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Department of the Treasury
Internal Revenue Service
Publication 560
Cat. No. 46574N
Retirement
Plans
for Small
Business
(SEP, SIMPLE, and
Qualified Plans)
For use in preparing
2023 Returns
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Contents
What's New ............................... 1
Reminders ............................... 2
Introduction .............................. 3
Chapter 1. Definitions You Need To Know ....... 5
Chapter 2. Simplified Employee
Pensions (SEPs) ........................ 7
Setting up a SEP ........................ 8
How Much Can I Contribute? ................ 8
Deducting Contributions ................... 9
Salary Reduction Simplified Employee
Pensions (SARSEPs) .................. 10
Distributions (Withdrawals) ................ 12
Additional Taxes ........................ 12
Reporting and Disclosure Requirements ....... 12
Chapter 3. SIMPLE Plans .................. 12
SIMPLE IRA Plan ....................... 13
SIMPLE 401(k) Plan ..................... 16
Chapter 4. Qualified Plans ................. 17
Kinds of Plans ......................... 18
Qualification Rules ...................... 18
Setting up a Qualified Plan ................ 20
Minimum Funding Requirement ............. 21
Contributions .......................... 22
Employer Deduction ..................... 22
Elective Deferrals (401(k) Plans) ............ 24
Qualified Roth Contribution Program ......... 27
Distributions ........................... 28
Prohibited Transactions ................... 31
Reporting Requirements .................. 32
Chapter 5. Table and Worksheets for the
Self-Employed ........................ 34
Chapter 6. How To Get Tax Help ............. 39
Index .................................. 43
Future Developments
For the latest information about developments related to
Pub. 560, such as legislation enacted after it was
published, go to IRS.gov/Pub560.
What's New
Compensation limits for 2023 and 2024. For 2023, the
maximum compensation used for figuring contributions
and benefits is $330,000. This limit increases to $345,000
for 2024.
Elective deferral limits for 2023 and 2024. The limit on
elective deferrals, other than catch-up contributions, is
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$22,500 for 2023 and $23,000 for 2024. These limits ap-
ply for participants in SARSEPs, 401(k) plans (excluding
SIMPLE plans), section 403(b) plans, and section 457(b)
plans.
Defined contribution limits for 2023 and 2024. The
limit on contributions, other than catch-up contributions,
for a participant in a defined contribution plan is $66,000
for 2023 and increases to $69,000 for 2024.
Defined benefit limits for 2023 and 2024. The limit on
annual benefits for a participant in a defined benefit plan is
$265,000 for 2023 and increases to $275,000 for 2024.
SIMPLE plan salary reduction contribution limits for
2023 and 2024. The limit on salary reduction contribu-
tions, other than catch-up contributions, is $15,500 for
2023 and increases to $16,000 for 2024.
Catch-up contribution limits for 2023 and 2024. A
plan can permit participants who are age 50 or over at the
end of the calendar year to make catch-up contributions in
addition to elective deferrals and SIMPLE plan salary re-
duction contributions. The catch-up contribution limit for
defined contribution plans other than SIMPLE plans is
$7,500 for 2023 and 2024. The catch-up contribution limit
for SIMPLE plans is $3,500 for 2023 and 2024.
A participant's catch-up contributions for a year can't
exceed the lesser of the following amounts.
•
The catch-up contribution limit.
•
The excess of the participant's compensation over the
elective deferrals that aren’t catch-up contributions.
See Catch-up contributions under Contribution Limits and
Limit on Elective Deferrals in chapters 3 and 4, respec-
tively, for more information.
Required minimum distributions (RMDs). Individuals
who reach age 72 after December 31, 2022, may delay re-
ceiving their RMDs until April 1 of the year following the
year in which they turn age 73. This change in the age for
making these beginning RMDs applies to both IRA own-
ers and participants in a qualified retirement plan.
Plans established after end of taxable year. For 2023
and later years, a sole-proprietor with no employees can
adopt a section 401(k) plan after the end of the taxable
year, provided the plan is adopted by the tax filing dead-
line (without regard to extensions).
Increased small employer pension plan startup cost
credit. The Secure 2.0 Act of Division T of the Consolida-
ted Appropriations Act, 2023, P.L. 117-328 (SECURE 2.0
Act), provides that eligible employers with 1–50 employ-
ees are eligible for an increased small employer pension
plan startup cost credit under section 45E of 100% of
qualified startup costs, subject to limitation. The credit for
eligible employers with 51–100 employees remains at
50% of qualified startup costs, subject to limitation. See
the instructions to Form 3800 and Form 8881 for more in-
formation on the startup cost credit.
Employer contributions credit. The Secure 2.0 Act
added an additional startup cost credit under section 45E
available to certain eligible employers, in an amount equal
to an applicable percentage of the employer’s
contributions (not including an elective deferral, as defined
in section 402(g)(3)) to an eligible employer plan, subject
to limitation. See the instructions to Form 3800 and Form
8881 for more information on the employer contributions
credit.
Small employer military spouse participation credit.
The Secure 2.0 Act added a new military spouse partici-
pation credit under section 45AA available to eligible small
employers who maintain defined contribution plans with
specific features that benefit military spouses. See the in-
structions to Form 3800 and Form 8881 for more informa-
tion on the military spouse participation credit.
Designated Roth nonelective contributions and des-
ignated Roth matching contributions. The Secure 2.0
Act of 2022 permits certain nonelective contributions and
matching contributions that are made after December 29,
2022, to be designated as Roth contributions.
Reminders
Small employer automatic enrollment credit. The Fur-
ther Consolidated Appropriations Act, 2020, P.L. 116-94,
added section 45T. An eligible employer may claim a tax
credit if it includes an eligible automatic contribution ar-
rangement under a qualified employer plan. The credit
equals $500 per year over a 3-year period beginning with
the first tax year in which it includes the automatic contri-
bution arrangement, and may first be claimed on the em-
ployer’s return for the year 2020.
Increase in credit limitation for small employer plan
startup costs. The Further Consolidated Appropriations
Act, 2020, P.L. 116-94, amended section 45E. For tax
years beginning after December 31, 2019, eligible em-
ployers can claim a tax credit for the first credit year and
each of the 2 tax years immediately following. The credit
equals 50% of qualified startup costs, up to the greater of
(a) $500; or (b) the lesser of (i) $250 for each employee
who is not a “highly compensated employee” eligible to
participate in the employer plan, or (ii) $5,000.
Note. The SECURE 2.0 Act further amended section
45E to increase the credit for tax years beginning after De-
cember 31, 2022. See What’s New.
See the instructions for Form 3800 and Form 8881 for
more information on the small employer automatic enroll-
ment credit and the small employer startup cost credit.
Restriction on conditions of participation. Effective
for plan years beginning after December 31, 2020, a
401(k) plan can’t require, as a condition of participation,
that an employee complete a period of service that ex-
tends beyond the close of the earlier of (a) 1 year of serv-
ice, or (b) the first period of 3 consecutive 12-month peri-
ods (excluding 12-month periods beginning before
January 1, 2021) during each of which the employee has
completed at least 500 hours of service. Effective for plan
years beginning after December 31, 2024, 3 consecutive
12-month periods are reduced to 2 consecutive 12-month
periods.
Retirement savings contributions credit. Retirement
plan participants (including self-employed individuals)
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who make contributions to their plan may qualify for the re-
tirement savings contribution credit. The maximum contri-
bution eligible for the credit is $2,000. To take the credit,
use Form 8880, Credit for Qualified Retirement Savings
Contributions. For more information on who is eligible for
the credit, retirement plan contributions eligible for the
credit, and how to figure the credit, see Form 8880 and its
instructions or go to IRS.gov/Retirement-Plans/Plan-
Participant-Employee/Retirement-Savings-Contributions-
Savers-Credit.
Photographs of missing children. The IRS is a proud
partner with the National Center for Missing & Exploited
Children® (NCMEC). Photographs of missing children se-
lected by the Center may appear in this publication on pa-
ges that would otherwise be blank. You can help bring
these children home by looking at the photographs and
calling 1-800-THE-LOST (1-800-843-5678) if you recog-
nize a child.
Introduction
This publication discusses retirement plans you can set
up and maintain for yourself and your employees. In this
publication, “you” refers to the employer. See chapter 1 for
the definition of the term “employer” and the definitions of
other terms used in this publication. This publication cov-
ers the following types of retirement plans.
•
SEP (simplified employee pension) plans.
•
SIMPLE (savings incentive match plan for employees)
plans.
•
Qualified plans (also called H.R. 10 plans or Keogh
plans when covering self-employed individuals), in-
cluding 401(k) plans.
SEP, SIMPLE, and qualified plans offer you and your
employees a tax-favored way to save for retirement. You
can deduct contributions you make to the plan for your
employees. If you are a sole proprietor, you can deduct
contributions you make to the plan for yourself. You can
also deduct trustees' fees if contributions to the plan don't
cover them. Earnings on the contributions are generally
tax free until you or your employees receive distributions
from the plan.
Under a 401(k) plan, employees can have you contrib-
ute limited amounts of their before-tax (after-tax, in the
case of a qualified Roth contribution program) pay to the
plan. These amounts (and the earnings on them) are gen-
erally tax free until your employees receive distributions
from the plan or, in the case of a qualified distribution from
a designated Roth account, completely tax free.
What this publication covers. This publication contains
the information you need to understand the following top-
ics.
•
What type of plan to set up.
•
How to set up a plan.
•
How much you can contribute to a plan.
•
How much of your contribution is deductible.
•
How to treat certain distributions.
•
How to report information about the plan to the IRS
and your employees.
•
Basic features of SEP, SIMPLE, and qualified plans.
The key rules for SEP, SIMPLE, and qualified plans
are outlined in Table 1.
SEP plans. SEP plans provide a simplified method for
you to make contributions to a retirement plan for yourself
and your employees. Instead of setting up a profit-sharing
or money purchase plan with a trust, you can adopt a SEP
agreement and make contributions directly to a traditional
individual retirement account or a traditional individual re-
tirement annuity (SEP-IRA) set up for yourself and each
eligible employee.
SIMPLE plans. Generally, if you had 100 or fewer em-
ployees who received at least $5,000 in compensation last
year, you can set up a SIMPLE IRA plan. Under a SIMPLE
plan, employees can choose to make salary reduction
contributions rather than receiving these amounts as part
of their regular pay. In addition, you will contribute match-
ing or nonelective contributions. The two types of SIMPLE
plans are the SIMPLE IRA plan and the SIMPLE 401(k)
plan.
Qualified plans. The qualified plan rules are more
complex than the SEP plan and SIMPLE plan rules. How-
ever, there are advantages to qualified plans, such as in-
creased flexibility in designing plans and increased contri-
bution and deduction limits in some cases.
Publication 560 (2023) 3
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Table 1. Key Retirement Plan Rules for 2023
Type
of
Plan Last Date for Contribution Maximum Contribution Maximum Deduction When To Set Up Plan
SEP Due date of employer's return
(including extensions).
Smaller of $66,000 or 25%
1
of participant's
compensation.
2
25%
1
of all participants'
compensation.
2
Any time up to the due date of
employer's return (including
extensions).
SIMPLE
IRA
and
SIMPLE
401(k)
Salary reduction contributions: 30
days after the end of the month for
which the contributions are to be made.
4
Matching or nonelective
contributions: Due date of employer's
return (including extensions).
Employee contribution:
Salary reduction contribution
up to $15,500; $19,000 if
age 50 or over.
Employer contribution:
Either dollar-for-dollar
matching contributions, up to
3% of employee's
compensation,
3
or fixed
nonelective contributions of
2% of compensation.
2
Same as maximum
contribution.
Any time between January 1
and October 1 of the calendar
year.
For a new employer coming
into existence after October 1,
as soon as administratively
feasible.
Qualified
Plan:
Defined
Contribution
Plan
Elective deferral: Due date of
employer's return (including
extensions).
4
Employer contribution:
Profit-Sharing Plan: Due date of
employer's return (including
extensions). Money Purchase Pan: 8
1/2 months after the end of the plan
year.
Employee contribution:
Elective deferral up to
$22,500; $30,000 if age 50
or over.
Employer contribution:
Money Purchase Pension
Plan: Smaller of $66,000 or
100%
1
of participant's
compensation.
2
Profit-Sharing: Smaller of
$66,000 or 100%
1
of
participant's compensation.
2
25%
1
of all participants'
compensation,
2
plus
amount of elective
deferrals made.
By the employer’s tax-filing
due date, including
extensions, for the taxable
year.
Qualified
Plan:
Defined
Benefit Plan
Contributions must generally be paid in
quarterly installments, due 15 days
after the end of each quarter, with a
final contribution due 8 1/2 months after
the end of the plan year. See Minimum
Funding Requirement in chapter 4.
Amount needed to provide
an annual benefit no larger
than the smaller of $265,000
or 100% of the participant's
average compensation for
the highest 3 consecutive
calendar years.
Based on actuarial
assumptions and
computations.
By the employer’s tax filing
due date (although it’s not best
to set up after the minimum
funding due date).
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 $330,000 in 2023.
3
Under a SIMPLE 401(k) plan, compensation is generally limited to $330,000 in 2023.
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 the “elective deferral” definition in Definitions You Need To Know, later. Solo/self-employed 401(k) plans are non-ERISA plans and don’t fall under DOL
rules.
What this publication doesn’t cover. Although the pur-
pose of this publication is to provide general information
about retirement plans you can set up for your employees,
it doesn't contain all the rules and exceptions that apply to
these plans. You may need professional help and guid-
ance.
