Retirement Plans for Small Business

Publication 560
               Cat. No. 46574N                                                   Contents

               Retirement
                                                                                 What's New      .................. 1
Department
of the                                                                           Reminders . . . . . . . . . . . . . . . . . . . 2


               Plans
Treasury
Internal                                                                         Introduction . . . . . . . . . . . . . . . . . . 2
Revenue

               for Small
Service                                                                          Chapter 1. Definitions You Need
                                                                                     To Know . . . . . . . . . . . . . . . . . 3



               Business
                                                                                 Chapter 2. Simplified Employee
                                                                                     Pensions (SEPs) . . . . . . .        .   .   .   .   .    5
                                                                                     Setting Up a SEP . . . . . . . .     .   .   .   .   .    5
                                                                                     How Much Can I Contribute? .         .   .   .   .   .    6

               (SEP, SIMPLE, and                                                     Deducting Contributions . . . .
                                                                                     Salary Reduction Simplified
                                                                                                                          .   .   .   .   .    6


               Qualified Plans)                                                         Employee Pensions
                                                                                        (SARSEPs) . . . . . . . . .       ..... 7
                                                                                     Distributions (Withdrawals) . .      ..... 8
                                                                                     Additional Taxes . . . . . . . .     ..... 8
                                                                                     Reporting and Disclosure
               For use in preparing                                                     Requirements . . . . . . . .      ..... 8


               2017 Returns                                                      Chapter 3. SIMPLE Plans . . . . . . . . . 8
                                                                                     SIMPLE IRA Plan . . . . . . . . . . . . . 9
                                                                                     SIMPLE 401(k) Plan . . . . . . . . . . 11

                                                                                 Chapter 4. Qualified Plans . . . . .         .   .   .       11
                                                                                     Kinds of Plans . . . . . . . . . .       .   .   .       12
                                                                                     Qualification Rules . . . . . . . .      .   .   .       12
                                                                                     Setting Up a Qualified Plan . . .        .   .   .       13
                                                                                     Minimum Funding Requirement              .   .   .       14
                                                                                     Contributions . . . . . . . . . . .      .   .   .       14
                                                                                     Employer Deduction . . . . . . .         .   .   .       15
                                                                                     Elective Deferrals (401(k) Plans)        .   .   .       16
                                                                                     Qualified Roth Contribution
                                                                                        Program . . . . . . . . . . . .       .   .   .       18
                                                                                     Distributions . . . . . . . . . . . .    .   .   .       18
                                                                                     Prohibited Transactions . . . . .        .   .   .       20
                                                                                     Reporting Requirements . . . .           .   .   .       21

                                                                                 Chapter 5. Table and Worksheets
                                                                                     for the Self-Employed . . . . . . . . 22

                                                                                 Chapter 6. How To Get Tax Help . . . . 25

                                                                                 Index    . . . . . . . . . . . . . . . . . . . . . 27



                                                                                 Future Developments
                                                                                 For the latest information about developments
                                                                                 related to Pub. 560, such as legislation enacted
                                                                                 after we release it, go to IRS.gov/Pub560.



                                                                                 What's New
                                                                                 Compensation limits for 2017 and 2018. For
                                                                                 2017, the maximum compensation used for fig-
                                                                                 uring contributions and benefits is $270,000.
                                                                                 This limit increases to $275,000 for 2018.
                                                                                 Elective deferral limits for 2017 and 2018.
                                                                                 The limit on elective deferrals, other than
                Get forms and other information faster and easier at:            catch-up contributions, is $18,000 for 2017 and
                • IRS.gov (English)           • IRS.gov/Korean (한국어)             increases to $18,500 for 2018. These limits ap-
                • IRS.gov/Spanish (Español)   • IRS.gov/Russian (Pусский)        ply for participants in SARSEPs, 401(k) plans
                • IRS.gov/Chinese (中文)        • IRS.gov/Vietnamese (TiếngViệt)   (excluding SIMPLE plans), section 403(b)
                                                                                 plans, and section 457(b) plans.


Mar 12, 2018
Defined contribution limits for 2017 and              necessary costs of starting a SEP, SIMPLE, or        other terms used in this publication. This publi-
2018. The limit on contributions, other than          qualified plan. The credit equals 50% of the         cation covers the following types of retirement
catch-up contributions, for a participant in a de-    cost to set up and administer the plan and edu-      plans.
fined contribution plan is $54,000 for 2017 and       cate employees about the plan, up to a maxi-              SEP (simplified employee pension) plans.
increases to $55,000 for 2018.                        mum of $500 per year for each of the first 3              SIMPLE (savings incentive match plan for
                                                      years of the plan. You can choose to start                employees) plans.
Defined benefit limits for 2017 and 2018.             claiming the credit in the tax year before the tax        Qualified plans (also called H.R. 10 plans
The limit on annual benefits for a participant in a   year in which the plan becomes effective.                 or Keogh plans when covering self-em-
defined benefit plan is $215,000 for 2017 and                                                                   ployed individuals), including 401(k) plans.
                                                           You must have had 100 or fewer employees
increases to $220,000 for 2018.
                                                      who received at least $5,000 in compensation             SEP, SIMPLE, and qualified plans offer you
SIMPLE plan salary reduction contribution             from you for the preceding year. At least one        and your employees a tax-favored way to save
limit for 2017 and 2018. The limit on salary          participant must be a non-highly compensated         for retirement. You can deduct contributions
reduction contributions, other than catch-up          employee. The employees generally can't be           you make to the plan for your employees. If you
contributions, is $12,500 for 2017 and 2018.          substantially the same employees for whom            are a sole proprietor, you can deduct contribu-
                                                      contributions were made or benefits accrued          tions you make to the plan for yourself. You can
Catch-up contribution limits for 2017 and             under a plan of any of the following employers       also deduct trustees' fees if contributions to the
2018. A plan can permit participants who are          in the 3-tax-year period immediately before the      plan don't cover them. Earnings on the contribu-
age 50 or over at the end of the calendar year to     first year to which the credit applies.              tions are generally tax free until you or your em-
make catch-up contributions in addition to elec-        1. You.                                            ployees receive distributions from the plan.
tive deferrals and SIMPLE plan salary reduction                                                                Under a 401(k) plan, employees can have
contributions. The catch-up contribution limita-        2. A member of a controlled group that in-         you contribute limited amounts of their be-
tion for defined contribution plans other than             cludes you.                                     fore-tax (after-tax, in the case of a qualified
SIMPLE plans is $6,000 for 2017 and 2018.               3. A predecessor of (1) or (2).                    Roth contribution program) pay to the plan.
The catch-up contribution limitation for SIMPLE                                                            These amounts (and the earnings on them) are
plans is $3,000 for 2017 and 2018.                        The credit is part of the general business       generally tax free until your employees receive
    A participant's catch-up contributions for a      credit, which can be carried back or forward to      distributions from the plan or, in the case of a
year can't exceed the lesser of the following         other tax years if it can't be used in the current   qualified distribution from a designated Roth ac-
amounts.                                              year. However, the part of the general business      count, completely tax free.
      The catch-up contribution limit.                credit attributable to the small employer pension
      The excess of the participant's compensa-       plan startup cost credit can't be carried back to    What this publication covers. This publica-
      tion over the elective deferrals that are not   a tax year beginning before January 1, 2002.         tion contains the information you need to under-
      catch-up contributions.                         You can't deduct the part of the startup costs       stand the following topics.
                                                      equal to the credit claimed for a tax year, but            What type of plan to set up.
See Catch-up contribution under Contribution          you can choose not to claim the allowable credit           How to set up a plan.
Limits and Limit on Elective Deferrals in chap-       for a tax year.                                            How much you can contribute to a plan.
ters 3 and 4, respectively, for more information.         To take the credit, use Form 8881, Credit for          How much of your contribution is deducti-
                                                      Small Employer Pension Plan Startup Costs.                 ble.
Tax relief for victims of 2016 and 2017 dis-
                                                                                                                 How to treat certain distributions.
asters. New rules provide for tax-favored with-       Retirement savings contributions credit.
                                                                                                                 How to report information about the plan to
drawals and repayments from certain retirement        Retirement plan participants (including self-em-
                                                                                                                 the IRS and your employees.
plans for taxpayers who suffered economic los-        ployed individuals) who make contributions to
                                                                                                                 Basic features of SEP, SIMPLE, and quali-
ses as a result of disasters declared by the          their plan may qualify for the retirement savings
                                                                                                                 fied plans. The key rules for SEP, SIMPLE,
President under section 401 of the Robert T.          contribution credit. The maximum contribution
                                                                                                                 and qualified plans are outlined in Table 1.
Stafford Disaster Relief and Emergency Assis-         eligible for the credit is $2,000. To take the
tance Act during calendar year 2016. New rules        credit, use Form 8880, Credit for Qualified Re-          SEP plans. SEP plans provide a simplified
also provide for tax-favored withdrawals, repay-      tirement Savings Contributions. For more infor-      method for you to make contributions to a retire-
ments, and loans from certain retirement plans        mation on who is eligible for the credit, retire-    ment plan for yourself and your employees. In-
for taxpayers who suffered economic losses as         ment plan contributions eligible for the credit,     stead of setting up a profit-sharing or money
a result of Hurricane Harvey and Tropical Storm       and how to figure the credit, see Form 8880 and      purchase plan with a trust, you can adopt a SEP
Harvey, Hurricane Irma, Hurricane Maria, or the       its instructions or go to IRS.gov/Retirement-        agreement and make contributions directly to a
California Wildfires in 2017. For more informa-       Plans/Plan-Participant-Employee/Retirement-          traditional individual retirement account or a tra-
tion, see Pub. 976, Disaster Relief.                  Savings-Contributions-Savers-Credit.                 ditional individual retirement annuity (SEP-IRA)
                                                      Photographs of missing children. The IRS is          set up for yourself and each eligible employee.
IRS pre-approved plan program. Guidance
has been issued modifying the IRS pre-ap-             a proud partner with the National Center for
                                                                                                               SIMPLE plans. Generally, if you had 100 or
proved plan opinion letter program by combin-         Missing & Exploited Children® (NCMEC). Pho-
                                                                                                           fewer employees who received at least $5,000
ing the master and prototype program and the          tographs of missing children selected by the
                                                                                                           in compensation last year, you can set up a
volume submitter program into a single pre-ap-        Center may appear in this publication on pages
                                                                                                           SIMPLE IRA plan. Under a SIMPLE plan, em-
proved plan program. For more information, see        that would otherwise be blank. You can help
                                                                                                           ployees can choose to make salary reduction
Revenue Procedure 2017–41, 2017-29 I.R.B.             bring these children home by looking at the
                                                                                                           contributions rather than receiving these
92.                                                   photographs and calling 1-800-THE-LOST
                                                                                                           amounts as part of their regular pay. In addition,
                                                      (1-800-843-5678) if you recognize a child.
                                                                                                           you will contribute matching or nonelective con-
                                                                                                           tributions. The two types of SIMPLE plans are

