIMPLE IRA plan for the calendar year 2005 (including contributions made in
2005 before July 1, 2005) are deductible in the tax year ending June 30, 2006.
Example 2.
You are a sole proprietor whose tax year is the calendar year. Contributions under a SIMPLE IRA plan for the calendar year 2005 (including
contributions made in 2006 by April 15, 2006) are deductible in the 2005 tax year.
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 C (Form
1040), Profit or Loss From Business, or Schedule F (Form 1040), Profit or Loss From Farming, partnerships deduct them on Form 1065, U.S. Return of
Partnership Income, and corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, Form 1120-A, U.S. Corporation Short-Form Income Tax
Return, or Form 1120S, U.S. Income Tax Return for an S Corporation.
Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040, U.S. Individual Income Tax Return. (If you are a
partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., you get from the
partnership.)
Tax Treatment
of Contributions
You can deduct your contributions and your employees can exclude these contributions from their gross income. SIMPLE IRA plan contributions are not
subject to federal income tax withholding. However, salary reduction contributions are subject to social security, Medicare, and federal unemployment
(FUTA) taxes. Matching and nonelective contributions are not subject to these taxes.
Reporting on Form W-2.SIMPLE plans:Form:Form W-2
Do not include SIMPLE IRA plan contributions in the Wages, tips, other compensation box of Form W-2. However, salary reduction contributions
must be included in the boxes for social security and Medicare wages. Also include the proper code in box 12. For more information, see the
instructions for Forms W-2 and W-3.
Distributions (Withdrawals)Distributions (withdrawals)SIMPLE IRA plan:Distributions
(withdrawals)
Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. Tax-free rollovers can be
made from one SIMPLE IRA into another SIMPLE IRA. However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year
participation in the SIMPLE IRA plan.
Early withdrawals generally are subject to a 10% additional tax. However, the additional tax is increased to 25% if funds are withdrawn within 2
years of beginning participation.
More information.
See Publication 590, Individual Retirement Arrangements, for information about IRA rules, including those on the tax treatment of distributions,
rollovers, required distributions, and income tax withholding.
More Information
on SIMPLE IRA Plans
If you need more help to set up and maintain SIMPLE IRA plans, see the following IRS notice.
Notice 98-4.
This notice contains questions and answers about the implementation and operation of SIMPLE IRA plans, including the election and notice
requirements for these plans. Notice 98-4 is in Cumulative Bulletin 1998-1.
SIMPLE 401(k) PlanSIMPLE plans:SIMPLE 401(k)
You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit as discussed earlier under SIMPLE IRA Plan. A
SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules discussed under Qualification Rules in chapter 4.
However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules in that discussion if the plan meets the conditions listed
below.
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 $10,000 for 2005. If permitted under the plan, an employee who is age 50 or over can also
make a catch-up contribution of up to $2,000 for 2005 ($2,500 for 2006). See Catch-up contributions, earlier under Contribution
Limits.
You must make either:
Matching contributions up to 3% of compensation for the year, or
Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the
year.
No other contributions can be made to the trust.
No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan of the employer on
behalf of any employee eligible to participate in the SIMPLE 401(k) plan.
The employee's rights to any contributions are nonforfeitable.
No more than $210,000 of the employee's compensation can be taken into account in figuring salary reduction contributions, matching contributions,
and nonelective contributions.
Employee notification.
The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. See Notification Requirement in this
chapter.
Credit for startup costs.
You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE 401(k) plan that first became effective in
2005. For more information, see Credit for startup costs under Reminders, earlier.
Qualified PlansKeogh plans:Qualified plans
Kinds of plans
Setting up a qualified plan
Minimum funding requirement
Contributions
Employer deduction
Elective deferrals (401(k) plans)
Distributions
Prohibited transactions
Reporting requirements
Qualification rules
Publication575 Pension and Annuity IncomeForms (and Instructions)Profit or Loss From BusinessProfit or Loss From FarmingPartner's Share of Income, Deductions, Credits, etc.Wage and Tax StatementU.S. Individual Income Tax ReturnDistributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.Return of Excise Taxes Related to Employee Benefit PlansAnnual Return/Report of Employee Benefit PlanAnnual Return of One-Participant (Owners and Their Spouses) Retirement PlanInsurance Information
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 a qualified plan. A common-law employee or a partner cannot set up a qualified plan. 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. A qualified plan 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 PlansQualified plans: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 PlanQualified plans: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.Defined contribution plan:Profit-sharing plan
A profit-sharing plan is a plan for sharing your business profits with your employees. However, you do not have to make contributions out of net
profits to have a profit-sharing plan.