Also, this publication doesn't cover all the rules that
may be of interest to employees. For example, it doesn't
cover the following topics.
•
The comprehensive IRA rules an employee needs to
know. These rules are covered in Pub. 590-A, Contri-
butions to Individual Retirement Arrangements (IRAs),
and Pub. 590-B, Distributions from Individual Retire-
ment Arrangements (IRAs).
•
The comprehensive rules that apply to distributions
from retirement plans. These rules are covered in Pub.
575, Pension and Annuity Income.
•
The comprehensive rules that apply to section 403(b)
plans. These rules are covered in Pub. 571, Tax-Shel-
tered Annuity Plans (403(b) Plans) For Employees of
Public Schools and Certain Tax-Exempt Organiza-
tions.
Comments and suggestions. We welcome your com-
ments about this publication and your suggestions for fu-
ture editions.
You can send us comments through IRS.gov/
FormComments. Or you can write to the Internal Revenue
Service, Tax Forms and Publications, 1111 Constitution
Ave. NW, IR-6526, Washington, DC 20224.
Although we can’t respond individually to each com-
ment received, we do appreciate your feedback and will
consider your comments and suggestions as we revise
our tax forms, instructions, and publications. Don’t send
tax questions, tax returns, or payments to the above ad-
dress.
Getting answers to your tax questions. If you have
a tax question not answered by this publication or the How
To Get Tax Help section at the end of this publication, go
to the IRS Interactive Tax Assistant page at IRS.gov/
Help/ITA where you can find topics by using the search
feature or viewing the categories listed.
Getting tax forms, instructions, and publications.
Go to IRS.gov/Forms to download current and prior-year
forms, instructions, and publications.
Ordering forms and publications. Go to IRS.gov/
OrderForms to order current forms, instructions, and
4 Publication 560 (2023)
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publications; call 800-829-3676 to order prior-year forms
and instructions. The IRS will process your order for forms
and publications as soon as possible. Don’t resubmit re-
quests you’ve already sent us. You can get forms and pub-
lications faster online.
Tax questions. If you have a tax question not an-
swered by this publication, check IRS.gov and How To Get
Tax Help at the end of this publication.
1.
Definitions
You Need To Know
Certain terms used in this publication are defined below.
The same term used in another publication may have a
slightly different meaning.
Annual additions. Annual additions are the total of all
your contributions in a year, employee contributions (not
including rollovers), and forfeitures allocated to a partici-
pant's account.
Annual benefits. Annual benefits are the benefits to be
paid yearly in the form of a straight life annuity (with no ex-
tra benefits) under a plan to which employees don't con-
tribute and under which no rollover contributions are
made.
Business. A business is an activity in which a profit mo-
tive is present and economic activity is involved. Service
as a newspaper carrier under age 18 or as a public official
isn’t a business.
Common-law employee. A common-law employee is
any individual who, under common law, would have the
status of an employee. A leased employee can also be a
common-law employee.
A common-law employee is a person who performs
services for an employer who has the right to control and
direct the results of the work and the way in which it is
done. For example, the employer:
•
Provides the employee's tools, materials, and work-
place; and
•
Can fire the employee.
Common-law employees aren't self-employed and can't
set up retirement plans for income from their work, even if
that income is self-employment income for social security
tax purposes. For example, common-law employees who
are ministers, members of religious orders, full-time insur-
ance salespeople, and U.S. citizens employed in the Uni-
ted States by foreign governments can't set up retirement
plans for their earnings from those employments, even
though their earnings are treated as self-employment in-
come.
However, an individual may be a common-law em-
ployee and a self-employed person as well. For example,
an attorney can be a corporate common-law employee
during regular working hours and also practice law in the
evening as a self-employed person. In another example, a
minister employed by a congregation for a salary is a com-
mon-law employee even though the salary is treated as
self-employment income for social security tax purposes.
However, fees reported on Schedule C (Form 1040), Profit
or Loss From Business, for performing marriages, bap-
tisms, and other personal services are self-employment
earnings for qualified plan purposes.
Compensation. Compensation for plan allocations is the
pay a participant received from you for personal services
for a year. You can generally define compensation as in-
cluding all the following payments.
1. Wages and salaries.
2. Fees for professional services.
3. Other amounts received (cash or noncash) for per-
sonal services actually rendered by an employee, in-
cluding, but not limited to, the following items.
a. Commissions and tips.
b. Fringe benefits.
c. Bonuses.
For a self-employed individual, compensation means
the earned income, discussed later, of that individual.
Compensation generally includes amounts deferred at
the employee's election in the following employee benefit
plans.
•
Section 401(k) plans.
•
Section 403(b) plans.
•
SIMPLE IRA plans.
•
SARSEPs.
•
Section 457 deferred compensation plans.
•
Section 125 cafeteria plans.
However, an employer can choose to exclude elective
deferrals under the above plans from the definition of com-
pensation. The limit on elective deferrals is discussed in
chapter 2 under Salary Reduction Simplified Employee
Pension (SARSEP) and in chapter 4.
Other options. In figuring the compensation of a par-
ticipant, you can treat any of the following amounts as the
employee's compensation.
•
The employee's wages as defined for income tax with-
holding purposes.
•
The employee's wages you report in box 1 of Form
W-2, Wage and Tax Statement.
•
The employee's social security wages (including elec-
tive deferrals).
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Compensation generally can't include either of the fol-
lowing items.
•
Nontaxable reimbursements or other expense allow-
ances.
•
Deferred compensation (other than elective deferrals).
SIMPLE plans. A special definition of compensation
applies for SIMPLE plans. See chapter 3.
Contribution. A contribution is an amount you pay into a
plan for all those participating in the plan, including
self-employed individuals. Limits apply to how much, un-
der the contribution formula of the plan, can be contrib-
uted each year for a participant.
Deduction. A deduction is the plan contribution you can
subtract from gross income on your federal income tax re-
turn. Limits apply to the amount deductible.
Earned income. Earned income is net earnings from
self-employment, discussed later, from a business in
which your services materially helped to produce the in-
come.
You can also have earned income from property your
personal efforts helped create, such as royalties from your
books or inventions. Earned income includes net earnings
from selling or otherwise disposing of the property, but it
doesn't include capital gains. It includes income from li-
censing the use of property other than goodwill.
Earned income includes amounts received for services
by self-employed members of recognized religious sects
opposed to social security benefits who are exempt from
self-employment tax.
If you have more than one business, but only one has a
retirement plan, only the earned income from that busi-
ness is considered for that plan.
Elective deferral. An elective deferral is the contribution
made by employees to a qualified retirement plan.
•
Non-owner employees: The employee salary reduc-
tion/elective deferral contributions must be elected/
made by the end of the tax year and deposited into the
employee’s plan account within 7 business days (safe
harbor) and no later than 15 days.
•
Owner/employees: The employee deferrals must be
elected by the end of the tax year and can then be
made by the tax return filing deadline, including exten-
sions.
Employer. An employer is generally any person for whom
an individual performs or did perform any service, of what-
ever nature, as an employee. A sole proprietor is treated
as its own employer for retirement plan purposes. How-
ever, a partner isn't an employer for retirement plan purpo-
ses. Instead, the partnership is treated as the employer of
each partner.
Highly compensated employee. A highly compensated
employee is an individual who:
•
Owned more than 5% of the interest in your business
at any time during the year or the preceding year, re-
gardless of how much compensation that person
earned or received; or
•
For the preceding year, received compensation from
you of more than $135,000 (if the preceding year is
2022 and increased to $150,000 for 2023), more than
$155,000 (if the preceding year is 2024), and, if you so
choose, was in the top 20% of employees when
ranked by compensation.
Leased employee. A leased employee who isn't your
common-law employee must generally be treated as your
employee for retirement plan purposes if they do all the
following.
•
Provides services to you under an agreement be-
tween you and a leasing organization.
•
Has performed services for you (or for you and related
persons) substantially full time for at least 1 year.
•
Performs services under your primary direction or con-
trol.
Exception. A leased employee isn't treated as your
employee if all the following conditions are met.
1. Leased employees aren't more than 20% of your
non-highly compensated workforce.
2. The employee is covered under the leasing organiza-
tion's qualified pension plan.
3. The leasing organization's plan is a money purchase
pension plan that has all the following provisions.
a. Immediate participation. (This requirement doesn't
apply to any individual whose compensation from
the leasing organization in each plan year during
the 4-year period ending with the plan year is less
than $1,000.)
b. Full and immediate vesting.
c. A nonintegrated employer contribution rate of at
least 10% of compensation for each participant.
However, if the leased employee is your common-law em-
ployee, that employee will be your employee for all purpo-
ses, regardless of any pension plan of the leasing organi-
zation.
Net earnings from self-employment. For SEP and
qualified plans, net earnings from self-employment are
your gross income from your trade or business (provided
your personal services are a material income-producing
factor) minus allowable business deductions. Allowable
deductions include contributions to SEP and qualified
plans for common-law employees and the deduction al-
lowed for the deductible part of your self-employment tax.
Net earnings from self-employment don’t include items
excluded from gross income (or their related deductions)
other than foreign earned income and foreign housing
cost amounts.
For the deduction limits, earned income is net earnings
for personal services actually rendered to the business.
You take into account the income tax deduction for the de-
ductible part of self-employment tax and the deduction for
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contributions to the plan made on your behalf when figur-
ing net earnings.
Net earnings include a partner's distributive share of
partnership income or loss (other than separately stated
items, such as capital gains and losses). They don’t in-
clude income passed through to shareholders of S corpo-
rations. Guaranteed payments to limited partners are net
earnings from self-employment if they are paid for serv-
ices to or for the partnership. Distributions of other income
or loss to limited partners aren't net earnings from self-em-
ployment.
For SIMPLE plans, net earnings from self-employment
are the amount on line 4 ofSchedule SE (Form 1040),
Self-Employment Tax, before subtracting any contribu-
tions made to the SIMPLE plan for yourself.
Qualified plan. A qualified plan is a retirement plan that
offers a tax-favored way to save for retirement. You can
deduct contributions made to the plan for your employees.
Earnings on these contributions are generally tax free until
distributed at retirement. Profit-sharing, money purchase,
and defined benefit plans are qualified plans. A 401(k)
plan is also a qualified plan.
Participant. A participant is an eligible employee who is
covered by your retirement plan. See the discussions,
later, of the different types of plans for the definition of an
employee eligible to participate in each type of plan.
Partner. A partner is an individual who shares ownership
of an unincorporated trade or business with one or more
persons. For retirement plans, a partner is treated as an
employee of the partnership.
Self-employed individual. An individual in business for
himself or herself, and whose business isn't incorporated,
is self-employed. Sole proprietors and partners are
self-employed. Self-employment can include part-time
work.
Not everyone who has net earnings from self-employ-
ment for social security tax purposes is self-employed for
qualified plan purposes. See Common-law employee and
Net earnings from self-employment, earlier.
In addition, certain fishermen may be considered
self-employed for setting up a qualified plan. See Pub.
595, Capital Construction Fund for Commercial Fisher-
men, for the special rules used to determine whether fish-
ermen are self-employed.
Sole proprietor. A sole proprietor is an individual who
owns an unincorporated business alone, including a sin-
gle-member limited liability company that is treated as a
disregarded entity for tax purposes. For retirement plans,
a sole proprietor is treated as both an employer and an
employee.
2.
Simplified Employee
Pensions (SEPs)
Topics
This chapter discusses:
•
Setting up a SEP
•
How much can I contribute
•
Deducting contributions
•
Salary reduction simplified employee pensions (SAR-
SEPs)
•
Distributions (withdrawals)
•
Additional taxes
•
Reporting and disclosure requirements
Useful Items
You may want to see:
Publications
590-A Contributions to Individual Retirement
Arrangements (IRAs)
590-B Distributions from Individual Retirement
Arrangements (IRAs)
3998 Choosing a Retirement Solution for Your Small
Business
4285 SEP Checklist
4286 SARSEP Checklist
4333 SEP Retirement Plans for Small Businesses
4336 SARSEP for Small Businesses
4407 SARSEP—Key Issues and Assistance
Forms (and Instructions)
W-2 Wage and Tax Statement
1040 U.S. Individual Income Tax Return
1040-SR U.S. Tax Return for Seniors
5305-SEP Simplified Employee Pension—Individual
Retirement Accounts Contribution Agreement
5305A-SEP Salary Reduction Simplified Employee
Pension—Individual Retirement Accounts
Contribution Agreement
8880 Credit for Qualified Retirement Savings
Contributions
8881 Credit for Small Employer Pension Plan
Startup Costs
590-A
590-B
3998
4285
4286
4333
4336
4407
W-2
1040
1040-SR
5305-SEP
5305A-SEP
8880
8881
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A SEP is a written plan that allows you to make contribu-
tions toward your own retirement and your employees' re-
tirement without getting involved in a more complex quali-
fied plan.
Under a SEP, you make contributions to a traditional indi-
vidual retirement arrangement (called a SEP-IRA) set up
by or for each eligible employee. A SEP-IRA is owned and
controlled by the employee, and you make contributions to
the financial institution where the SEP-IRA is maintained.
SEP-IRAs are set up for, at a minimum, each eligible em-
ployee (defined below). A SEP-IRA may have to be set up
for a leased employee (defined in chapter 1), but doesn't
need to be set up for excludable employees (defined
later).
Eligible employee. An eligible employee is an individual
who meets all the following requirements.