Reminders                                             Introduction                                         the SIMPLE IRA plan and the SIMPLE 401(k)
                                                                                                           plan.
                                                      Section references are to the Internal Revenue
Mid-year changes to safe harbor plans and             Code unless otherwise noted.                             Qualified plans. The qualified plan rules
notices. Guidance has been issued regarding               This publication discusses retirement plans      are more complex than the SEP plan and SIM-
permissible mid-year changes to safe harbor           you can set up and maintain for yourself and         PLE plan rules. However, there are advantages
401(k) and 401(m) plans and notices. For more         your employees. In this publication, “you” refers    to qualified plans, such as increased flexibility in
information, see Notice 2016-16, 2016-7 I.R.B.        to the employer. See chapter 1 for the definition    designing plans and increased contribution and
318.                                                  of the term “employer” and the definitions of        deduction limits in some cases.

Credit for startup costs. You may be able to
claim a tax credit for part of the ordinary and

Page 2                                                                                                                              Publication 560 (2017)
Table 1. Key Retirement Plan Rules for 2017
     Type
      of
     Plan                Last Date for Contribution                 Maximum Contribution              Maximum Deduction                 When To Set Up Plan
 SEP              Due date of employer's return                  Smaller of $54,000 or 25%1          25%1 of all participants'      Any time up to the due date of
                  (including extensions).                        of participant's                    compensation.2                 employer's return (including
                                                                 compensation.2                                                     extensions).
 SIMPLE           Salary reduction contributions: 30       Employee contribution:                    Same as maximum                Any time between January 1
 IRA              days after the end of the month for      Salary reduction contribution             contribution.                  and October 1 of the calendar
 and              which the contributions are to be made. up to $12,500, $15,500 if
                                                         4
                                                                                                                                    year.
 SIMPLE                                                    age 50 or over.
 401(k)           Matching or nonelective                                                                                           For a new employer coming
                  contributions: Due date of employer's Employer contribution:                                                      into existence after October 1,
                  return (including extensions).           Either dollar-for-dollar                                                 as soon as administratively
                                                           matching contributions, up to                                            feasible.
                                                           3% of employee's
                                                           compensation,3 or fixed
                                                           nonelective contributions of
                                                           2% of compensation.2
 Qualified    Elective deferral: Due date of                     Employee contribution:              25%1 of all participants'      By the end of the tax year.
 Plan:        employer's return (including                       Elective deferral up to             compensation,2 plus
 Defined      extensions).4                                      $18,000, $24,000 if age 50          amount of elective
 Contribution                                                    or over.                            deferrals made.
 Plan
              Employer contribution:                             Employer contribution:
              Money Purchase Pension Plan or                     Money Purchase Pension
              Profit-Sharing: Due date of employer's             Plan: Smaller of $54,000 or
              return (including extensions).                     100%1 of participant's
                                                                 compensation.2
                                                                 Profit-Sharing: Smaller of
                                                                 $54,000 or 100%1 of
                                                                 participant's compensation.2
 Qualified        Contributions generally must be paid in        Amount needed to provide            Based on actuarial             By the end of the tax year.
 Plan:            quarterly installments, due 15 days            an annual benefit no larger         assumptions and
 Defined          after the end of each quarter. See             than the smaller of $215,000        computations.
 Benefit Plan     Minimum Funding Requirement in                 or 100% of the participant's
                  chapter 4.                                     average compensation for
                                                                 his or her highest 3
                                                                 consecutive calendar years.
 1
   Net earnings from self-employment must take the contribution into account. See Deduction Limit for Self-Employed Individuals in chapters 2 and 4.
 2
   Compensation is generally limited to $270,000 in 2017.
 3
   Under a SIMPLE 401(k) plan, compensation is generally limited to $270,000 in 2017.
 4
   Certain plans subject to Department of Labor (DOL) rules may have an earlier due date for salary reduction contributions and elective deferrals, such as 401(k)
 plans. See “elective deferral” definition in Definitions You Need To Know, later. Solo/self-employed 401(k) plans are non-ERISA plans and do not fall under DOL
 rules.


