Publication 560: Retirement Plans for Small Business; Introductory Material

This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

What's New for 2004

Compensation limit. For 2004, the maximum compensation used for figuring contributions and benefits increases to $205,000. This amount increases to $210,000 in 2005.

Elective deferrals. The limit on elective deferrals increases to $13,000 for tax years beginning in 2004 and then increases $1,000 each tax year thereafter until it reaches $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 2004 is $3,000. This limit increases by $1,000 each year thereafter until it reaches $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. The limit on salary reduction contributions to a SIMPLE plan increases to $9,000 beginning in 2004 and then increases to $10,000 in 2005. 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 2004 is $1,500. This limit increases by $500 each year thereafter until it reaches $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.

What's New for 2005

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.

Reminders

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, 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.

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Introduction

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.

Table 1. Key Retirement Plan Rules for 2004

Type of Plan	Last Date for Contribution	Maximum Contribution	Maximum Deduction	When to Set Up Plan
SEP	Due date of employer's return (including extensions).	Smaller of $41,000 or 25% ¹ of participant's compensation. ²	25% ¹ of all participants' compensation. ²	Any 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. ³	Employee: Salary reduction contribution, up to $9,000.	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. ²	Same as maximum contribution.
Qualified	Due date of employer's return (including extensions).	Defined Contribution Plans	Defined Contribution Plans	By 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 $41,000 or 100% ¹ of participant's compensation. ² Profit-Sharing: Smaller of $41,000 or 100% ¹ of participant's compensation. ²	Money Purchase: 25% ¹ of all participants' compensation. ² Profit-Sharing: 25% ¹ of all participants' compensation. ²
		Defined Benefit Plans	Defined Benefit Plans
		Amount needed to provide an annual benefit no larger than the smaller of $165,000 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 $205,000. 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 $205,000.

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. 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 *[email protected]. (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 one of the three addresses 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.

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