•
Has reached age 21.
•
Has worked for you in at least 3 of the last 5 years.
•
Has received at least $750 in compensation from you
in 2023. The amount remains the same for 2023.
You can use less restrictive participation require-
ments than those listed, but not more restrictive
ones.
Excludable employees. The following employees can
be excluded from coverage under a SEP.
•
Employees covered by a union agreement and whose
retirement benefits were bargained for in good faith by
the employees' union and you.
•
Nonresident alien employees who have received no
U.S. source wages, salaries, or other personal serv-
ices compensation from you. For more information
about nonresident aliens, see Pub. 519, U.S. Tax
Guide for Aliens.
Setting up a SEP
There are three basic steps in setting up a SEP.
1. You must execute a formal written agreement to pro-
vide benefits to all eligible employees.
2. You must give each eligible employee certain informa-
tion about the SEP.
3. A SEP-IRA must be set up by or for each eligible em-
ployee.
Many financial institutions will help you set up a
SEP.
Formal written agreement. You must execute a formal
written agreement to provide benefits to all eligible em-
ployees under a SEP. You can satisfy the written agree-
ment requirement by adopting an IRS model SEP using
Form 5305-SEP. However, see When not to use Form
5305-SEP, later.
TIP
TIP
If you adopt an IRS model SEP using Form 5305-SEP,
no prior IRS approval or determination letter is required.
Keep the original form. Don't file it with the IRS. Also, us-
ing Form 5305-SEP will usually relieve you from filing an-
nual retirement plan information returns with the IRS and
the Department of Labor. See the Form 5305-SEP instruc-
tions for details. If you choose not to use Form 5305-SEP,
you should seek professional advice in adopting a SEP.
When not to use Form 5305-SEP. You can't use
Form 5305-SEP if any of the following apply.
1. You currently maintain any other qualified retirement
plan other than another SEP.
2. You have any eligible employees for whom IRAs
haven’t been set up.
3. You use the services of leased employees, who aren't
your common-law employees (as described in chap-
ter 1).
4. You are a member of any of the following unless all eli-
gible employees of all the members of these groups,
trades, or businesses participate under the SEP.
a. An affiliated service group described in section
414(m).
b. A controlled group of corporations described in
section 414(b).
c. Trades or businesses under common control de-
scribed in section 414(c).
5. You don't pay the cost of the SEP contributions.
Information you must give to employees. You must
give each eligible employee a copy of Form 5305-SEP, its
instructions, and the other information listed in the Form
5305-SEP instructions. An IRS model SEP isn't consid-
ered adopted until you give each employee this informa-
tion.
Setting up the employee's SEP-IRA. A SEP-IRA must
be set up by or for each eligible employee. SEP-IRAs can
be set up with banks, insurance companies, or other quali-
fied financial institutions. You send SEP contributions to
the financial institution where the SEP-IRA is maintained.
Deadline for setting up a SEP. You can set up a SEP for
any year as late as the due date (including extensions) of
your income tax return for that year.
How Much Can I Contribute?
The SEP rules permit you to contribute a limited amount of
money each year to each employee's SEP-IRA. If you are
self-employed, you can contribute to your own SEP-IRA.
Contributions must be in the form of money (cash, check,
or money order). You can't contribute property. However,
participants may be able to transfer or roll over certain
property from one retirement plan to another. See Pubs.
590-A and 590-B for more information about rollovers.
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You don't have to make contributions every year. But if
you make contributions, they must be based on a written
allocation formula and must not discriminate in favor of
highly compensated employees (defined in chapter 1).
When you contribute, you must contribute to the
SEP-IRAs of all participants who actually performed per-
sonal services during the year for which the contributions
are made, including employees who die or terminate em-
ployment before the contributions are made.
Contributions are deductible within limits, as discussed
later, and generally aren't taxable to the plan participants.
Employer contributions to a SEP-IRA won’t affect the
amount an individual can contribute to a Roth or traditional
IRA.
Unlike regular contributions to a traditional IRA before
2020, contributions under a SEP can be made to partici-
pants over age 70
1
/2. If you are self-employed, you can
also make contributions under the SEP for yourself even if
you are over age 70
1
/2. Participants age 72 or over (if age
70
1
/2 was reached after December 31, 2019) must take
RMDs.
Note. Individuals who reach age 72 after December
31, 2022, may delay receiving their RMDs until April 1 of
the year following the year in which they reach age 73.
Time limit for making contributions. To deduct contri-
butions for a year, you must make the contributions by the
due date (including extensions) of your tax return for the
year.
Contribution Limits
Contributions you make for 2023 to a common-law em-
ployee's SEP-IRA can't exceed the lesser of 25% of the
employee's compensation or $66,000. Compensation
generally doesn't include your contributions to the SEP.
The SEP plan document will specify how the employer
contribution is determined and how it will be allocated to
participants.
Example. Your employee has earned $21,000 for
2023. The maximum contribution you can make to your
employee’s SEP-IRA is $5,250 (25% (0.25) x $21,000).
Contributions for yourself. The annual limits on your
contributions to a common-law employee's SEP-IRA also
apply to contributions you make to your own SEP-IRA.
However, special rules apply when figuring your maximum
deductible contribution. See Deduction Limit for Self-Em-
ployed Individuals, later.
Annual compensation limit. You can't consider the part
of an employee's compensation over $330,000 when fig-
uring your contribution limit for that employee. However,
$66,000 is the maximum contribution for an eligible em-
ployee. These limits increase to $345,000 and $69,000,
respectively, in 2024.
Example. Your employee has earned $260,000 for
2023. Because of the maximum contribution limit for 2023,
you can only contribute $66,000 to your employee’s
SEP-IRA.
More than one plan. If you contribute to a defined contri-
bution plan (defined in chapter 4), annual additions to an
account are limited to the lesser of $66,000 or 100% of the
participant's compensation. When you figure this limit, you
must add your contributions to all defined contribution
plans maintained by you. Because a SEP is considered a
defined contribution plan for this limit, your contributions to
a SEP must be added to your contributions to other de-
fined contribution plans you maintain.
Tax treatment of excess contributions. Excess contri-
butions are your contributions to an employee's SEP-IRA
(or to your own SEP-IRA) for 2023 that exceed the lesser
of the following amounts.
•
25% of the employee's compensation (or, for you,
20% of your net earnings from self-employment).
•
$66,000.
Excess contributions are included in the employee's in-
come for the year and are treated as contributions by the
employee to their SEP-IRA. For more information on em-
ployee tax treatment of excess contributions, see Pub.
590-A.
Reporting on Form W-2. Don't include SEP contribu-
tions on your employee's Form W-2 unless contributions
were made under a salary reduction arrangement (dis-
cussed later).
Deducting Contributions
Generally, you can deduct the contributions you make
each year to each employee's SEP-IRA. If you are
self-employed, you can deduct the contributions you make
each year to your own SEP-IRA.
Deduction Limit for Contributions for
Participants
The most you can deduct for your contributions to your or
your employee's SEP-IRA is the lesser of the following
amounts.
1. Your contributions (including any excess contributions
carryover).
2. 25% of the compensation (limited to $330,000 per
participant) paid to the participants during 2023, from
the business that has the plan, not to exceed $66,000
per participant.
In 2024, the amounts in (2) above increase to $345,000
and $69,000, respectively.
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Deduction Limit for
Self-Employed Individuals
If you contribute to your own SEP-IRA, you must make a
special computation to figure your maximum deduction for
these contributions. When figuring the deduction for con-
tributions made to your own SEP-IRA, compensation is
your net earnings from self-employment (defined in chap-
ter 1), which takes into account both the following deduc-
tions.
•
The deduction for the deductible part of your self-em-
ployment tax.
•
The deduction for contributions to your own SEP-IRA.
The deduction for contributions to your own SEP-IRA
and your net earnings depend on each other. For this rea-
son, you determine the deduction for contributions to your
own SEP-IRA indirectly by reducing the contribution rate
called for in your plan. To do this, use the Rate Table for
Self-Employed or the Rate Worksheet for Self-Employed,
whichever is appropriate for your plan's contribution rate,
in chapter 5. Then, figure your maximum deduction by us-
ing the Deduction Worksheet for Self-Employed in chap-
ter 5.
Carryover of Excess SEP
Contributions
If you made SEP contributions that are more than the de-
duction limit (nondeductible contributions), you can carry
over and deduct the difference in later years. However, the
carryover, when combined with the contribution for the
later year, is subject to the deduction limit for that year. If
you also contributed to a defined benefit plan or defined
contribution plan, see Carryover of Excess Contributions
under Employer Deduction in chapter 4 for the carryover
limit.
Excise tax. If you made nondeductible (excess) contribu-
tions to a SEP, you may be subject to a 10% excise tax.
For information about the excise tax, see Excise Tax for
Nondeductible (Excess) Contributions under Employer
Deduction in chapter 4.
When To Deduct Contributions
When you can deduct contributions made for a year de-
pends on the tax year for which the SEP is maintained.
•
If the SEP is maintained on a calendar-year basis, you
deduct the yearly contributions on your tax return for
the year within which the calendar year ends.
•
If you file your tax return and maintain the SEP using a
fiscal year or short tax year, you deduct contributions
made for a year on your tax return for that year.
Example. You are a fiscal-year taxpayer whose tax
year ends June 30. You maintain a SEP on a calen-
dar-year basis. You deduct SEP contributions made for
calendar year 2023 on your tax return for your tax year
ending June 30, 2024.
Where To Deduct Contributions
Deduct the contributions you make for your common-law
employees on your tax return. For example, sole proprie-
tors deduct them on Schedule C (Form 1040) or Sched-
ule F (Form 1040), Profit or Loss From Farming; partner-
ships deduct them on Form 1065, U.S. Return of
Partnership Income; and corporations deduct them on
Form 1120, U.S. Corporation Income Tax Return, or Form
1120-S, U.S. Income Tax Return for an S Corporation.
Sole proprietors and partners deduct contributions for
themselves on line 16 of Schedule 1 (Form 1040). (If you
are a partner, contributions for yourself are shown on the
Schedule K-1 (Form 1065), Partner's Share of Income,
Deductions, Credits, etc., you receive from the partner-
ship.)
Remember that sole proprietors and partners
can't deduct as a business expense contributions
made to a SEP for themselves, only those made
for their common-law employees.
Salary Reduction Simplified
Employee Pensions
(SARSEPs)
A SARSEP is a SEP set up before 1997 that includes a
salary reduction arrangement. (See the Caution next.) Un-
der a SARSEP, your employees can choose to have you
contribute part of their pay to their SEP-IRAs rather than
receive it in cash. This contribution is called an elective
deferral because employees choose (elect) to set aside
the money, and they defer the tax on the money until it is
distributed to them.
You aren't allowed to set up a SARSEP after
1996. However, participants (including employees
hired after 1996) in a SARSEP set up before 1997
can continue to have you contribute part of their pay to the
plan. If you are interested in setting up a retirement plan
that includes a salary reduction arrangement, see chap-
ter 3.
Who can have a SARSEP? A SARSEP set up before
1997 is available to you and your eligible employees only if
all the following requirements are met.
•
At least 50% of your employees eligible to participate
choose to make elective deferrals.
•
You have 25 or fewer employees who were eligible to
participate in the SEP at any time during the preceding
year.
•
The elective deferrals of your highly compensated em-
ployees meet the SARSEP average deferral percent-
age (ADP) test.
SARSEP ADP test. Under the SARSEP ADP test, the
amount deferred each year by each eligible highly
CAUTION
!
CAUTION
!
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compensated employee as a percentage of pay (the de-
ferral percentage) can't be more than 125% of the ADP of
all non-highly compensated employees eligible to partici-
pate. A highly compensated employee is defined in chap-
ter 1.
Deferral percentage. The deferral percentage for an
employee for a year is figured as follows.
The elective employer contributions
(excluding certain catch-up contributions)
paid to the SEP for the employee for the year
The employee's compensation
(limited to $330,000 in 2023)
The instructions for Form 5305A-SEP have a
worksheet you can use to determine whether the
elective deferrals of your highly compensated em-
ployees meet the SARSEP ADP test.
Employee compensation. For figuring the deferral
percentage, compensation is generally the amount you
pay to the employee for the year. Compensation includes
the elective deferral and other amounts deferred in certain
employee benefit plans. See Compensation in chapter 1.
Elective deferrals under the SARSEP are included in figur-
ing your employees' deferral percentage even though they
aren't included in the income of your employees for in-
come tax purposes.
Compensation of self-employed individuals. If you
are self-employed, compensation is your net earnings
from self-employment as defined in chapter 1.
Compensation doesn't include tax-free items (or de-
ductions related to them) other than foreign earned in-
come and housing cost amounts.
Choice not to treat deferrals as compensation. You
can choose not to treat elective deferrals (and other
amounts deferred in certain employee benefit plans) for a
year as compensation under your SARSEP.
Limit on Elective Deferrals
The most a participant can choose to defer for calendar
year 2023 is the lesser of the following amounts.
1. 25% of the participant's compensation (limited to
$330,000 of the participant's compensation).
2. $22,500.
The $22,500 limit applies to the total elective deferrals
the employee makes for the year to a SEP and any of the
following.
•
Cash or deferred arrangement (section 401(k) plan).
•
Salary reduction arrangement under a tax-sheltered
annuity plan (section 403(b) plan).
•
SIMPLE IRA plan.
In 2024, the $330,000 limit increases to $345,000, and
the $22,500 limit increases to $23,000.