What this publication doesn’t cover. Al-                    You can send us comments from IRS.gov/
though the purpose of this publication is to pro-        FormComments.
vide general information about retirement plans
you can set up for your employees, it doesn't
                                                            Or you can write to:
                                                                                                                   1.
contain all the rules and exceptions that apply                Internal Revenue Service
to these plans. You may need professional help                 Tax Forms and Publications
and guidance.
    Also, this publication doesn't cover all the
                                                               1111 Constitution Ave. NW, IR-6526
                                                               Washington, DC 20224
                                                                                                                   Definitions
rules that may be of interest to employees. For
example, it doesn't cover the following topics.             Although we can’t respond individually to              You Need To
     The comprehensive IRA rules an em-                  each comment received, we do appreciate your
     ployee needs to know. These rules are
     covered in Pub. 590-A, Contributions to In-
                                                         feedback and will consider your comments as
                                                         we revise our tax products.
                                                                                                                   Know
     dividual Retirement Arrangements (IRAs),
     and Pub. 590-B, Distributions from Individ-             Ordering forms and publications. Visit                Certain terms used in this publication are de-
     ual Retirement Arrangements (IRAs).                 IRS.gov/FormsPubs to download forms and                   fined below. The same term used in another
     The comprehensive rules that apply to dis-          publications. Otherwise, you can go to IRS.gov/           publication may have a slightly different mean-
     tributions from retirement plans. These             OrderForms to order current and prior-year                ing.
     rules are covered in Pub. 575, Pension and          forms and instructions. Your order should arrive
     Annuity Income.                                     within 10 business days.                                  Annual additions. Annual additions are the to-
     The comprehensive rules that apply to                                                                         tal of all your contributions in a year, employee
                                                             Tax questions. If you have a tax question             contributions (not including rollovers), and for-
     section 403(b) plans. These rules are cov-
                                                         not answered by this publication, check                   feitures allocated to a participant's account.
     ered in Pub. 571, Tax-Sheltered Annuity
                                                         IRS.gov and How To Get Tax Help at the end of
     Plans (403(b) Plans) For Employees of
                                                         this publication.                                         Annual benefits. Annual benefits are the ben-
     Public Schools and Certain Tax-Exempt
     Organizations.                                                                                                efits to be paid yearly in the form of a straight
                                                                                                                   life annuity (with no extra benefits) under a plan
Comments and suggestions. We welcome                                                                               to which employees don't contribute and under
your comments about this publication and your                                                                      which no rollover contributions are made.
suggestions for future editions.
                                                                                                                   Business. A business is an activity in which a
                                                                                                                   profit motive is present and economic activity is

                                                                                                       Chapter 1      Definitions You Need To Know              Page 3
involved. Service as a newspaper carrier under           However, an employer can choose to ex-              Employer. An employer is generally any per-
age 18 or as a public official isn’t a business.      clude elective deferrals under the above plans         son for whom an individual performs or did per-
                                                      from the definition of compensation. The limit         form any service, of whatever nature, as an em-
Common-law employee. A common-law em-                 on elective deferrals is discussed in chapter 2        ployee. A sole proprietor is treated as his or her
ployee is any individual who, under common            under Salary Reduction Simplified Employee             own employer for retirement plan purposes.
law, would have the status of an employee. A          Pension (SARSEP) and in chapter 4.                     However, a partner isn't an employer for retire-
leased employee can also be a common-law                                                                     ment plan purposes. Instead, the partnership is
employee.                                                 Other options. In figuring the compensa-           treated as the employer of each partner.
                                                      tion of a participant, you can treat any of the fol-
    A common-law employee is a person who
                                                      lowing amounts as the employee's compensa-             Highly compensated employee. A highly
performs services for an employer who has the
                                                      tion.                                                  compensated employee is an individual who:
right to control and direct the results of the work
                                                            The employee's wages as defined for in-              Owned more than 5% of the interest in
and the way in which it is done. For example,
                                                            come tax withholding purposes.                       your business at any time during the year
the employer:
                                                            The employee's wages you report in box 1             or the preceding year, regardless of how
      Provides the employee's tools, materials,
                                                            of Form W-2, Wage and Tax Statement.                 much compensation that person earned or
      and workplace; and
                                                            The employee's social security wages (in-            received; or
      Can fire the employee.
                                                            cluding elective deferrals).                         For the preceding year, received compen-
     Common-law employees aren't self-em-
                                                          Compensation generally can't include either            sation from you of more than $120,000 (if
ployed and can't set up retirement plans for in-
                                                      of the following items.                                    the preceding year is 2016, 2017, or 2018)
come from their work, even if that income is
                                                           Nontaxable reimbursements or other ex-                and, if you so choose, was in the top 20%
self-employment income for social security tax
                                                           pense allowances.                                     of employees when ranked by compensa-
purposes. For example, common-law employ-
                                                           Deferred compensation (other than elec-               tion.
ees who are ministers, members of religious or-
                                                           tive deferrals).
ders, full-time insurance salespeople, and U.S.                                                              Leased employee. A leased employee who
citizens employed in the United States by for-                                                               isn't your common-law employee must gener-
                                                      SIMPLE plans. A special definition of compen-
eign governments can't set up retirement plans                                                               ally be treated as your employee for retirement
                                                      sation applies for SIMPLE plans. See chapter 3.
for their earnings from those employments,                                                                   plan purposes if he or she does all the follow-
even though their earnings are treated as
                                                      Contribution. A contribution is an amount you          ing.
self-employment income.
                                                      pay into a plan for all those participating in the           Provides services to you under an agree-
     However, an individual may be a com-             plan, including self-employed individuals. Limits            ment between you and a leasing organiza-
mon-law employee and a self-employed person           apply to how much, under the contribution for-               tion.
as well. For example, an attorney can be a cor-       mula of the plan, can be contributed each year               Has performed services for you (or for you
porate common-law employee during regular             for a participant.                                           and related persons) substantially full time
working hours and also practice law in the eve-                                                                    for at least 1 year.
ning as a self-employed person. In another ex-        Deduction. A deduction is the plan contribu-                 Performs services under your primary di-
ample, a minister employed by a congregation          tions you can subtract from gross income on                  rection or control.
for a salary is a common-law employee even            your federal income tax return. Limits apply to
though the salary is treated as self-employment       the amount deductible.                                    Exception. A leased employee isn't treated
income for social security tax purposes. How-                                                                as your employee if all the following conditions
ever, fees reported on Schedule C (Form               Earned income. Earned income is net earn-              are met.
1040), Profit or Loss From Business, for per-         ings from self-employment, discussed later,              1. Leased employees aren't more than 20%
forming marriages, baptisms, and other per-           from a business in which your services materi-              of your non-highly compensated work
sonal services are self-employment earnings for       ally helped to produce the income.                          force.
qualified plan purposes.                                  You can also have earned income from
                                                      property your personal efforts helped create,            2. The employee is covered under the leas-
Compensation. Compensation for plan alloca-                                                                       ing organization's qualified pension plan.
                                                      such as royalties from your books or inventions.
tions is the pay a participant received from you      Earned income includes net earnings from sell-           3. The leasing organization's plan is a money
for personal services for a year. You can gener-      ing or otherwise disposing of the property, but it          purchase pension plan that has all the fol-
ally define compensation as including all the fol-    doesn't include capital gains. It includes income           lowing provisions.
lowing payments.                                      from licensing the use of property other than
                                                      goodwill.                                                    a. Immediate participation. (This require-
  1. Wages and salaries.
                                                                                                                      ment doesn't apply to any individual
                                                          Earned income includes amounts received
  2. Fees for professional services.                                                                                  whose compensation from the leasing
                                                      for services by self-employed members of rec-
                                                                                                                      organization in each plan year during
  3. Other amounts received (cash or non-             ognized religious sects opposed to social se-
                                                                                                                      the 4-year period ending with the plan
     cash) for personal services actually ren-        curity benefits who are exempt from self-em-
                                                                                                                      year is less than $1,000.)
     dered by an employee, including, but not         ployment tax.
     limited to, the following items.                     If you have more than one business, but                  b. Full and immediate vesting.
      a. Commissions and tips.                        only one has a retirement plan, only the earned              c. A nonintegrated employer contribu-
                                                      income from that business is considered for that                tion rate of at least 10% of compensa-
      b. Fringe benefits.                             plan.                                                           tion for each participant.
      c. Bonuses.
                                                      Elective deferral. An elective deferral is the         However, if the leased employee is your com-
    For a self-employed individual, compensa-         contribution made by employees to a qualified          mon-law employee, that employee will be your
tion means the earned income, discussed later,        retirement plan.                                       employee for all purposes, regardless of any
of that individual.                                         Non-owner employees: The employee sal-           pension plan of the leasing organization.
    Compensation generally includes amounts                 ary reduction/elective deferral contribu-
deferred at the employee's election in the fol-             tions must be elected/made by end of the         Net earnings from self-employment. For
lowing employee benefit plans.                              tax year and deposited into the employee’s       SEP and qualified plans, net earnings from
     Section 401(k) plans.                                  plan account within 7 business days (safe        self-employment is your gross income from
     Section 403(b) plans.                                  harbor) and no later than 15 days.               your trade or business (provided your personal
     SIMPLE IRA plans.                                      Owner/employees: The employee defer-             services are a material income-producing fac-
     SARSEPs.                                               rals must be elected by the end of the tax       tor) minus allowable business deductions. Al-
     Section 457 deferred compensation plans.               year and then can be made by the tax re-         lowable deductions include contributions to
     Section 125 cafeteria plans.                           turn filing deadline, including extensions.      SEP and qualified plans for common-law