The plan does not need to provide a definite formula for figuring the profits to be shared. But, if there is no formula, there must be systematic
and substantial contributions.
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).
Forfeitures under a profit-sharing plan can be allocated to the accounts of remaining participants in a nondiscriminatory way or they can be used
to reduce your contributions.
Money purchase pension plan.Defined contribution plan:Money purchase pension plan
Contributions to a money purchase pension plan are fixed and are not based on your business profits. For example, if the plan requires that
contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the
plan is a money purchase pension plan. This applies even though the compensation of a self-employed individual as a participant is based on earned
income derived from business profits.
Defined Benefit PlanQualified plans:Defined benefit plan
A defined benefit plan is any plan that is not 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.
Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. Forfeitures
must be used instead to reduce employer contributions.
Setting Up a
Qualified PlanQualified plans:Setting up
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.
If you are self-employed, it is not necessary to have employees besides yourself to sponsor and set up a qualified plan. If you have employees, see
Participation, under Qualification Rules, later.
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
2005. 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
is not 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.
Banks (including some savings and loan associations and federally insured credit unions).
Trade or professional organizations.
Insurance companies.
Mutual funds.
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. Revenue Procedure 2006-6 in Internal
Revenue Bulletin 2006-1 may help you decide whether to apply for approval.
Internal Revenue Bulletins are available on the IRS website at www.irs.gov. They are also available at most IRS offices and at certain
libraries.
User fee.User fee
The fee mentioned earlier for requesting a determination letter does not apply to certain requests made in 2005 and later years, by 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 does not apply to requests made by the later of the following dates.
The end of the 5th plan year the plan is in effect.
The end of any remedial amendment period for the plan that begins within the first 5 plan years.
The request cannot 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 Revenue Procedure 2006-8 in Internal Revenue Bulletin 2006-1 and Notice 2003-49 in
Internal Revenue Bulletin 2003-32.
Investing Plan AssetsQualified plans:Investing plan assets
In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets.
You can establish a trust or custodial account to invest the funds.
You, the trust, or the custodial account can buy an annuity contract from an insurance company. Life insurance can be included only if it is
incidental to the retirement benefits.
You, the trust, or the custodial account can buy face-amount certificates from an insurance company. These certificates are treated like
annuity contracts.
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 do not 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 are not transferable.
Other plan requirements.
For information on other important plan requirements, see Qualification Rules, later.
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. The amount is based on what should be contributed under the plan formula using actuarial assumptions and formulas. 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 must make quarterly installment payments of the required
contributions. If you do not 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
months after the end of that year.
ContributionsQualified plans:Contributions
A qualified plan is generally funded by your contributions. However, employees participating in the plan may be permitted to make contributions.
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 cannot make contributions for yourself for the year, even if you can contribute for common-law employees based on their
compensation.
When Contributions
Are Considered MadeQualified plans:Contributions
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.
You make them by the due date of your tax return for the previous year (plus extensions).
The plan was established by the end of the previous year.
The plan treats the contributions as though it had received them on the last day of the previous year.
You do either of the following.
You specify in writing to the plan administrator or trustee that the contributions apply to the previous year.
You deduct the contributions on your tax return for the previous year. (A partnership shows contributions for partners on Schedule K (Form
1065), Partner's Share of Income, Deductions, Credits, etc.)
Employer's promissory note.
Your promissory note made out to the plan is not a payment that qualifies for the deduction. Also, issuing this note is a prohibited transaction
subject to tax. See Prohibited Transactions, later.
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 BenefitsQualified plans:ContributionsQualified plans:Contribution:Limits:Qualified plans
Your plan must provide that contributions or benefits cannot exceed certain limits. The limits differ depending on whether your plan is a defined
contribution plan or a defined benefit plan.
Defined benefit plan.Defined benefit plan:Limits on contributions
For 2005, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts.
100% of the participant's average compensation for his or her highest 3 consecutive calendar years.
$170,000 ($175,000 for 2006).
Defined contribution plan.Defined contribution plan:Limits on contributions
For 2005, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed
the lesser of the following amounts.
100% of the participant's compensation.
$42,000 ($44,000 for 2006).
Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit.
Excess annual additions.
Excess annual additions are the amounts contributed to a defined contribution plan that are more than the limits discussed previously. A plan can
correct excess annual additions caused by any of the following actions.
A reasonable error in estimating a participant's compensation.
A reasonable error in determining the elective deferrals permitted (discussed later).
Forfeitures allocated to participants' accounts.
Correcting excess annual additions.
A plan can provide for the correction of excess annual additions in the following ways.
Allocate and reallocate the excess to other participants in the plan to the extent of their unused limits for the year.
If these limits are exceeded, do one of the following.
Hold the excess in a separate account and allocate (and reallocate) it to participants' accounts in the following year (or years) before
making any contributions for that year (see also Carryover of Excess Contributions, later).
Return employee after-tax contributions or elective deferrals (see Employee Contributions and Elective Deferrals (401(k)
Plans), later).
Tax treatment of returned contributions or distributed elective deferrals.
The return of employee after-tax contributions or the distribution of elective deferrals to correct excess annual additions is considered a
corrective payment rather than a distribution of accrued benefits. The penalties for early distributions and excess distributions do not apply.
These disbursements are not wages reportable on Form W-2. For specific information about reporting them, see the Instructions for Forms 1099, 1098,
5498, and W-2G.
Participants must report these amounts on the line for Pensions and annuities on Form 1040 or Form 1040A, U.S. Individual Income Tax Return.
Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Even though these employee
contributions are not deductible, the earnings on them are tax free until distributed in later years. Also, these contributions must satisfy the
nondiscrimination test of section 401(m). 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).
Employer DeductionQualified plans:Deductions
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 LimitsQualified plans:Deduction limits
The deduction limit for your contributions to a qualified plan depends on the kind of plan you have.
Defined contribution plans.Qualified plans:Deduction limitsDefined contribution plan:Deduction limits
The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot 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.
Elective deferrals (discussed later) are not subject to the limit.
Compensation includes elective deferrals.
The maximum compensation that can be taken into account for each employee is $210,000.
Defined benefit plans.Qualified plans:Deduction limitsDefined benefit plan:Deduction limits
The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Consequently, an actuary must figure
your deduction limit.
In figuring the deduction for contributions, you cannot take into account any contributions or benefits that are more than the limits discussed
earlier under Limits on Contributions and Benefits. However, your deduction for contributions to a defined benefit plan can be as much as
the plan's unfunded current liability.
Deduction limit for multiple plans.Qualified plans:Deduction limits
If you contribute to both a defined contribution plan and a defined benefit plan and at least one employee is covered by both plans, your deduction
for those contributions is limited. Your deduction cannot be more than the greater of the following amounts.
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 25% limit in figuring the deduction for contributions you make for your own account.
Your contributions to the defined benefit plans, but not more than the amount needed to meet the year's minimum funding standard for any of
these plans.
This limit does not apply if contributions to the defined contribution plan consist only of elective deferrals.
For this rule, a SEP is treated as a separate profit-sharing (defined contribution) plan.
Deduction Limit for
Self-Employed IndividualsQualified plans:Deduction limits
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 one-half of your self-employment tax.
The deduction for contributions on your behalf to the plan.
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.
Multiple plans.
The deduction limit for multiple plans (discussed earlier) also applies to contributions you make as an employer on your own behalf.
Where To Deduct ContributionsQualified plans:ContributionsForm:1040Form:Schedule K (Form 1065)
Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form
1040), Profit or Loss From Business, or Schedule F (Form 1040), Profit or Loss From Farming, partnerships deduct them on Form 1065, U.S. Return of
Partnership Income, and corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, Form 1120-A, U.S. Corporation Short-Form Income Tax
Return, or Form 1120S, U.S. Income Tax Return for an S Corporation.
Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040, U.S. Individual Income Tax Return. (If you are a
partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deduction, Credits, etc., you get from the
partnership.)
Carryover of
Excess ContributionsQualified plans:Deduction limits
If you contribute more to the plans 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 illustrates the carryover of excess contributions to a profit-sharing plan.
<ROM>Table 4–1.</ROM> Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's
omitted)Year Participants' CompensationParticipants' share of required contribution (10% of annual profit)Deductible
limit for current
year (25% of compensation)ContributionExcess contribution carryover
used
1Total
deduction including carryoversExcess contribution carryover available at
end of year2002$1,000$100$250$100$ 0$100