TIP
Catch-up contributions. A SARSEP can permit partici-
pants who are age 50 or over at the end of the calendar
year to also make catch-up contributions. The catch-up
contribution limit is $7,500 for 2023 and 2024. Elective de-
ferrals aren't treated as catch-up contributions for 2023
until they exceed the elective deferral limit (the lesser of
25% of compensation, or $22,500), the SARSEP ADP test
limit discussed earlier, or the plan limit (if any). However,
the catch-up contribution a participant can make for a year
can't exceed the lesser of the following amounts.
•
The catch-up contribution limit.
•
The excess of the participant's compensation over the
elective deferrals that aren't catch-up contributions.
Catch-up contributions aren't subject to the elective de-
ferral limit (the lesser of 25% of compensation, or $22,500
in 2023 and $23,000 in 2024).
Overall limit on SEP contributions. If you also make
nonelective contributions to a SEP-IRA, the total of the
nonelective and elective contributions to that SEP-IRA
can't exceed the lesser of 25% of the employee's compen-
sation, or $66,000 for 2023 ($69,000 for 2024). The same
rule applies to contributions you make to your own
SEP-IRA. See Contribution Limits, earlier.
Figuring the elective deferral. For figuring the 25% limit
on elective deferrals, compensation doesn't include SEP
contributions, including elective deferrals or other
amounts deferred in certain employee benefit plans.
Tax Treatment of Deferrals
Elective deferrals that aren't more than the limits dis-
cussed earlier under Limit on Elective Deferrals are exclu-
ded from your employees' wages subject to federal in-
come tax in the year of deferral. However, these deferrals
are included in wages for social security, Medicare, and
federal unemployment (FUTA) taxes.
Excess deferrals. For 2023, excess deferrals are the
elective deferrals for the year that are more than the
$22,500 limit discussed earlier. For a participant who is el-
igible to make catch-up contributions, excess deferrals are
the elective deferrals that are more than $30,000. The
treatment of excess deferrals made under a SARSEP is
similar to the treatment of excess deferrals made under a
qualified plan. See Treatment of Excess Deferrals under
Elective Deferrals (401(k) Plans) in chapter 4.
Excess SEP contributions. Excess SEP contributions
are elective deferrals of highly compensated employees
that are more than the amount permitted under the SAR-
SEP ADP test. You must notify your highly compensated
employees within 2
1
/2 months after the end of the plan
year of their excess SEP contributions. If you don't notify
them within this time period, you must pay a 10% tax on
the excess. For an explanation of the notification require-
ments, see Revenue Procedure 91-44, 1991-2 C.B. 733. If
you adopted a SARSEP using Form 5305A-SEP, the notifi-
cation requirements are explained in the instructions for
that form.
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Reporting on Form W-2. Don’t include elective deferrals
in the “Wages, tips, other compensation” box of Form
W-2. You must, however, include them in the “Social se-
curity wages” and “Medicare wages and tips” boxes. You
must also include them in box 12. Check the “Retirement
plan” checkbox in box 13. For more information, see the
Form W-2 instructions.
Distributions (Withdrawals)
As an employer, you can't prohibit distributions from a
SEP-IRA. Also, you can't make your contributions on the
condition that any part of them must be kept in the ac-
count after you have made your contributions to the em-
ployee's accounts.
Distributions are subject to IRA rules. Generally, you or
your employee must begin to receive distributions from a
SEP-IRA by April 1 of the first year after the calendar year
in which you or your employee reaches age 72 (if age
70
1
/2 was reached after December 31, 2019). For more in-
formation about IRA rules, including the tax treatment of
distributions, rollovers, required distributions, and income
tax withholding, see Pubs. 590-A and 590-B.
Note. Individuals who reach age 72 after December
31, 2022, may delay receiving their RMDs until April 1 of
the year following the year in which they reach age 73.
Additional Taxes
The tax advantages of using SEP-IRAs for retirement sav-
ings can be offset by additional taxes that may be im-
posed for all the following actions.
•
Making excess contributions.
•
Making early withdrawals.
•
Not making required withdrawals.
For information about these taxes, see Pubs. 590-A
and 590-B. Also, a SEP-IRA may be disqualified, or an ex-
cise tax may apply, if the account is involved in a prohibi-
ted transaction, discussed next.
Prohibited transaction. If an employee improperly uses
their SEP-IRA, such as by borrowing money from it, the
employee has engaged in a prohibited transaction. In that
case, the SEP-IRA will no longer qualify as an IRA. For a
list of prohibited transactions, see Prohibited Transactions
in chapter 4.
Effects on employee. If a SEP-IRA is disqualified be-
cause of a prohibited transaction, the assets in the ac-
count will be treated as having been distributed to the em-
ployee on the first day of the year in which the transaction
occurred. The employee must include in income the fair
market value of the assets (on the first day of the year)
that is more than any cost basis in the account. Also, the
employee may have to pay the additional tax for making
early withdrawals.
Reporting and Disclosure
Requirements
If you set up a SEP using Form 5305-SEP, you must give
your eligible employees certain information about the SEP
when you set it up. See Setting Up a SEP, earlier. Also,
you must give your eligible employees a statement each
year showing any contributions to their SEP-IRAs. You
must also give them notice of any excess contributions.
For details about other information you must give them,
see the instructions for Form 5305-SEP or Form
5305A-SEP (for a salary SARSEP).
Even if you didn't use Form 5305-SEP or Form
5305A-SEP to set up your SEP, you must give your em-
ployees information similar to that described above. For
more information, see the instructions for either Form
5305-SEP or Form 5305A-SEP.
3.
SIMPLE Plans
Topics
This chapter discusses:
•
SIMPLE IRA plans
•
SIMPLE 401(k) plans
Useful Items
You may want to see:
Publications
590-A Contributions to Individual Retirement
Arrangements (IRAs)
590-B Distributions from Individual Retirement
Arrangements (IRAs)
3998 Choosing a Retirement Solution for Your Small
Business
4284 SIMPLE IRA Plan Checklist
4334 SIMPLE IRA Plans for Small Businesses
Forms (and Instructions)
W-2 Wage and Tax Statement
5304-SIMPLE Savings Incentive Match Plan for
Employees of Small Employers (SIMPLE)—Not
for Use With a Designated Financial Institution
5305-SIMPLE Savings Incentive Match Plan for
Employees of Small Employers (SIMPLE)—for
Use With a Designated Financial Institution
590-A
590-B
3998
4284
4334
W-2
5304-SIMPLE
5305-SIMPLE
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8880 Credit for Qualified Retirement Savings
Contributions
8881 Credit for Small Employer Pension Plan
Startup Costs and Auto Enrollment
A SIMPLE plan is a written arrangement that provides you
and your employees with a simplified way to make contri-
butions to provide retirement income. Under a SIMPLE
plan, employees can choose to make salary reduction
contributions to the plan rather than receiving these
amounts as part of their regular pay. In addition, you will
contribute matching or nonelective contributions.
SIMPLE plans can only be maintained on a calendar-year
basis.
A SIMPLE plan can be set up in either of the following
ways.
•
Using SIMPLE IRAs (SIMPLE IRA plan).
•
As part of a 401(k) plan (SIMPLE 401(k) plan).
Many financial institutions will help you set up a
SIMPLE plan.
SIMPLE IRA Plan
A SIMPLE IRA plan is a retirement plan that uses a SIM-
PLE IRA for each eligible employee. Under a SIMPLE IRA
plan, a SIMPLE IRA must be set up for each eligible em-
ployee. For the definition of an eligible employee, see Who
Can Participate in a SIMPLE IRA Plan, later.
Who Can Set up
a SIMPLE IRA Plan?
You can set up a SIMPLE IRA plan if you meet both the
following requirements.
•
You meet the employee limit.
•
You don't maintain another qualified plan unless the
other plan is for collective bargaining employees.
Employee limit. You can set up a SIMPLE IRA plan only
if you had 100 or fewer employees who received $5,000 or
more in compensation from you for the preceding year.
Under this rule, you must take into account all employees
employed at any time during the calendar year regardless
of whether they are eligible to participate. Employees in-
clude self-employed individuals who received earned in-
come and leased employees (defined in chapter 1).
Once you set up a SIMPLE IRA plan, you must con-
tinue to meet the 100-employee limit each year you main-
tain the plan.
Grace period for employers who cease to meet the
100-employee limit. If you maintain the SIMPLE IRA
plan for at least 1 year and you cease to meet the 100-em-
ployee limit in a later year, you will be treated as meeting it
for the 2 calendar years immediately following the calen-
dar year for which you last met it.
8880
8881
TIP
A different rule applies if you don't meet the 100-em-
ployee limit because of an acquisition, disposition, or simi-
lar transaction. Under this rule, the SIMPLE IRA plan will
be treated as meeting the 100-employee limit for the year
of the transaction and the 2 following years if both the fol-
lowing conditions are satisfied.
•
Coverage under the plan hasn’t significantly changed
during the grace period.
•
The SIMPLE IRA plan would have continued to qualify
after the transaction if you had remained a separate
employer.
The grace period for acquisitions, dispositions,
and similar transactions also applies if, because
of these types of transactions, you don't meet the
rules explained under Other qualified plan or Who Can
Participate in a SIMPLE IRA Plan, later.
Other qualified plan. The SIMPLE IRA plan must gener-
ally be the only retirement plan to which you make contri-
butions, or to which benefits accrue, for service in any
year beginning with the year the SIMPLE IRA plan be-
comes effective.
Exception. If you maintain a qualified plan for collec-
tive bargaining employees, you are permitted to maintain a
SIMPLE IRA plan for other employees.
Who Can Participate in a SIMPLE IRA
Plan?
Eligible employee. Any employee who received at least
$5,000 in compensation during any 2 years preceding the
current calendar year and is reasonably expected to re-
ceive at least $5,000 during the current calendar year is
eligible to participate. The term “employee” includes a
self-employed individual who received earned income.
You can use less restrictive eligibility requirements (but
not more restrictive ones) by eliminating or reducing the
prior year compensation requirements, the current year
compensation requirements, or both. For example, you
can allow participation for employees who received at
least $3,000 in compensation during any preceding calen-
dar year. However, you can't impose any other conditions
for participating in a SIMPLE IRA plan.
Excludable employees. The following employees don't
need to be covered under a SIMPLE IRA plan.
•
Employees who are covered by a union agreement
and whose retirement benefits were bargained for in
good faith by the employees' union and you.
•
Nonresident alien employees who have received no
U.S. source wages, salaries, or other personal serv-
ices compensation from you.
Compensation. Compensation for employees is the total
wages, tips, and other compensation from the employer
subject to federal income tax withholding and the amounts
paid for domestic service in a private home, local college
club, or local chapter of a college fraternity or sorority.
CAUTION
!
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Compensation also includes the employee's salary reduc-
tion contributions made under this plan and, if applicable,
elective deferrals under a section 401(k) plan, a SARSEP,
or a section 403(b) annuity contract and compensation
deferred under a section 457 plan required to be reported
by the employer on Form W-2. If you are self-employed,
compensation is your net earnings from self-employment
(line 4 of Schedule SE (Form 1040) before subtracting any
contributions made to the SIMPLE IRA plan for yourself.
How To Set up a SIMPLE IRA Plan
You can use Form 5304-SIMPLE or Form 5305-SIMPLE to
set up a SIMPLE IRA plan. Each form is a model SIMPLE
plan document. Which form you use depends on whether
you select a financial institution or your employees select
the institution that will receive the contributions.
Use Form 5304-SIMPLE if you allow each plan partici-
pant to select the financial institution for receiving their
SIMPLE IRA plan contributions. Use Form 5305-SIMPLE
if you require that all contributions under the SIMPLE IRA
plan be deposited initially at a designated financial institu-
tion.
The SIMPLE IRA plan is adopted when you have com-
pleted all appropriate boxes and blanks on the form and
you (and the designated financial institution, if any) have
signed it. Keep the original form. Don’t file it with the IRS.
Other uses of the forms. If you set up a SIMPLE IRA
plan using Form 5304-SIMPLE or Form 5305-SIMPLE,
you can use the form to satisfy other requirements, includ-
ing the following.
•
Meeting employer notification requirements for the
SIMPLE IRA plan. Form 5304-SIMPLE and Form
5305-SIMPLE contain a Model Notification to Eligible
Employees that provides the necessary information to
the employee.
•
Maintaining the SIMPLE IRA plan records and proving
you set up a SIMPLE IRA plan for employees.
Deadline for setting up a SIMPLE IRA plan. You can
set up a SIMPLE IRA plan effective on any date from Jan-
uary 1 through October 1 of a year, provided you didn't
previously maintain a SIMPLE IRA plan. This requirement
doesn't apply if you are a new employer that comes into
existence after October 1 of the year the SIMPLE IRA plan
is set up and you set up a SIMPLE IRA plan as soon as
administratively feasible after your business comes into
existence. If you previously maintained a SIMPLE IRA
plan, you can set up a SIMPLE IRA plan effective only on
January 1 of a year. A SIMPLE IRA plan can't have an ef-
fective date that is before the date you actually adopt the
plan.
Setting up a SIMPLE IRA. SIMPLE IRAs are the individ-
ual retirement accounts or annuities into which the contri-
butions are deposited. A SIMPLE IRA must be set up for
each eligible employee. Forms 5305-S, SIMPLE Individual
Retirement Trust Account, and 5305-SA, SIMPLE Individ-
ual Retirement Custodial Account, are model trust and
custodial account documents the participant and the
trustee (or custodian) can use for this purpose.