Page 4      Chapter 1     Definitions You Need To Know
employees and the deduction allowed for the            plans, a sole proprietor is treated as both an    your employees' retirement without getting in-
deductible part of your self-employment tax.           employer and an employee.                         volved in a more complex qualified plan.
    Net earnings from self-employment doesn't
                                                                                                         Under a SEP, you make contributions to a tradi-
include items excluded from gross income (or
                                                                                                         tional individual retirement arrangement (called
their related deductions) other than foreign
                                                                                                         a SEP-IRA) set up by or for each eligible em-
earned income and foreign housing cost
                                                                                                         ployee. A SEP-IRA is owned and controlled by
amounts.
                                                                                                         the employee, and you make contributions to
    For the deduction limits, earned income is
net earnings for personal services actually ren-       2.                                                the financial institution where the SEP-IRA is
                                                                                                         maintained.
dered to the business. You take into account
the income tax deduction for the deductible part                                                         SEP-IRAs are set up for, at a minimum, each el-
of self-employment tax and the deduction for
contributions to the plan made on your behalf          Simplified                                        igible employee (defined below). A SEP-IRA
                                                                                                         may have to be set up for a leased employee
when figuring net earnings.                                                                              (defined in chapter 1), but doesn't need to be
    Net earnings include a partner's distributive
share of partnership income or loss (other than
                                                       Employee                                          set up for excludable employees (defined later).

                                                                                                         Eligible employee. An eligible employee is an
separately stated items, such as capital gains
and losses). It doesn't include income passed          Pensions (SEPs)                                   individual who meets all the following require-
                                                                                                         ments.
through to shareholders of S corporations.
Guaranteed payments to limited partners are                                                                   Has reached age 21.
net earnings from self-employment if they are          Topics                                                 Has worked for you in at least 3 of the last
paid for services to or for the partnership. Distri-   This chapter discusses:                                5 years.
butions of other income or loss to limited part-                                                              Has received at least $600 in compensa-
ners aren't net earnings from self-employment.             Setting up a SEP                                   tion from you in 2017. This amount re-
    For SIMPLE plans, net earnings from                    How much can I contribute                          mains unchanged in 2018.
self-employment is the amount on line 4 of                 Deducting contributions                               You can use less restrictive participa-
Short Schedule SE or line 6 of Long Sched-                 Salary reduction simplified employee pen-      TIP tion requirements than those listed, but
ule SE (Form 1040), Self-Employment Tax, be-               sions (SARSEPs)                                       not more restrictive ones.
fore subtracting any contributions made to the             Distributions (withdrawals)
SIMPLE plan for yourself.                                  Additional taxes
                                                                                                         Excludable employees. The following em-
                                                           Reporting and disclosure requirements
                                                                                                         ployees can be excluded from coverage under
Qualified plan. A qualified plan is a retirement
                                                                                                         a SEP.
plan that offers a tax-favored way to save for re-     Useful Items                                           Employees covered by a union agreement
tirement. You can deduct contributions made to         You may want to see:                                   and whose retirement benefits were bar-
the plan for your employees. Earnings on these
                                                                                                              gained for in good faith by the employees'
contributions are generally tax free until distrib-
                                                         Publications                                         union and you.
uted at retirement. Profit-sharing, money pur-
                                                                                                              Nonresident alien employees who have re-
chase, and defined benefit plans are qualified             590-A Contributions to Individual
                                                                                                              ceived no U.S. source wages, salaries, or
plans. A 401(k) plan is also a qualified plan.                 Retirement Arrangements (IRAs)
                                                                                                              other personal services compensation
Participant. A participant is an eligible em-              590-B Distributions from Individual                from you. For more information about non-
ployee who is covered by your retirement plan.                 Retirement Arrangements (IRAs)                 resident aliens, see Pub. 519, U.S. Tax
See the discussions of the different types of                                                                 Guide for Aliens.
                                                           3998 Choosing a Retirement Solution for
plans for the definition of an employee eligible               Your Small Business
to participate in each type of plan.
                                                           4285 SEP Checklist                            Setting Up a SEP
Partner. A partner is an individual who shares             4286 SARSEP Checklist
ownership of an unincorporated trade or busi-                                                            There are three basic steps in setting up a SEP.
ness with one or more persons. For retirement              4333 SEP Retirement Plans for Small
                                                               Businesses                                 1. You must execute a formal written agree-
plans, a partner is treated as an employee of                                                                ment to provide benefits to all eligible em-
the partnership.                                           4336 SARSEP for Small Businesses                  ployees.
Self-employed individual. An individual in                 4407 SARSEP—Key Issues and                     2. You must give each eligible employee cer-
business for himself or herself, and whose busi-               Assistance                                    tain information about the SEP.
ness isn't incorporated, is self-employed. Sole
                                                         Forms (and Instructions)                         3. A SEP-IRA must be set up by or for each
proprietors and partners are self-employed.
                                                                                                             eligible employee.
Self-employment can include part-time work.                W-2 Wage and Tax Statement
    Not everyone who has net earnings from                                                                       Many financial institutions will help you
                                                           1040 U.S. Individual Income Tax Return
self-employment for social security tax purpo-                                                            TIP set up a SEP.
ses is self-employed for qualified plan purpo-             5305-SEP Simplified Employee
ses. See Common-law employee and Net earn-                     Pension—Individual Retirement
ings from self-employment, earlier.                            Accounts Contribution Agreement           Formal written agreement. You must exe-
    In addition, certain fishermen may be con-                                                           cute a formal written agreement to provide ben-
                                                           5305A-SEP Salary Reduction Simplified
sidered self-employed for setting up a qualified                                                         efits to all eligible employees under a SEP. You
                                                               Employee Pension—Individual
plan. See Pub. 595, Capital Construction Fund                                                            can satisfy the written agreement requirement
                                                               Retirement Accounts Contribution
for Commercial Fishermen, for the special rules                                                          by adopting an IRS model SEP using Form
                                                               Agreement
used to determine whether fishermen are                                                                  5305-SEP. However, see When not to use
self-employed.                                             8880 Credit for Qualified Retirement          Form 5305-SEP below.
                                                               Savings Contributions                         If you adopt an IRS model SEP using Form
Sole proprietor. A sole proprietor is an indi-                                                           5305-SEP, no prior IRS approval or determina-
                                                           8881 Credit for Small Employer Pension
vidual who owns an unincorporated business                                                               tion letter is required. Keep the original form.
                                                               Plan Startup Costs
by himself or herself, including a single-member                                                         Don't file it with the IRS. Also, using Form
limited liability company that is treated as a dis-    A SEP is a written plan that allows you to make   5305-SEP will usually relieve you from filing
regarded entity for tax purposes. For retirement       contributions toward your own retirement and      annual retirement plan information returns with