Contributions to a SIMPLE IRA won't affect the amount
an individual can contribute to a Roth or traditional IRA.
Deadline for setting up a SIMPLE IRA. A SIMPLE
IRA must be set up for an employee before the first date
by which a contribution is required to be deposited into the
employee's IRA. See Time limits for contributing funds,
later, under Contribution Limits.
Notification Requirement
If you adopt a SIMPLE IRA plan, you must notify each em-
ployee of the following information before the beginning of
the election period.
1. The employee's opportunity to make or change a sal-
ary reduction choice under a SIMPLE IRA plan.
2. Your decision to make either matching contributions
or nonelective contributions (discussed later).
3. A summary description provided by the financial insti-
tution.
4. Written notice that their balance can be transferred
without cost or penalty if they use a designated finan-
cial institution.
Election period. The election period is generally the
60-day period immediately preceding January 1 of a cal-
endar year (November 2 to December 31 of the preceding
calendar year). However, the dates of this period are
modified if you set up a SIMPLE IRA plan mid-year (for ex-
ample, on July 1) or if the 60-day period falls before the
first day an employee becomes eligible to participate in
the SIMPLE IRA plan.
A SIMPLE IRA plan can provide longer periods for per-
mitting employees to enter into salary reduction agree-
ments or to modify prior agreements. For example, a SIM-
PLE IRA plan can provide a 90-day election period
instead of the 60-day period. Similarly, in addition to the
60-day period, a SIMPLE IRA plan can provide quarterly
election periods during the 30 days before each calendar
quarter, other than the first quarter of each year.
Contribution Limits
Contributions are made up of salary reduction contribu-
tions and employer contributions. You, as the employer,
must make either matching contributions or nonelective
contributions, defined later. No other contributions can be
made to the SIMPLE IRA plan. These contributions, which
you can deduct, must be made timely. See Time limits for
contributing funds, later.
Salary reduction contributions. The amount the em-
ployee chooses to have you contribute to a SIMPLE IRA
on their behalf can't be more than $15,500 for 2023 and
increases to $16,000 for 2024. These contributions must
be expressed as a percentage of the employee's compen-
sation unless you permit the employee to express them as
a specific dollar amount. You can't place restrictions on
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the contribution amount (such as limiting the contribution
percentage), except to comply with the $15,500 limit for
2023 ($16,000 for 2024).
If you or an employee participates in any other qualified
plan during the year and you or your employee has salary
reduction contributions (elective deferrals) under those
plans, the salary reduction contributions under a SIMPLE
IRA plan also count toward the overall annual limit
($22,500 for 2023; $23,000 for 2024) on exclusion of sal-
ary reduction contributions and other elective deferrals.
Catch-up contributions. A SIMPLE IRA plan can per-
mit participants who are age 50 or over at the end of the
calendar year to also make catch-up contributions. The
catch-up contribution limit for SIMPLE IRA plans is $3,500
for 2023 and 2024. Salary reduction contributions aren't
treated as catch-up contributions until they exceed
$15,500 for 2023 ($16,000 for 2024). However, the
catch-up contribution a participant can make for a year
can't exceed the lesser of the following amounts.
•
The catch-up contribution limit.
•
The excess of the participant's compensation over the
salary reduction contributions that aren't catch-up
contributions.
Employer matching contributions. You are generally
required to match each employee's salary reduction con-
tribution(s) on a dollar-for-dollar basis up to 3% of the em-
ployee's compensation, where only employees who have
elected to make contributions will receive an employer
matching contribution. This requirement doesn't apply if
you make nonelective contributions, as discussed later.
Example. In 2023, your employee earned $25,000 and
chose to defer 5% of their salary. The net earnings from
self-employment are $40,000, and you choose to contrib-
ute 10% of your earnings to your SIMPLE IRA. You make
3% matching contributions. The total contribution made
for the employee is $2,000, figured as follows.
Salary reduction contributions
($25,000 × 5% (0.05)) ...................... $1,250
Employer matching contribution
($25,000 × 3% (0.03)) ......................
750
Total contributions ...................... $2,000
The total contribution you make for yourself is $5,200,
figured as follows.
Salary reduction contributions
($40,000 × 10% (0.10)) ..................... $4,000
Employer matching contribution
($40,000 × 3% (0.03)) ......................
1,200
Total contributions ...................... $5,200
Lower percentage. If you choose a matching contri-
bution less than 3%, the percentage must be at least 1%.
You must notify the employees of the lower match within a
reasonable period of time before the 60-day election pe-
riod (discussed earlier) for the calendar year. You can't
choose a percentage less than 3% for more than 2 years
during the 5-year period that ends with (and includes) the
year for which the choice is effective.
Nonelective contributions. Instead of matching contri-
butions, you can choose to make nonelective contribu-
tions of 2% of compensation on behalf of each eligible
employee who has at least $5,000 (or some lower amount
you select) of compensation from you for the year. If you
make this choice, you must make nonelective contribu-
tions whether or not the employee chooses to make salary
reduction contributions. Only $330,000 of the employee's
compensation can be taken into account to figure the con-
tribution limit in 2023 ($345,000 in 2024).
If you choose this 2% contribution formula, you must
notify the employees within a reasonable period of time
before the 60-day election period (discussed earlier) for
the calendar year.
Example 1. In 2023, your employee, Jane Wood,
earned $36,000 and chose to have you contribute 10% of
her salary. Your net earnings from self-employment are
$50,000, and you choose to contribute 10% of your earn-
ings to your SIMPLE IRA. You make a 2% nonelective
contribution. Both of you are under age 50. The total con-
tribution you make for Jane is $4,320, figured as follows.
Salary reduction contributions
($36,000 × 10% (0.10)) ..................... $3,600
2% nonelective contributions
($36,000 × 2% (0.02)) ......................
720
Total contributions ...................... $4,320
The total contribution you make for yourself is $6,000,
figured as follows.
Salary reduction contributions
($50,000 × 10% (0.10)) ..................... $5,000
2% nonelective contributions
($50,000 × 2% (0.02)) ......................
1,000
Total contributions ...................... $6,000
Example 2. Using the same facts as in Example 1
above, the maximum contribution you make for Jane or for
yourself if you each earned $75,000 is $14,000, figured as
follows.
Salary reduction contributions
(maximum amount allowed) .................. $12,500
2% nonelective contributions
($75,000 × 2% (0.02)) ......................
1,500
Total contributions ...................... $14,000
Time limits for contributing funds. You must make the
salary reduction contributions to the SIMPLE IRA within
30 days after the end of the month in which the amounts
would have otherwise have been payable to the employee
in cash. You must make matching contributions or non-
elective contributions by the due date (including exten-
sions) for filing your federal income tax return for the year.
Certain plans subject to Department of Labor rules may
have an earlier due date for salary reduction contributions.
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When To Deduct Contributions
You can deduct SIMPLE IRA contributions in the tax year
within which the calendar year for which contributions
were made ends. You can deduct contributions for a par-
ticular tax year if they are made for that tax year and are
made by the due date (including extensions) of your fed-
eral income tax return for that year.
The due date for making contributions for 2023 for most
plans is Monday, April 15, 2024.
Example 1. Your tax year is the fiscal year ending
June 30. Contributions under a SIMPLE IRA plan for cal-
endar year 2023 (including contributions made by the due
date for the return for the tax year that ends on June 30,
2024) are deductible in the tax year ending June 30, 2024.
Example 2. You are a sole proprietor whose tax year is
the calendar year. Contributions under a SIMPLE IRA plan
for calendar year 2023 (including contributions made by
the due date for the return for the 2023 tax year) are de-
ductible in the 2023 tax year.
Where To Deduct Contributions
Deduct the contributions you make for your common-law
employees on your tax return. For example, sole proprie-
tors deduct them on Schedule C (Form 1040) or Sched-
ule F (Form 1040), partnerships deduct them on Form
1065, and corporations deduct them on Form 1120 or
1120-S.
Sole proprietors and partners deduct contributions for
themselves on line 16 of Schedule 1 (Form 1040). (If you
are a partner, contributions for yourself are shown on the
Schedule K-1 (Form 1065) you receive from the partner-
ship.)
Tax Treatment of Contributions
You can deduct your contributions and your employees
can exclude these contributions from their gross income.
SIMPLE IRA plan contributions aren't subject to federal in-
come tax withholding. However, salary reduction contribu-
tions are subject to social security, Medicare, and FUTA
taxes. Matching and nonelective contributions aren't sub-
ject to these taxes.
Reporting on Form W-2. Don’t include SIMPLE IRA
plan contributions in the “Wages, tips, other compensa-
tion” box of Form W-2. You must, however, include them in
the “Social security wages” and “Medicare wages and
tips” boxes. You must also include them in box 12. Check
the “Retirement plan” checkbox in box 13. For more infor-
mation, see the Form W-2 instructions.
Distributions (Withdrawals)
Distributions from a SIMPLE IRA are subject to IRA rules
and are generally includible in income for the year re-
ceived. Tax-free rollovers can be made from one SIMPLE
IRA into another SIMPLE IRA. However, a rollover from a
SIMPLE IRA to a non-SIMPLE IRA can be made tax free
only after a 2-year participation in the SIMPLE IRA plan.
Generally, you or your employee must begin to receive
distributions from a SIMPLE IRA by April 1 of the first year
after the calendar year in which you or your employee rea-
ches age 72 (if age 70
1
/2 was reached after December 31,
2019).
Note. Individuals who reach age 72 after December
31, 2022, may delay receiving their RMDs until April 1 of
the year following the year in which they reach age 73.
Early withdrawals are generally subject to a 10% addi-
tional tax. However, the additional tax is increased to 25%
if funds are withdrawn within 2 years of beginning partici-
pation.
More information. See Pubs. 590-A and 590-B for infor-
mation about IRA rules, including those on the tax treat-
ment of distributions, rollovers, required distributions, and
income tax withholding.
More Information on SIMPLE IRA
Plans
If you need help to set up or maintain a SIMPLE IRA plan,
go to the IRS website and searchSIMPLE IRA Plan.
SIMPLE 401(k) Plan
You can adopt a SIMPLE plan as part of a 401(k) plan if
you meet the 100-employee limit, as discussed earlier un-
der SIMPLE IRA Plan. A SIMPLE 401(k) plan is a qualified
retirement plan and must generally satisfy the rules dis-
cussed under Qualification Rules in chapter 4, including
the required distribution rules. However, a SIMPLE 401(k)
plan isn't subject to the nondiscrimination and top-heavy
rules discussed in chapter 4 if the plan meets the condi-
tions listed below.
1. Under the plan, an employee can choose to have you
make salary reduction contributions for the year to a
trust in an amount expressed as a percentage of the
employee's compensation, but not more than $15,500
for 2023 ($16,000 for 2024). If permitted under the
plan, an employee who is age 50 or over can also
make a catch-up contribution of up to $3,500 for 2023
and 2024. See Catch-up contributions, earlier, under
Contribution Limits.
2. You must make either:
a. Matching contributions up to 3% of compensation
for the year, or
b. Nonelective contributions of 2% of compensation
on behalf of each eligible employee who has at
least $5,000 of compensation from you for the
year.
3. No other contributions can be made to the trust.
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4. No contributions are made, and no benefits accrue,
for services during the year under any other qualified
retirement plan sponsored by you on behalf of any
employee eligible to participate in the
SIMPLE 401(k) plan.
5. The employee's rights to any contributions are nonfor-
feitable.
No more than $330,000 of the employee's compensa-
tion can be taken into account in figuring matching contri-
butions and nonelective contributions in 2023 ($345,000
in 2024). Compensation is defined earlier in this chapter.
Employee notification. The notification requirement that
applies to SIMPLE IRA plans also applies to SIMPLE
401(k) plans. See Notification Requirement, earlier in this
chapter.
Note on forms. Please note that Forms 5304-SIMPLE
and 5305-SIMPLE can’t be used to establish a SIMPLE
401(k) plan. To set up a SIMPLE 401(k) plan, see Adopt-
ing a Written Plan in chapter 4.
4.
Qualified Plans
Topics
This chapter discusses:
•
Kinds of plans
•
Qualification rules
•
Setting up a qualified plan
•
Minimum funding requirement
•
Contributions
•
Employer deduction
•
Elective deferrals (401(k) plans)
•
Qualified Roth contribution program
•
Distributions
•
Prohibited transactions
•
Reporting requirements
Useful Items
You may want to see:
Publications
575 Pension and Annuity Income
590-A Contributions to Individual Retirement
Arrangements (IRAs)
590-B Distributions from Individual Retirement
Arrangements (IRAs)
575
590-A
590-B
3066 Have you had your check-up this year? for
Retirement Plans
3998 Choosing a Retirement Solution for Your Small
Business
4222 401(k) Plans for Small Businesses
4530 Designated Roth Accounts under a 401(k),
403(b) or governmental 457(b) plan
4531 401(k) Plan Checklist
4674 Automatic Enrollment 401(k) Plans for Small
Businesses
4806 Profit Sharing Plans for Small Businesses
Forms (and Instructions)
W-2 Wage and Tax Statement
Schedule K-1 (Form 1065) Partner's Share of
Income, Deductions, Credits, etc.
1099-R Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc.