                                                                                       Chapter 2    Simplified Employee Pensions (SEPs)           Page 5
the IRS and the Department of Labor. See the            You don't have to make contributions every      compensation. When you figure this limit, you
Form 5305-SEP instructions for details. If you      year. But if you make contributions, they must      must add your contributions to all defined con-
choose not to use Form 5305-SEP, you should         be based on a written allocation formula and        tribution plans maintained by you. Because a
seek professional advice in adopting a SEP.         must not discriminate in favor of highly compen-    SEP is considered a defined contribution plan
                                                    sated employees (defined in chapter 1). When        for this limit, your contributions to a SEP must
   When not to use Form 5305-SEP. You               you contribute, you must contribute to the          be added to your contributions to other defined
can't use Form 5305-SEP if any of the following     SEP-IRAs of all participants who actually per-      contribution plans you maintain.
apply.                                              formed personal services during the year for
 1. You currently maintain any other qualified      which the contributions are made, including em-     Tax treatment of excess contributions. Ex-
    retirement plan other than another SEP.         ployees who die or terminate employment be-         cess contributions are your contributions to an
                                                    fore the contributions are made.                    employee's SEP-IRA (or to your own SEP-IRA)
 2. You have any eligible employees for                                                                 for 2017 that exceed the lesser of the following
    whom IRAs haven’t been set up.                     Contributions are deductible within limits, as   amounts.
                                                    discussed later, and generally aren't taxable to         25% of the employee's compensation (or,
 3. You use the services of leased employ-
                                                    the plan participants.                                   for you, 20% of your net earnings from
    ees, who aren't your common-law employ-
    ees (as described in chapter 1).                    A SEP-IRA can't be a Roth IRA. Employer              self-employment).
                                                    contributions to a SEP-IRA won’t affect the              $54,000.
 4. You are a member of any of the following
    unless all eligible employees of all the        amount an individual can contribute to a Roth or    Excess contributions are included in the em-
    members of these groups, trades, or busi-       traditional IRA.                                    ployee's income for the year and are treated as
    nesses participate under the SEP.                                                                   contributions by the employee to his or her
                                                        Unlike regular contributions to a traditional
                                                                                                        SEP-IRA. For more information on employee
      a. An affiliated service group described      IRA, contributions under a SEP can be made to
                                                                                                        tax treatment of excess contributions, see Pub.
         in section 414(m).                         participants over age 701 2. If you are self-em-    590-A.
                                                    ployed, you can also make contributions under
      b. A controlled group of corporations de-     the SEP for yourself even if you are over 701 2.
         scribed in section 414(b).                                                                     Reporting on Form W-2. Don't include SEP
                                                    Participants age 701 2 or over must take re-        contributions on your employee's Form W-2 un-
      c. Trades or businesses under common          quired minimum distributions.                       less contributions were made under a salary re-
         control described in section 414(c).                                                           duction arrangement (discussed later).
                                                    Time limit for making contributions. To de-
 5. You don't pay the cost of the SEP contri-
                                                    duct contributions for a year, you must make
    butions.
                                                    the contributions by the due date (including ex-
                                                    tensions) of your tax return for the year.
                                                                                                        Deducting Contributions
Information you must give to employees.
You must give each eligible employee a copy of                                                          Generally, you can deduct the contributions you
Form 5305-SEP, its instructions, and the other      Contribution Limits                                 make each year to each employee's SEP-IRA.
information listed in the Form 5305-SEP instruc-                                                        If you are self-employed, you can deduct the
tions. An IRS model SEP isn't considered adop-      Contributions you make for 2017 to a com-           contributions you make each year to your own
ted until you give each employee this informa-      mon-law employee's SEP-IRA can't exceed the         SEP-IRA.
tion.                                               lesser of 25% of the employee's compensation
                                                    or $54,000. Compensation generally doesn't in-
Setting up the employee's SEP-IRA. A                clude your contributions to the SEP. The SEP
                                                                                                        Deduction Limit for
SEP-IRA must be set up by or for each eligible      plan document will specify how the employer         Contributions for
employee. SEP-IRAs can be set up with banks,        contribution is determined and how it will be al-   Participants
insurance companies, or other qualified finan-      located to participants.
cial institutions. You send SEP contributions to                                                        The most you can deduct for your contributions
the financial institution where the SEP-IRA is          Example. Your employee, Mary Plant,             to your or your employee's SEP-IRA is the
maintained.                                         earned $21,000 for 2017. The maximum contri-        lesser of the following amounts.
                                                    bution you can make to her SEP-IRA is $5,250
Deadline for setting up a SEP. You can set          (25% (0.25) x $21,000).                              1. Your contributions (including any excess
up a SEP for any year as late as the due date                                                               contributions carryover).
(including extensions) of your income tax return    Contributions for yourself. The annual limits        2. 25% of the compensation (limited to
for that year.                                      on your contributions to a common-law employ-           $270,000 per participant) paid to the par-
                                                    ee's SEP-IRA also apply to contributions you            ticipants during 2017 from the business
Credit for startup costs. You may be able to        make to your own SEP-IRA. However, special              that has the plan, not to exceed $54,000
claim a tax credit for part of the ordinary and     rules apply when figuring your maximum deduc-           per participant.
necessary costs of starting a SEP that first be-    tible contribution. See Deduction Limit for
came effective in 2017. For more information,       Self-Employed Individuals, later.                   In 2018, the amounts in (2) above increase to
see Credit for startup costs under Reminders,                                                           $275,000 and $55,000, respectively.
earlier.                                            Annual compensation limit. You can't con-
                                                    sider the part of an employee's compensation
                                                    over $270,000 when figuring your contribution
                                                                                                        Deduction Limit for
How Much                                            limit for that employee. However, $54,000 is the    Self-Employed Individuals
                                                    maximum contribution for an eligible employee.
Can I Contribute?                                   These limits increase to $275,000 and $55,000,      If you contribute to your own SEP-IRA, you
                                                    respectively, in 2018.                              must make a special computation to figure your
The SEP rules permit you to contribute a limited                                                        maximum deduction for these contributions.
amount of money each year to each employee's           Example. Your employee, Susan Green,             When figuring the deduction for contributions
SEP-IRA. If you are self-employed, you can          earned $210,000 for 2017. Because of the max-       made to your own SEP-IRA, compensation is
contribute to your own SEP-IRA. Contributions       imum contribution limit for 2017, you can only      your net earnings from self-employment (de-
must be in the form of money (cash, check, or       contribute $54,000 to her SEP-IRA.                  fined in chapter 1), which takes into account
money order). You can't contribute property.                                                            both the following deductions.
However, participants may be able to transfer       More than one plan. If you contribute to a de-           The deduction for the deductible part of
or roll over certain property from one retirement   fined contribution plan (defined in chapter 4),          your self-employment tax.
plan to another. See Pubs. 590-A and 590-B for      annual additions to an account are limited to the        The deduction for contributions to your
more information about rollovers.                   lesser of $54,000 or 100% of the participant's           own SEP-IRA.