1040 U.S. Individual Income Tax Return
1040-SR U.S. Tax Return for Seniors
Schedule C (Form 1040) Profit or Loss From
Business
Schedule F (Form 1040) Profit or Loss From
Farming
5300 Application for Determination for Employee
Benefit Plan
5310 Application for Determination for Terminating
Plan
5329 Additional Taxes on Qualified Plans (Including
IRAs) and Other Tax-Favored Accounts
5330 Return of Excise Taxes Related to Employee
Benefit Plans
5500 Annual Return/Report of Employee Benefit
Plan
5500-EZ Annual Return of A One-Participant
(Owners/Partners and Their Spouses)
Retirement Plan or A Foreign Plan
5500-SF Short Form Annual Return/Report of Small
Employee Benefit Plan
8717 User Fee for Employee Plan Determination
Letter Request
8880 Credit for Qualified Retirement Savings
Contributions
8881 Credit for Small Employer Pension Plan
Startup Costs
8955-SSA Annual Registration Statement Identifying
Separated Participants With Deferred Vested
Benefits
These qualified retirement plans set up by self-employed
individuals are sometimes called Keogh or H.R. 10 plans.
3066
3998
4222
4530
4531
4674
4806
W-2
Schedule K-1 (Form 1065)
1099-R
1040
1040-SR
Schedule C (Form 1040)
Schedule F (Form 1040)
5300
5310
5329
5330
5500
5500-EZ
5500-SF
8717
8880
8881
8955-SSA
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A sole proprietor or a partnership can set up one of these
plans. A common-law employee or a partner can't set up
one of these plans. The plans described here can also be
set up and maintained by employers that are corporations.
All of the rules discussed here apply to corporations ex-
cept where specifically limited to the self-employed.
The plan must be for the exclusive benefit of employees or
their beneficiaries. These qualified plans can include cov-
erage for a self-employed individual.
As an employer, you can usually deduct, subject to limits,
contributions you make to a qualified plan, including those
made for your own retirement. The contributions (and
earnings and gains on them) are generally tax free until
distributed by the plan.
Kinds of Plans
There are two basic kinds of qualified plans—defined con-
tribution plans and defined benefit plans—and different
rules apply to each. You can have more than one qualified
plan, but your contributions to all the plans must not total
more than the overall limits discussed under Contributions
and Employer Deduction, later.
Defined Contribution Plan
A defined contribution plan provides an individual account
for each participant in the plan. It provides benefits to a
participant largely based on the amount contributed to that
participant's account. Benefits are also affected by any in-
come, expenses, gains, losses, and forfeitures of other ac-
counts that may be allocated to an account. A defined
contribution plan can be either a profit-sharing plan or a
money purchase pension plan.
Profit-sharing plan. Although it is called a profit-sharing
plan, you don’t actually have to make a business profit for
the year in order to make a contribution (except for your-
self if you are self-employed, as discussed under Self-em-
ployed individual, later). A profit-sharing plan can be set
up to allow for discretionary employer contributions,
meaning the amount contributed each year to the plan
isn't fixed. An employer may even make no contribution to
the plan for a given year.
The plan must provide a definite formula for allocating
the contribution among the participants and for distributing
the accumulated funds to the employees after they reach
a certain age, after a fixed number of years, or upon cer-
tain other occurrences.
In general, you can be more flexible in making contribu-
tions to a profit-sharing plan than to a money purchase
pension plan (discussed next) or a defined benefit plan
(discussed later).
Money purchase pension plan. Contributions to a
money purchase pension plan are fixed and aren't based
on your business profits. For example, a money purchase
pension plan may require that contributions be 10% of the
participants' compensation without regard to whether you
have profits (or the self-employed person has earned in-
come).
Defined Benefit Plan
A defined benefit plan is any plan that isn't a defined con-
tribution plan. Contributions to a defined benefit plan are
based on what is needed to provide definitely determina-
ble benefits to plan participants. Actuarial assumptions
and computations are required to figure these contribu-
tions. Generally, you will need continuing professional help
to have a defined benefit plan.
Qualification Rules
To qualify for the tax benefits available to qualified plans, a
plan must meet certain requirements (qualification rules)
of the tax law. Generally, unless you write your own plan,
the financial institution that provided your plan will take the
continuing responsibility for meeting qualification rules
that are later changed. The following is a brief overview of
important qualification rules that generally haven't yet
been discussed. It isn't intended to be all-inclusive. See
Setting Up a Qualified Plan, later.
Generally, the following qualification rules also ap-
ply to a SIMPLE 401(k) retirement plan. A SIM-
PLE 401(k) plan is, however, not subject to the
top-heavy plan rules and nondiscrimination rules if the
plan satisfies the provisions discussed in chapter 3 under
SIMPLE 401(k) Plan.
Plan assets must not be diverted. Your plan must
make it impossible for its assets to be used for, or diverted
to, purposes other than the exclusive benefit of employees
and their beneficiaries. As a general rule, the assets can't
be diverted to the employer.
Minimum coverage requirement must be met. To be a
qualified plan, a defined benefit plan must benefit at least
the lesser of the following.
1. 50 employees.
2. The greater of:
a. 40% of all employees, or
b. Two employees.
If there is only one employee, the plan must benefit that
employee.
Contributions or benefits must not discriminate. Un-
der the plan, contributions or benefits to be provided must
not discriminate in favor of highly compensated employ-
ees.
Contributions and benefits must not be more than
certain limits. Your plan must not provide for contribu-
tions or benefits that are more than certain limits. The lim-
its apply to the annual contributions and other additions to
the account of a participant in a defined contribution plan
TIP
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and to the annual benefit payable to a participant in a de-
fined benefit plan. These limits are discussed later in this
chapter under Contributions.
Minimum vesting standard must be met. Your plan
must satisfy certain requirements regarding when benefits
vest. A benefit is vested (you have a fixed right to it) when
it becomes nonforfeitable. A benefit is nonforfeitable if it
can't be lost upon the happening, or failure to happen, of
any event. Special rules apply to forfeited benefit
amounts. In defined contribution plans, forfeitures can be
allocated to the accounts of remaining participants in a
nondiscriminatory way, or they can be used to reduce your
contributions.
Forfeitures under a defined benefit plan can't be used
to increase the benefits any employee would otherwise re-
ceive under the plan. Forfeitures must be used instead to
reduce employer contributions.
Participation. In general, an employee must be allowed
to participate in your plan if they meet both the following
requirements.
•
Has reached age 21.
•
Has at least 1 year of service (2 years if the plan isn't a
401(k) plan and provides that after not more than 2
years of service the employee has a nonforfeitable
right to all their accrued benefit).
See Elective Deferrals )401(k) Plans, later, for addi-
tional information regarding conditions of participation in a
401(k) plan.
A plan can't exclude an employee because the
employee has reached a specified age.
Leased employee. A leased employee, defined in chap-
ter 1, who performs services for you (recipient of the serv-
ices) is treated as your employee for certain plan qualifica-
tion rules. These rules include those in all the following
areas.
•
Nondiscrimination in coverage, contributions, and
benefits.
•
Minimum age and service requirements.
•
Vesting.
•
Limits on contributions and benefits.
•
Top-heavy plan requirements.
Contributions or benefits provided by the leasing organiza-
tion for services performed for you are treated as provided
by you.
Benefit payment must begin when required. Your plan
must provide that, unless the participant chooses other-
wise, the payment of benefits to the participant must begin
within 60 days after the close of the latest of the following
periods.
•
The plan year in which the participant reaches the ear-
lier of age 65 or the normal retirement age specified in
the plan.
CAUTION
!
•
The plan year in which the 10th anniversary of the
year in which the participant began participating in the
plan occurs.
•
The plan year in which the participant separates from
service.
Early retirement. Your plan can provide for payment
of retirement benefits before the normal retirement age. If
your plan offers an early retirement benefit, a participant
who separates from service before satisfying the early re-
tirement age requirement is entitled to that benefit if the
participant meets both the following requirements.
•
Satisfies the service requirement for the early retire-
ment benefit.
•
Separates from service with a nonforfeitable right to
an accrued benefit. The benefit, which may be actuari-
ally reduced, is payable when the early retirement age
requirement is met.
Required minimum distributions (RMDs). Special
rules require minimum annual distributions from qualified
plans, generally beginning after age 72 (if age 70
1
/2 was
reached after December 31, 2019). See Required Distri-
butions under Distributions, later.
Note. Individuals who reach age 72 after December
31, 2022, may delay receiving their RMDs until April 1 of
the year following the year in which they reach age 73.
Survivor benefits. Defined benefit and money purchase
pension plans must provide automatic survivor benefits in
both the following forms.
•
A qualified joint and survivor annuity for a vested par-
ticipant who doesn't die before the annuity starting
date.
•
A qualified pre-retirement survivor annuity for a vested
participant who dies before the annuity starting date
and who has a surviving spouse.
The automatic survivor benefit also applies to any par-
ticipant under a profit-sharing plan unless all the following
conditions are met.
•
The participant doesn't choose benefits in the form of
a life annuity.
•
The plan pays the full vested account balance to the
participant's surviving spouse (or other beneficiary if
the surviving spouse consents or if there is no surviv-
ing spouse) if the participant dies.
•
The plan isn't a direct or indirect transferee of a plan
that must provide automatic survivor benefits.
Loan secured by benefits. If automatic survivor ben-
efits are required for a spouse under a plan, they must
consent to a loan that uses as security the accrued bene-
fits in the plan.
Waiver of survivor benefits. Each plan participant
may be permitted to waive the joint and survivor annuity or
the pre-retirement survivor annuity (or both), but only if the
participant has the written consent of the spouse. The
plan must also allow the participant to withdraw the
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waiver. The spouse's consent must be witnessed by a
plan representative or notary public.
Involuntary cash-out of benefits not more than dol-
lar limit. A plan may provide for the immediate distribu-
tion of the participant's benefit under the plan if the
present value of the benefit isn't greater than $5,000
($7,000 in 2024).
However, the distribution can't be made after the annu-
ity starting date unless the participant and the spouse or
surviving spouse of a participant who died (if automatic
survivor benefits are required for a spouse under the plan)
consents in writing to the distribution. If the present value
is greater than $5,000 ($7,000 in 2024), the plan must
have the written consent of the participant and the spouse
or surviving spouse (if automatic survivor benefits are re-
quired for a spouse under the plan) for any immediate dis-
tribution of the benefit.
Benefits attributable to rollover contributions and earn-
ings on them can be ignored in determining the present
value of these benefits.
A plan must provide for the automatic rollover of any
cash-out distribution of more than $1,000 to an individual
retirement account or annuity, unless the participant choo-
ses otherwise. A section 402(f) notice must be sent prior
to an involuntary cash-out of an eligible rollover distribu-
tion. See Section 402(f) notice under Distributions, later,
for more details.
Consolidation, merger, or transfer of assets or liabili-
ties. Your plan must provide that, in the case of any
merger or consolidation with, or transfer of assets or liabili-
ties to, any other plan, each participant would (if the plan
then terminated) receive a benefit equal to or more than
the benefit they would have been entitled to just before the
merger, etc. (if the plan had then terminated).
Benefits must not be assigned or alienated. Your plan
must provide that a participant's or beneficiary's benefits
under the plan can't be taken away by any legal or equi-
table proceeding except as provided below or pursuant to
certain judgments or settlements against the participant
for violations of plan rules.
Exception for certain loans. A loan from the plan
(not from a third party) to a participant or beneficiary isn't
treated as an assignment or alienation if the loan is se-
cured by the participant's accrued nonforfeitable benefit
and is exempt from the tax on prohibited transactions un-
der section 4975(d)(1) or would be exempt if the partici-
pant were a disqualified person. A disqualified person is
defined later in this chapter under Prohibited Transactions.
Exception for a qualified domestic relations order
(QDRO). Compliance with a QDRO doesn't result in a
prohibited assignment or alienation of benefits.
Payments to an alternate payee under a QDRO before
the participant reaches age 59
1
/2 aren't subject to the 10%
additional tax that would otherwise apply under certain cir-
cumstances. Benefits distributed to an alternate payee un-
der a QDRO can be rolled over tax free to an individual re-
tirement account or to an individual retirement annuity.
No benefit reduction for social security increases.
Your plan must not permit a benefit reduction for a
post-separation increase in the social security benefit level
or wage base for any participant or beneficiary who is re-
ceiving benefits under your plan, or who is separated from
service and has nonforfeitable rights to benefits. This rule
also applies to plans supplementing the benefits provided
by other federal or state laws.
Elective deferrals must be limited. If your plan pro-
vides for elective deferrals, it must limit those deferrals to
the amount in effect for that particular year. See Limit on
Elective Deferrals, later in this chapter.
Top-heavy plan requirements. A top-heavy plan is one
that mainly favors partners, sole proprietors, and other key
employees.
A plan is top-heavy for a plan year if, for the preceding
plan year, the total value of accrued benefits or account
balances of key employees is more than 60% of the total
value of accrued benefits or account balances of all em-
ployees. Additional requirements apply to a top-heavy
plan primarily to provide minimum benefits or contribu-
tions for non-key employees covered by the plan.
Most qualified plans, whether or not top-heavy, must
contain provisions that meet the top-heavy requirements
and will take effect in plan years in which the plans are
top-heavy. These qualification requirements for top-heavy
plans are explained in section 416 and its regulations.
SIMPLE and safe harbor 401(k) plan exception.
The top-heavy plan requirements don't apply to SIMPLE
401(k) plans, discussed earlier in chapter 3, or to safe har-
bor 401(k) plans that consist solely of safe harbor contri-
butions, discussed later in this chapter. QACAs (dis-
cussed later) also aren't subject to top-heavy
requirements.
Setting up a Qualified Plan
There are two basic steps in setting up a qualified plan.
First, you adopt a written plan. Then, you invest the plan
assets.
You, the employer, are responsible for setting up and
maintaining the plan.
If you are self-employed, it isn't necessary to have
employees besides yourself to sponsor and set
up a qualified plan. If you have employees, see
Participation under Qualification Rules, earlier.
Set-up deadline. To take a deduction for contributions
for a tax year, your plan must be set up (adopted) by the
last day of that year. If you are a sole proprietor with a new
section 401(k) plan that you adopted after the end of the
taxable year that ends after or with the first plan year, and
you are the only participant, your elective deferrals must
be paid to the plan before the time for filing your return for
that taxable year (determined without regard to any exten-
sions) in order for the elective deferrals to be treated as
having been made by the end of the first plan year.
TIP
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Adopting a Written Plan
You must adopt a written plan. The plan can be an IRS
pre-approved plan offered by a sponsoring organization.
Or it can be an individually designed plan.
Written plan requirement. To qualify, the plan you set
up must be in writing and must be communicated to your
employees. The plan's provisions must be stated in the
plan. It isn't sufficient for the plan to merely refer to a re-
quirement of the Internal Revenue Code.
IRS pre-approved plans. Most qualified plans follow a
standard form of plan approved by the IRS. An IRS
pre-approved plan is a plan, including a plan covering
self-employed individuals, that is made available by a pro-
vider for adoption by employers. Under the prior IRS
pre-approved plan program, a plan could be a master
plan, a prototype plan, or a volume submitter plan. Under
the restructured program, the three plan types were com-
bined into one type called a pre-approved plan. IRS
pre-approved plans include both standardized plans and
nonstandardized plans. An IRS pre-approved plan may
use a single funding medium, for example, a trust or cus-
todial account document, for the joint use of all adopting
employers or separate funding mediums established for
each adopting employer. An IRS pre-approved plan may
consist of an adoption agreement plan or a single docu-
ment plan. For more information about IRS pre-approved
plans, see Revenue Procedure 2017-41, 2017-29 I.R.B.
92, available at IRS.gov/irb/2017-29_IRB#RP-2017-41.
Plan providers. The following organizations can gen-
erally provide IRS pre-approved plans.
•
Banks (including some savings and loan associations
and federally insured credit unions).
•
Trade or professional organizations.
•
Insurance companies.
•
Mutual funds.
•
Law firms.
•
Third-party administrators.
Individually designed plan. If you prefer, you can set up
an individually designed plan to meet specific needs. Al-
though advance IRS approval is not required, you can ap-
ply for approval by paying a fee and requesting a determi-
nation letter. You may need professional help for this. See
Revenue Procedure 2024-4, 2024-1 I.R.B. 160, available
at IRS.gov/irb/2024-4_IRB, as annually updated, that may
help you decide whether to apply for approval.
User fee. The fee mentioned earlier for requesting a
determination letter doesn't apply to employers who have
100 or fewer employees who received at least $5,000 of
compensation from the employer for the preceding year.
At least one of them must be a non-highly compensated
employee participating in the plan. The fee doesn't apply
to requests made by the later of the following dates.
•
The end of the fifth plan year the plan is in effect.
•
The end of any remedial amendment period for the
plan that begins within the first 5 plan years.
The request can't be made by the provider of an IRS
pre-approved plan that intends to market to participating
employers.
For more information about whether the user fee ap-
plies, see Revenue Procedure 2020-4, 2020-1 I.R.B. 148,
available at IRS.gov/irb/2020-01_IRB, as may be annually
updated; Notice 2017-1, 2017-2 I.R.B. 367, available at
IRS.gov/irb/2017-02_IRB; and Form 8717.
Investing Plan Assets
In setting up a qualified plan, you arrange how the plan's
funds will be used to build its assets.
•
You can establish a trust or custodial account to invest
the funds.
•
You, the trust, or the custodial account can buy an an-
nuity contract from an insurance company. Life insur-
ance can be included only if it is incidental to the re-
tirement benefits.
You set up a trust by a legal instrument (written docu-
ment). You may need professional help to do this.
You can set up a custodial account with a bank, savings
and loan association, credit union, or other person who
can act as the plan trustee.
You don't need a trust or custodial account, although
you can have one, to invest the plan's funds in annuity
contracts or face-amount certificates. If anyone other than
a trustee holds them, however, the contracts or certificates
must state they aren't transferable.
Other plan requirements. For information on other im-
portant plan requirements, see Qualification Rules, earlier
in this chapter.
Minimum Funding
Requirement
In general, if your plan is a money purchase pension plan
or a defined benefit plan, you must actually pay enough
into the plan to satisfy the minimum funding standard for
each year. Determining the amount needed to satisfy the
minimum funding standard for a defined benefit plan is
complicated, and you should seek professional help in or-
der to meet these contribution requirements. For informa-
tion on this funding requirement, see section 430 and its
regulations.
Quarterly installments of required contributions. If
your plan is a defined benefit plan subject to the minimum
funding requirements, you must generally make quarterly
installment payments of the required contributions. If you
don't pay the full installments timely, you may have to pay
interest on any underpayment for the period of the under-
payment.
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Due dates. The due dates for the installments are 15
days after the end of each quarter. For a calendar-year
plan, the installments are due April 15, July 15, October
15, and January 15 (of the following year).
Installment percentage. Each quarterly installment
must be 25% of the required annual payment.
Extended period for making contributions. Addi-
tional contributions required to satisfy the minimum fund-
ing requirement for a plan year will be considered timely if
made by 8
1
/2 months after the end of that year.
Contributions
A qualified plan is generally funded by your contributions.
However, employees participating in the plan may be per-
mitted to make contributions, and you may be permitted to
make contributions on your own behalf. See Employee
Contributions and Elective Deferrals, later.
Contributions deadline. You can make deductible con-
tributions for a tax year up to the due date of your return
(plus extensions) for that year.
Self-employed individual. You can make contributions
on behalf of yourself only if you have net earnings (com-
pensation) from self-employment in the trade or business
for which the plan was set up. Your net earnings must be
from your personal services, not from your investments. If
you have a net loss from self-employment, you can't make
contributions for yourself for the year, even if you can con-
tribute for common-law employees based on their com-
pensation.
Employer Contributions
There are certain limits on the contributions and other an-
nual additions you can make each year for plan partici-
pants. There are also limits on the amount you can de-
duct. See Deduction Limits, later.
Limits on Contributions and Benefits
Your plan must provide that contributions or benefits can't
exceed certain limits. The limits differ depending on
whether your plan is a defined contribution plan or a de-
fined benefit plan.
Defined benefit plan. For 2023, the annual benefit for a
participant under a defined benefit plan can't exceed the
lesser of the following amounts.
1. 100% of the participant's average compensation for
their highest 3 consecutive calendar years.
2. $265,000 for 2023 ($275,000 for 2024).
Defined contribution plan. For 2023, a defined contri-
bution plan's annual contributions and other additions (ex-
cluding earnings) to the account of a participant can't ex-
ceed the lesser of the following amounts.
1. 100% of the participant's compensation.
2. $66,000 for 2023 ($69,000 for 2024).
Catch-up contributions (discussed later under Limit on
Elective Deferrals) aren't subject to the above limit.
Employee Contributions
Participants may be permitted to make nondeductible con-
tributions to a plan in addition to your contributions. Even
though these employee contributions aren't deductible,
the earnings on them are tax free until distributed in later
years. Also, these contributions must satisfy the actual
contribution percentage (ACP) test of section 401(m)(2), a
nondiscrimination test that applies to employee contribu-
tions and matching contributions. See Regulations sec-
tions 1.401(k)-2 and 1.401(m)-2 for further guidance relat-
ing to the nondiscrimination rules under sections 401(k)
and 401(m).
When Contributions Are Considered
Made
You generally apply your plan contributions to the year in
which you make them. But you can apply them to the pre-
vious year if all the following requirements are met.
1. You make them by the due date of your tax return for
the previous year (plus extensions).
2. The plan was established by the end of the previous
year.
3. The plan treats the contributions as though it had re-
ceived them on the last day of the previous year.
4. You do either of the following.
a. You specify in writing to the plan administrator or
trustee that the contributions apply to the previous
year.
b. You deduct the contributions on your tax return for
the previous year. A partnership shows contribu-
tions for partners on Form 1065.
Employer's promissory note. Your promissory note
made out to the plan isn't a payment that qualifies for the
deduction. Also, issuing this note is a prohibited transac-
tion subject to tax. See Prohibited Transactions, later.
Employer Deduction
You can usually deduct, subject to limits, contributions you
make to a qualified plan, including those made for your
own retirement. The contributions (and earnings and
gains on them) are generally tax free until distributed by
the plan.
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Deduction Limits
The deduction limit for your contributions to a qualified
plan depends on the kind of plan you have.
Defined contribution plans. The deduction for contribu-
tions to a defined contribution plan (profit-sharing plan or
money purchase pension plan) can't be more than 25% of
the compensation paid (or accrued) during the year to
your eligible employees participating in the plan. If you are
self-employed, you must reduce this limit in figuring the
deduction for contributions you make for your own ac-
count. See Deduction Limit for Self-Employed Individuals,
later.
When figuring the deduction limit, the following rules
apply.
•
Elective deferrals (discussed later) aren't subject to
the limit.
•
Compensation includes elective deferrals.
•
The maximum compensation that can be taken into
account for each employee in 2023 is $330,000
($345,000 in 2024).
Defined benefit plans. The deduction for contributions
to a defined benefit plan is based on actuarial assump-
tions and computations. Consequently, an actuary must
figure your deduction limit.
In figuring the deduction for contributions, you
can't take into account any contributions or bene-
fits that are more than the limits discussed earlier
under Limits on Contributions and Benefits.
Deduction Limit for
Self-Employed Individuals
If you make contributions for yourself, you need to make a
special computation to figure your maximum deduction for
these contributions. Compensation is your net earnings
from self-employment, defined in chapter 1. This definition
takes into account both the following items.
•
The deduction for the deductible part of your self-em-
ployment tax.
•
The deduction for contributions on your behalf to the
plan.
CAUTION
!
The deductions for your own contributions and your net
earnings depend on each other. For this reason, you de-
termine the deduction for your own contributions indirectly
by reducing the contribution rate called for in your plan. To
do this, use either the Rate Table for Self-Employed or the
Rate Worksheet for Self-Employed in chapter 5. Then, fig-
ure your maximum deduction by using the Deduction
Worksheet for Self-Employed in chapter 5.
Where To Deduct Contributions
Deduct the contributions you make for your common-law
employees on your tax return. For example, sole proprie-
tors deduct them on Schedule C (Form 1040) or Sched-
ule F (Form 1040), partnerships deduct them on Form
1065, and corporations deduct them on Form 1120 or
1120-S.
Sole proprietors and partners deduct contributions for
themselves on line 16 of Schedule 1 (Form 1040). (If you
are a partner, contributions for yourself are shown on the
Schedule K-1 (Form 1065) you get from the partnership.)
Carryover of Excess Contributions
If you contribute more to a plan than you can deduct for
the year, you can carry over and deduct the difference in
later years, combined with your contributions for those
years. Your combined deduction in a later year is limited to
25% of the participating employees' compensation for that
year. For purposes of this limit, a SEP is treated as a
profit-sharing (defined contribution) plan. However, this
percentage limit must be reduced to figure your maximum
deduction for contributions you make for yourself. See De-
duction Limit for Self-Employed Individuals, earlier. The
amount you carry over and deduct may be subject to the
excise tax discussed next.
Table 4-1. Carryover of Excess Contributions Illustrated
Profit-Sharing Plan illustrates the carryover of excess con-
tributions to a profit-sharing plan.
Excise Tax for Nondeductible
(Excess) Contributions
If you contribute more than your deduction limit to a retire-
ment plan, you have made nondeductible contributions
and you may be liable for an excise tax. In general, a 10%
excise tax applies to nondeductible contributions made to
qualified pension and profit-sharing plans and to SEPs.
Table 4-1. Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted)
Year
Participants'
compensation
Employer
contribution
Deductible
limit for current year
(25% of compensation)
Excess
contribution
carryover
used
1
Total
deduction
including
carryovers
Excess
contribution
carryover
available at
end of year
. . . . . .
2020 ......... $1,000 $100 $250 $ 0 $100 $ 0
2021 ......... 400 165 100 0 100 65
2022 ......... 500 100 125 25 125 40
2023 ......... 600 100 150 40 140 0
1
There were no carryovers from years before 2016.
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Special rule for self-employed individuals. The 10%
excise tax doesn't apply to any contribution made to meet
the minimum funding requirements in a money purchase
pension plan or a defined benefit plan. Even if that contri-
bution is more than your earned income from the trade or
business for which the plan is set up, the difference isn't
subject to this excise tax. See Minimum Funding Require-
ment, earlier.
Reporting the tax. You must report the tax on your non-
deductible contributions on Form 5330. Form 5330 in-
cludes a computation of the tax. See the separate instruc-
tions for completing the form.
Elective Deferrals
(401(k) Plans)
Your qualified plan can include a cash or deferred ar-
rangement under which participants can choose to have
you contribute part of their before-tax compensation to the
plan rather than receive the compensation in cash. A plan
with this type of arrangement is popularly known as a
401(k) plan. (As a self-employed individual participating in
the plan, you can contribute part of your before-tax net
earnings from the business.) This contribution is called an
elective deferral because participants choose (elect) to
defer receipt of the money.