Page 6     Chapter 2     Simplified Employee Pensions (SEPs)
The deduction for contributions to your own     (If you are a partner, contributions for yourself                 The instructions for Form 5305A-SEP
SEP-IRA and your net earnings depend on             are shown on the Schedule K-1 (Form 1065),                 TIP have a worksheet you can use to deter-
each other. For this reason, you determine the      Partner's Share of Income, Deductions, Credits,                   mine whether the elective deferrals of
deduction for contributions to your own             etc., you receive from the partnership.)                  your highly compensated employees meet the
SEP-IRA indirectly by reducing the contribution                                                               SARSEP ADP test.
                                                             Remember that sole proprietors and
rate called for in your plan. To do this, use the
                                                      !      partners can't deduct as a business ex-
Rate Table for Self-Employed or the Rate Work-                                                                    Employee compensation. For figuring the
                                                     CAUTION pense contributions made to a SEP for
sheet for Self-Employed, whichever is appropri-                                                               deferral percentage, compensation is generally
                                                    themselves, only those made for their com-
ate for your plan's contribution rate, in chap-                                                               the amount you pay to the employee for the
                                                    mon-law employees.
ter 5. Then figure your maximum deduction by                                                                  year. Compensation includes the elective defer-
using the Deduction Worksheet for Self-Em-                                                                    ral and other amounts deferred in certain em-
ployed in chapter 5.                                                                                          ployee benefit plans. See Compensation in
                                                    Salary Reduction                                          chapter 1. Elective deferrals under the SARSEP
Carryover of                                        Simplified Employee                                       are included in figuring your employees' defer-
                                                                                                              ral percentage even though they aren't included
Excess SEP Contributions
                                                    Pensions (SARSEPs)                                        in the income of your employees for income tax
                                                                                                              purposes.
If you made SEP contributions that are more
than the deduction limit (nondeductible contri-     A SARSEP is a SEP set up before 1997 that in-                 Compensation of self-employed individ-
butions), you can carry over and deduct the dif-    cludes a salary reduction arrangement. (See               uals. If you are self-employed, compensation
ference in later years. However, the carryover,     the Caution next.) Under a SARSEP, your em-               is your net earnings from self-employment as
when combined with the contribution for the         ployees can choose to have you contribute part            defined in chapter 1.
later year, is subject to the deduction limit for   of their pay to their SEP-IRAs rather than re-                Compensation doesn't include tax-free
that year. If you also contributed to a defined     ceive it in cash. This contribution is called an          items (or deductions related to them) other than
benefit plan or defined contribution plan, see      elective deferral because employees choose                foreign earned income and housing cost
Carryover of Excess Contributions under Em-         (elect) to set aside the money, and they defer            amounts.
ployer Deduction in chapter 4 for the carryover     the tax on the money until it is distributed to
limit.                                              them.                                                         Choice not to treat deferrals as compen-
                                                                                                              sation. You can choose not to treat elective
                                                             You aren't allowed to set up a SARSEP            deferrals (and other amounts deferred in certain
Excise tax. If you made nondeductible (ex-
                                                      !      after 1996. However, participants (in-           employee benefit plans) for a year as compen-
cess) contributions to a SEP, you may be sub-        CAUTION cluding employees hired after 1996) in
ject to a 10% excise tax. For information about                                                               sation under your SARSEP.
                                                    a SARSEP set up before 1997 can continue to
the excise tax, see Excise Tax for Nondeducti-      have you contribute part of their pay to the plan.
ble (Excess) Contributions under Employer De-       If you are interested in setting up a retirement          Limit on Elective Deferrals
duction in chapter 4.                               plan that includes a salary reduction arrange-
                                                    ment, see chapter 3.                                      The most a participant can choose to defer for
When To Deduct                                                                                                calendar year 2017 is the lesser of the following
                                                                                                              amounts.
Contributions                                       Who can have a SARSEP? A SARSEP set up
                                                    before 1997 is available to you and your eligible           1. 25% of the participant's compensation
When you can deduct contributions made for a        employees only if all the following requirements               (limited to $270,000 of the participant's
year depends on the tax year for which the SEP      are met.                                                       compensation).
is maintained.                                           At least 50% of your employees eligible to             2. $18,000.
     If the SEP is maintained on a calen-                participate choose to make elective defer-
     dar-year basis, you deduct the yearly con-          rals.                                                   The $18,000 limit applies to the total elective
     tributions on your tax return for the year          You have 25 or fewer employees who were              deferrals the employee makes for the year to a
     within which the calendar year ends.                eligible to participate in the SEP at any            SEP and any of the following.
     If you file your tax return and maintain the        time during the preceding year.                           Cash or deferred arrangement (section
     SEP using a fiscal year or short tax year,          The elective deferrals of your highly com-                401(k) plan).
     you deduct contributions made for a year            pensated employees meet the SARSEP                        Salary reduction arrangement under a
     on your tax return for that year.                   average deferral percentage (ADP) test.                   tax-sheltered annuity plan (section 403(b)
                                                                                                                   plan).
   Example. You are a fiscal-year taxpayer             SARSEP ADP test. Under the SARSEP                           SIMPLE IRA plan.
whose tax year ends June 30. You maintain a         ADP test, the amount deferred each year by
SEP on a calendar-year basis. You deduct SEP        each eligible highly compensated employee as                 In 2018, the $270,000 limit increases to
contributions made for calendar year 2017 on        a percentage of pay (the deferral percentage)             $275,000, and the $18,000 limit increases to
your tax return for your tax year ending June 30,   can't be more than 125% of the ADP of all                 $18,500.
2018.                                               non-highly compensated employees eligible to
                                                    participate. A highly compensated employee is             Catch-up contributions. A SARSEP can per-
                                                    defined in chapter 1.                                     mit participants who are age 50 or over at the
Where To Deduct                                                                                               end of the calendar year to also make catch-up
Contributions                                           Deferral percentage. The deferral per-
                                                    centage for an employee for a year is figured as
                                                                                                              contributions. The catch-up contribution limit is
                                                                                                              $6,000 for 2017 and 2018. Elective deferrals
Deduct the contributions you make for your          follows.                                                  aren't treated as catch-up contributions for 2017
common-law employees on your tax return. For                                                                  until they exceed the elective deferral limit (the
example, sole proprietors deduct them on                      The elective employer contributions             lesser of 25% of compensation or $18,000), the
Schedule C (Form 1040) or Schedule F (Form                 (excluding certain catch-up contributions)         SARSEP ADP test limit discussed earlier, or the
                                                          paid to the SEP for the employee for the year       plan limit (if any). However, the catch-up contri-
1040), Profit or Loss From Farming; partner-
ships deduct them on Form 1065, U.S. Return                      The employee's compensation                  bution a participant can make for a year can't
of Partnership Income; and corporations deduct                    (limited to $270,000 in 2017)               exceed the lesser of the following amounts.
them on Form 1120, U.S. Corporation Income                                                                          The catch-up contribution limit.
Tax Return, or Form 1120S, U.S. Income Tax                                                                          The excess of the participant's compensa-
Return for an S Corporation.                                                                                        tion over the elective deferrals that aren't
   Sole proprietors and partners deduct contri-                                                                     catch-up contributions.
butions for themselves on line 28 of Form 1040.

                                                                                           Chapter 2      Simplified Employee Pensions (SEPs)           Page 7
Catch-up contributions aren't subject to the      contributions on the condition that any part of       instructions for either Form 5305-SEP or Form
elective deferral limit (the lesser of 25% of com-   them must be kept in the account after you have       5305A-SEP.
pensation or $18,000 in 2017 and $18,500 in          made your contributions to the employee's ac-
2018).                                               counts.

Overall limit on SEP contributions. If you               Distributions are subject to IRA rules. Gen-
also make nonelective contributions to a             erally, you or your employee must begin to re-
SEP-IRA, the total of the nonelective and elec-      ceive distributions from a SEP-IRA by April 1 of
tive contributions to that SEP-IRA can't exceed
the lesser of 25% of the employee's compensa-
                                                     the first year after the calendar year in which
                                                     you or your employee reaches age 701 2. For
                                                                                                           3.
tion or $54,000 for 2017 ($55,000 for 2018).         more information about IRA rules, including the
The same rule applies to contributions you
make to your own SEP-IRA. See Contribution
                                                     tax treatment of distributions, rollovers, required
                                                     distributions, and income tax withholding, see        SIMPLE Plans
Limits, earlier.                                     Pubs. 590-A and 590-B.

Figuring the elective deferral. For figuring                                                               Topics
the 25% limit on elective deferrals, compensa-
tion doesn't include SEP contributions, includ-
                                                     Additional Taxes                                      This chapter discusses:

ing elective deferrals or other amounts deferred     The tax advantages of using SEP-IRAs for re-              SIMPLE IRA plan
in certain employee benefit plans.                   tirement savings can be offset by additional              SIMPLE 401(k) plan
                                                     taxes that may be imposed for all the following
Tax Treatment of Deferrals                           actions.                                              Useful Items
                                                          Making excess contributions.                     You may want to see:
Elective deferrals that aren't more than the lim-         Making early withdrawals.
its discussed earlier under Limit on Elective De-         Not making required withdrawals.                   Publications
ferrals are excluded from your employees' wa-
ges subject to federal income tax in the year of         For information about these taxes, see                 590-A Contributions to Individual
deferral. However, these deferrals are included      Pubs. 590-A and 590-B. Also, a SEP-IRA may                     Retirement Arrangements (IRAs)
in wages for social security, Medicare, and fed-     be disqualified, or an excise tax may apply, if            590-B Distributions from Individual
eral unemployment (FUTA) tax.                        the account is involved in a prohibited transac-               Retirement Arrangements (IRAs)
                                                     tion, discussed next.
Excess deferrals. For 2017, excess deferrals                                                                    3998 Choosing a Retirement Solution for
are the elective deferrals for the year that are     Prohibited transaction. If an employee im-                     Your Small Business
more than the $18,000 limit discussed earlier.       properly uses his or her SEP-IRA, such as by
                                                                                                                4284 SIMPLE IRA Plan Checklist
For a participant who is eligible to make            borrowing money from it, the employee has en-
catch-up contributions, excess deferrals are the     gaged in a prohibited transaction. In that case,           4334 SIMPLE IRA Plans for Small
elective deferrals that are more than $24,000.       the SEP-IRA will no longer qualify as an IRA.                  Businesses
The treatment of excess deferrals made under         For a list of prohibited transactions, see Prohibi-
a SARSEP is similar to the treatment of excess       ted Transactions in chapter 4.                          Forms (and Instructions)
deferrals made under a qualified plan. See               Effects on employee. If a SEP-IRA is dis-              W-2 Wage and Tax Statement
Treatment of Excess Deferrals under Elective         qualified because of a prohibited transaction,
Deferrals (401(k) Plans) in chapter 4.                                                                          5304-SIMPLE Savings Incentive Match
                                                     the assets in the account will be treated as hav-              Plan for Employees of Small
                                                     ing been distributed to the employee on the first              Employers (SIMPLE)—Not for Use
Excess SEP contributions. Excess SEP con-            day of the year in which the transaction occur-
tributions are elective deferrals of highly com-                                                                    With a Designated Financial
                                                     red. The employee must include in income the                   Institution
pensated employees that are more than the            fair market value of the assets (on the first day
amount permitted under the SARSEP ADP test.          of the year) that is more than any cost basis in           5305-SIMPLE Savings Incentive Match
You must notify your highly compensated em-          the account. Also, the employee may have to                    Plan for Employees of Small
ployees within 21 2 months after the end of the      pay the additional tax for making early with-                  Employers (SIMPLE)—for Use With a
plan year of their excess SEP contributions. If      drawals.                                                       Designated Financial Institution
you don't notify them within this time period, you
must pay a 10% tax on the excess. For an ex-                                                                    8880 Credit for Qualified Retirement
                                                                                                                    Savings Contributions
planation of the notification requirements, see
Revenue Procedure 91-44, 1991-2 C.B. 733. If
                                                     Reporting and                                              8881 Credit for Small Employer Pension
you adopted a SARSEP using Form                      Disclosure                                                     Plan Startup Costs
5305A-SEP, the notification requirements are
explained in the instructions for that form.         Requirements                                          A savings incentive match plan for employees
                                                                                                           (SIMPLE plan) is a written arrangement that
Reporting on Form W-2. Don’t include elec-           If you set up a SEP using Form 5305-SEP, you          provides you and your employees with a simpli-
tive deferrals in the “Wages, tips, other com-       must give your eligible employees certain infor-      fied way to make contributions to provide retire-
pensation” box of Form W-2. You must, how-           mation about the SEP when you set it up. See          ment income. Under a SIMPLE plan, employ-
ever, include them in the “Social security           Setting Up a SEP, earlier. Also, you must give        ees can choose to make salary reduction
wages” and “Medicare wages and tips” boxes.          your eligible employees a statement each year         contributions to the plan rather than receiving
You must also include them in box 12. Mark the       showing any contributions to their SEP-IRAs.          these amounts as part of their regular pay. In
“Retirement plan” checkbox in box 13. For more       You must also give them notice of any excess          addition, you will contribute matching or non-
information, see the Form W-2 instructions.          contributions. For details about other informa-       elective contributions.
                                                     tion you must give them, see the instructions for     SIMPLE plans can only be maintained on a cal-
                                                     Form 5305-SEP or Form 5305A-SEP (for a sal-           endar-year basis.
Distributions                                        ary reduction SEP).
                                                                                                           A SIMPLE plan can be set up in either of the fol-
(Withdrawals)                                           Even if you didn't use Form 5305-SEP or            lowing ways.
                                                     Form 5305A-SEP to set up your SEP, you must                Using SIMPLE IRAs (SIMPLE IRA plan).
As an employer, you can't prohibit distributions     give your employees information similar to that            As part of a 401(k) plan (SIMPLE 401(k)
from a SEP-IRA. Also, you can't make your            described above. For more information, see the             plan).

Page 8      Chapter 3     SIMPLE Plans
Many financial institutions will help you    permitted to maintain a SIMPLE IRA plan for            plan be deposited initially at a designated finan-
 TIP set up a SIMPLE plan.                           other employees.                                       cial institution.

                                                                                                                The SIMPLE IRA plan is adopted when you
                                                     Who Can Participate                                    have completed all appropriate boxes and
SIMPLE IRA Plan                                      in a SIMPLE IRA Plan?                                  blanks on the form and you (and the designated
                                                                                                            financial institution, if any) have signed it. Keep
A SIMPLE IRA plan is a retirement plan that                                                                 the original form. Don’t file it with the IRS.
                                                     Eligible employee. Any employee who re-
uses SIMPLE IRAs for each eligible employee.
                                                     ceived at least $5,000 in compensation during          Other uses of the forms. If you set up a SIM-
Under a SIMPLE IRA plan, a SIMPLE IRA must
                                                     any 2 years preceding the current calendar year        PLE IRA plan using Form 5304-SIMPLE or
be set up for each eligible employee. For the
                                                     and is reasonably expected to receive at least         Form 5305-SIMPLE, you can use the form to
definition of an eligible employee, see Who Can
                                                     $5,000 during the current calendar year is eligi-      satisfy other requirements, including the follow-
Participate in a SIMPLE IRA Plan, later.
                                                     ble to participate. The term “employee” includes       ing.
                                                     a self-employed individual who received earned              Meeting employer notification require-
Who Can Set Up                                       income.                                                     ments for the SIMPLE IRA plan. Form
a SIMPLE IRA Plan?                                       You can use less restrictive eligibility re-            5304-SIMPLE and Form 5305-SIMPLE
                                                     quirements (but not more restrictive ones) by               contain a Model Notification to Eligible Em-
You can set up a SIMPLE IRA plan if you meet         eliminating or reducing the prior year compen-              ployees that provides the necessary infor-
both the following requirements.                     sation requirements, the current year compen-               mation to the employee.
     You meet the employee limit.                    sation requirements, or both. For example, you              Maintaining the SIMPLE IRA plan records
     You don't maintain another qualified plan       can allow participation for employees who re-               and proving you set up a SIMPLE IRA plan
     unless the other plan is for collective bar-    ceived at least $3,000 in compensation during               for employees.
     gaining employees.                              any preceding calendar year. However, you
                                                     can't impose any other conditions for participat-      Deadline for setting up a SIMPLE IRA plan.
Employee limit. You can set up a SIMPLE IRA          ing in a SIMPLE IRA plan.                              You can set up a SIMPLE IRA plan effective on
plan only if you had 100 or fewer employees                                                                 any date from January 1 through October 1 of a
who received $5,000 or more in compensation          Excludable employees. The following em-                year, provided you didn't previously maintain a
from you for the preceding year. Under this rule,    ployees don't need to be covered under a SIM-          SIMPLE IRA plan. This requirement doesn't ap-
you must take into account all employees em-         PLE IRA plan.                                          ply if you are a new employer that comes into
ployed at any time during the calendar year re-           Employees who are covered by a union              existence after October 1 of the year the SIM-
gardless of whether they are eligible to partici-         agreement and whose retirement benefits           PLE IRA plan is set up and you set up a SIM-
pate. Employees include self-employed                     were bargained for in good faith by the em-       PLE IRA plan as soon as administratively feasi-
individuals who received earned income and                ployees' union and you.                           ble after your business comes into existence. If
leased employees (defined in chapter 1).                  Nonresident alien employees who have re-          you previously maintained a SIMPLE IRA plan,
                                                          ceived no U.S. source wages, salaries, or         you can set up a SIMPLE IRA plan effective
    Once you set up a SIMPLE IRA plan, you
                                                          other personal services compensation              only on January 1 of a year. A SIMPLE IRA plan
must continue to meet the 100-employee limit
                                                          from you.                                         can't have an effective date that is before the
each year you maintain the plan.
                                                                                                            date you actually adopt the plan.
    Grace period for employers who cease             Compensation. Compensation for employees
to meet the 100-employee limit. If you main-         is the total wages, tips, and other compensation       Setting up a SIMPLE IRA. SIMPLE IRAs are
tain the SIMPLE IRA plan for at least 1 year and     from the employer subject to federal income tax        the individual retirement accounts or annuities
you cease to meet the 100-employee limit in a        withholding and the amounts paid for domestic          into which the contributions are deposited. A
later year, you will be treated as meeting it for    service in a private home, local college club, or      SIMPLE IRA must be set up for each eligible
the 2 calendar years immediately following the       local chapter of a college fraternity or sorority.     employee. Forms 5305-S, SIMPLE Individual
calendar year for which you last met it.             Compensation also includes the employee's              Retirement Trust Account, and 5305-SA, SIM-
    A different rule applies if you don't meet the   salary reduction contributions made under this         PLE Individual Retirement Custodial Account,
100-employee limit because of an acquisition,        plan and, if applicable, elective deferrals under      are model trust and custodial account docu-
disposition, or similar transaction. Under this      a section 401(k) plan, a SARSEP, or a section          ments the participant and the trustee (or custo-
rule, the SIMPLE IRA plan will be treated as         403(b) annuity contract and compensation de-           dian) can use for this purpose.
meeting the 100-employee limit for the year of       ferred under a section 457 plan required to be             A SIMPLE IRA can't be a Roth IRA. Contri-
the transaction and the 2 following years if both    reported by the employer on Form W-2. If you           butions to a SIMPLE IRA won't affect the
the following conditions are satisfied.              are self-employed, compensation is your net            amount an individual can contribute to a Roth or
      Coverage under the plan hasn’t signifi-        earnings from self-employment (line 4 of Short         traditional IRA.
      cantly changed during the grace period.        Schedule SE or line 6 of Long Schedule SE
      The SIMPLE IRA plan would have contin-         (Form 1040)) before subtracting any contribu-              Deadline for setting up a SIMPLE IRA. A
      ued to qualify after the transaction if you    tions made to the SIMPLE IRA plan for yourself.        SIMPLE IRA must be set up for an employee
      had remained a separate employer.                                                                     before the first date by which a contribution is
                                                                                                            required to be deposited into the employee's
         The grace period for acquisitions, dis-     How To Set Up a                                        IRA. See Time limits for contributing funds,
  !      positions, and similar transactions also    SIMPLE IRA Plan                                        later, under Contribution Limits below.
 CAUTION applies if, because of these types of

transactions, you don't meet the rules explained     You can use Form 5304-SIMPLE or Form                   Credit for startup costs. You may be able to
under Other qualified plan or Who Can Partici-       5305-SIMPLE to set up a SIMPLE IRA plan.               claim a tax credit for part of the ordinary and
pate in a SIMPLE IRA Plan below.                     Each form is a model SIMPLE plan document.             necessary costs of starting a SIMPLE IRA plan
                                                     Which form you use depends on whether you              that first became effective in 2017. For more in-
Other qualified plan. The SIMPLE IRA plan            select a financial institution or your employees       formation, see Credit for startup costs under
generally must be the only retirement plan to        select the institution that will receive the contri-   Reminders, earlier.
which you make contributions, or to which ben-       butions.
efits accrue, for service in any year beginning
                                                         Use Form 5304-SIMPLE if you allow each
                                                                                                            Notification Requirement
with the year the SIMPLE IRA plan becomes ef-
fective.                                             plan participant to select the financial institution
                                                     for receiving his or her SIMPLE IRA plan contri-       If you adopt a SIMPLE IRA plan, you must notify
    Exception. If you maintain a qualified plan      butions. Use Form 5305-SIMPLE if you require           each employee of the following information be-
for collective bargaining employees, you are         that all contributions under the SIMPLE IRA            fore the beginning of the election period.

                                                                                                                    Chapter 3     SIMPLE Plans         Page 9
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