In general, a qualified plan can include a cash or defer-
red arrangement only if the qualified plan is one of the fol-
lowing plans.
•
A profit-sharing plan.
•
A money purchase pension plan in existence on June
27, 1974, that included a salary reduction arrange-
ment on that date.
Partnership. A partnership can have a 401(k) plan.
Restriction on conditions of participation. Effective
for plan years beginning after December 31, 2020, a
401(k) plan can’t require, as a condition of participation,
that an employee complete a period of service that ex-
tends beyond the close of the earlier of (1) 1 year of serv-
ice, or (2) the first period of 3 consecutive 12-month peri-
ods (excluding 12-month periods beginning before
January 1, 2021) during each of which the employee has
completed at least 500 hours of service. Effective for plan
years beginning after December 31, 2024, 3 consecutive
12-month periods are reduced to 2 consecutive 12-month
periods.
Matching contributions. If your plan permits, you can
make matching contributions for an employee who makes
an elective deferral to your 401(k) plan. For example, the
plan might provide that you will contribute 50 cents for
each dollar your participating employees choose to defer
under your 401(k) plan. Matching contributions are gener-
ally subject to the ACP test discussed earlier under Em-
ployee Contributions.
Nonelective contributions. You can also make contribu-
tions (other than matching contributions) for your partici-
pating employees without giving them the choice to take
cash instead. These are called nonelective contributions.
Employee compensation limit. No more than $330,000
of the employee's compensation can be taken into ac-
count when figuring contributions other than elective de-
ferrals in 2023. This limit is $345,000 for 2024.
SIMPLE 401(k) plan. If you had 100 or fewer employees
who earned $5,000 or more in compensation during the
preceding year, you may be able to set up a SIMPLE
401(k) plan. A SIMPLE 401(k) plan isn't subject to the
nondiscrimination and top-heavy plan requirements dis-
cussed earlier under Qualification Rules. For details about
SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chap-
ter 3.
Distributions. Certain rules apply to distributions from
401(k) plans. See Distributions From 401(k) Plans, later.
Limit on Elective Deferrals
There is a limit on the amount an employee can defer
each year under these plans. This limit applies without re-
gard to community property laws. Your plan must provide
that your employees can't defer more than the limit that
applies for a particular year. The basic limit on elective de-
ferrals is $22,500 for 2023 and increases to $23,000 for
2024. This limit applies to all salary reduction contribu-
tions and elective deferrals. If, in conjunction with other
plans, the deferral limit is exceeded, the difference is in-
cluded in the employee's gross income.
Catch-up contributions. A 401(k) plan can permit par-
ticipants who are age 50 or over at the end of the calendar
year to also make catch-up contributions. The catch-up
contribution limit is $7,500 for 2023 and 2024. Elective de-
ferrals aren't treated as catch-up contributions for 2023
until they exceed the $22,500 limit ($23,000 limit for
2024), the ADP test limit of section 401(k)(3), or the plan
limit (if any). However, the catch-up contributions a partici-
pant can make for a year can't exceed the lesser of the fol-
lowing amounts.
•
The catch-up contribution limit.
•
The excess of the participant's compensation over the
elective deferrals that aren't catch-up contributions.
Treatment of contributions. Your contributions to your
own 401(k) plan are generally deductible by you for the
year they are contributed to the plan. Matching or non-
elective contributions made to the plan are also deductible
by you in the year of contribution.
Your employees' elective deferrals other than designa-
ted Roth contributions are tax free until distributed from
the plan. Elective deferrals are included in wages for so-
cial security, Medicare, and FUTA taxes.
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Forfeiture. Employees have a nonforfeitable right at all
times to their accrued benefit attributable to elective
deferrals.
Reporting on Form W-2. Don't include elective deferrals
in the “Wages, tips, other compensation” box of Form
W-2. You must, however, include them in the “Social se-
curity wages” and “Medicare wages and tips” boxes. You
must also include them in box 12. Check the “Retirement
plan” checkbox in box 13. For more information, see the
Form W-2 instructions.
Automatic Enrollment
Your 401(k) plan can have an automatic enrollment fea-
ture. Under this feature, you can automatically reduce an
employee's pay by a fixed percentage and contribute that
amount to the 401(k) plan on their behalf unless the em-
ployee affirmatively chooses not to have their pay reduced
or chooses to have it reduced by a different percentage.
These contributions are elective deferrals. An automatic
enrollment feature will encourage employees' saving for
retirement and will help your plan pass nondiscrimination
testing (if applicable). For more information, see Pub.
4674.
Eligible automatic contribution arrangement (EACA).
Under an EACA, a participant is treated as having elected
to have the employer make contributions in an amount
equal to a uniform percentage of compensation. This au-
tomatic election will remain in place until the participant
specifically elects not to have such deferral percentage
made (or elects a different percentage). There is no re-
quired deferral percentage.
Withdrawals. Under an EACA, you may allow partici-
pants to withdraw their automatic contributions to the plan
if certain conditions are met.
•
The participant must elect the withdrawal no later than
90 days after the date of the first elective contributions
under the EACA.
•
The participant must withdraw the entire amount of
EACA default contributions, including any earnings
thereon.
If the plan allows withdrawals under the EACA, the
amount of the withdrawal other than the amount of any
designated Roth contributions must be included in the
employee's gross income for the tax year in which the dis-
tribution is made. The additional 10% tax on early distribu-
tions won't apply to the distribution.
Notice requirement. Under an EACA, employees
must be given written notice of the terms of the EACA
within a reasonable period of time before each plan year.
The notice must be written in a manner calculated to be
understood by the average employee and be sufficiently
accurate and comprehensive in order to apprise the em-
ployee of their rights and obligations under the EACA. The
notice must include an explanation of the employee's right
to elect not to have elective contributions made on their
behalf, or to elect a different percentage, and the
employee must be given a reasonable period of time after
receipt of the notice before the first elective contribution is
made. The notice must also explain how contributions will
be invested in the absence of an investment election by
the employee.
Qualified automatic contribution arrangement
(QACA). A QACA is a type of safe harbor plan. It contains
an automatic enrollment feature, and mandatory employer
contributions are required. If your plan includes a QACA, it
won't be subject to the ADP test (discussed later) or the
top-heavy requirements (discussed earlier). Additionally,
your plan won't be subject to the ACP test if certain addi-
tional requirements are met. Under a QACA, each em-
ployee who is eligible to participate in the plan will be trea-
ted as having elected to make elective deferral
contributions equal to a certain default percentage of com-
pensation. In order to not have default elective deferrals
made, an employee must make an affirmative election
specifying a deferral percentage (including zero, if de-
sired). If an employee doesn't make an affirmative elec-
tion, the default deferral percentage must meet the follow-
ing conditions.
1. It must be applied uniformly.
2. It must not exceed 10%. (After December 31, 2019,
the maximum default deferral percentage increases to
15%.)
3. It must be at least 3% in the first plan year it applies to
an employee and through the end of the following
year.
4. It must increase to at least 4% in the following plan
year.
5. It must increase to at least 5% in the following plan
year.
6. It must increase to at least 6% in subsequent plan
years.
Matching or nonelective contributions. Under the
terms of the QACA, you must make either matching or
nonelective contributions according to the following terms.
1. Matching contributions. You must make matching
contributions on behalf of each non-highly compensa-
ted employee in the following amounts.
a. An amount equal to 100% of elective deferrals, up
to 1% of compensation.
b. An amount equal to 50% of elective deferrals, from
1% up to 6% of compensation.
Other formulas may be used as long as they are at
least as favorable to non-highly compensated employ-
ees. The rate of matching contributions for highly
compensated employees, including yourself, must not
exceed the rates for non-highly compensated employ-
ees.
2. Nonelective contributions. You must make nonelec-
tive contributions on behalf of every non-highly com-
pensated employee eligible to participate in the plan,
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regardless of whether they elected to participate, in
an amount equal to at least 3% of their compensation.
Vesting requirements. All accrued benefits attributed
to matching or nonelective contributions under the QACA
must be 100% vested for all employees who complete 2
years of service. These contributions are subject to spe-
cial withdrawal restrictions, discussed later.
Notice requirements. Each employee eligible to par-
ticipate in the QACA must receive written notice of their
rights and obligations under the QACA within a reasona-
ble period before each plan year. The notice must be writ-
ten in a manner calculated to be understood by the aver-
age employee, and it must be accurate and
comprehensive. The notice must explain their right to elect
not to have elective contributions made on their behalf, or
to have contributions made at a different percentage than
the default percentage. Additionally, the notice must ex-
plain how contributions will be invested in the absence of
any investment election by the employee. The employee
must have a reasonable period of time after receiving the
notice to make such contribution and investment elections
prior to the first contributions under the QACA.
If you make nonelective contributions under the QACA
and you either don't make any matching contributions or
you make matching contributions that are intended to sat-
isfy the ACP test, then this QACA notice requirement
doesn’t apply. However, this exception doesn’t apply to the
EACA notice requirement, earlier.
Treatment of Excess Deferrals
If the total of an employee's deferrals is more than the limit
for 2023, the employee can have the difference (called an
excess deferral) paid out of any of the plans that permit
these distributions. The employee must notify the plan by
April 15, 2024 (or an earlier date specified in the plan), of
the amount to be paid from each plan. The plan must then
pay the employee that amount, plus earnings on the
amount through the end of 2023, by April 15, 2024.
Excess withdrawn by April 15. If the employee takes
out the excess deferral by April 15, 2024, it isn't reported
again by including it in the employee's gross income for
2024. However, any income earned in 2023 on the excess
deferral taken out is taxable in the tax year in which it is
taken out. The distribution isn't subject to the additional
10% tax on early distributions.
If the employee takes out part of the excess deferral
and the income on it, the distribution is treated as made
proportionately from the excess deferral and the income.
Even if the employee takes out the excess deferral by
April 15, the amount will be considered for purposes of
nondiscrimination testing requirements of the plan, unless
the distributed amount is for a non-highly compensated
employee who participates in only one employer's 401(k)
plan or plans.
Excess not withdrawn by April 15. If the employee
doesn't take out the excess deferral by April 15, 2024, the
excess, though taxable in 2023, isn't included in the em-
ployee's cost basis in figuring the taxable amount of any
eventual distributions under the plan. In effect, an excess
deferral left in the plan is taxed twice, once when contrib-
uted and again when distributed. Also, if the employee's
excess deferral is allowed to stay in the plan and the em-
ployee participates in no other employer's plan, the plan
can be disqualified.
Reporting corrective distributions on Form 1099-R.
Report corrective distributions of excess deferrals (includ-
ing any earnings) on Form 1099-R. For specific informa-
tion about reporting corrective distributions, see the In-
structions for Forms 1099-R and 5498.
Tax on excess contributions of highly compensated
employees. The law provides tests to detect discrimina-
tion in a plan. If tests, such as the ADP test (see section
401(k)(3)) and the ACP test (see section 401(m)(2)), show
that contributions for highly compensated employees are
more than the test limits for these contributions, the em-
ployer may have to pay a 10% excise tax. Report the tax
on Form 5330. The ADP test doesn't apply to a safe har-
bor 401(k) plan (discussed next) or to a QACA. Also, the
ACP test doesn't apply to these plans if certain additional
requirements are met.
The tax for the year is 10% of the excess contributions
for the plan year ending in your tax year. Excess contribu-
tions are elective deferrals, employee contributions, or
employer matching or nonelective contributions that are
more than the amount permitted under the ADP test or the
ACP test.
See Regulations sections 1.401(k)-2 and 1.401(m)-2
for further guidance relating to the nondiscrimination rules
under sections 401(k) and 401(m).
If the plan fails the ADP or ACP testing, and the
failure isn't corrected by the end of the next plan
year, the plan can be disqualified.
Safe Harbor 401(k) Plan
If you meet the requirements for a safe harbor 401(k) plan,
you don't have to satisfy the ADP test or the ACP test if
certain additional requirements are met. For your plan to
be a safe harbor plan, you must meet the following condi-
tions.
1. Matching or nonelective contributions. You must
make matching or nonelective contributions according
to one of the following formulas.
a. Matching contributions. You must make match-
ing contributions according to the following rules.
i. You must contribute an amount equal to 100%
of each non-highly compensated employee's
elective deferrals, up to 3% of compensation.
ii. You must contribute an amount equal to 50%
of each non-highly compensated employee's
elective deferrals, from 3% up to 5% of com-
pensation.
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iii. The rate of matching contributions for highly
compensated employees, including yourself,
must not exceed the rates for non-highly com-
pensated employees.
b. Nonelective contributions. You must make non-
elective contributions, without regard to whether
the employee made elective deferrals, on behalf of
all non-highly compensated employees eligible to
participate in the plan, equal to at least 3% of the
employee's compensation.
These mandatory matching and nonelective contri-
butions must be immediately 100% vested and are
subject to special withdrawal restrictions.
2. Notice requirement. You must give eligible employ-
ees written notice of their rights and obligations with
regard to contributions under the plan within a reason-
able period before the plan year.
If you make nonelective contributions and you either
don't make any matching contributions or you make
matching contributions that are intended to satisfy the
ACP test, then this notice requirement doesn’t apply. How-
ever, this exception doesn’t apply to the EACA notice re-
quirement, earlier.
The other requirements for a 401(k) plan, including
withdrawal and vesting rules, must also be met for your
plan to qualify as a safe harbor 401(k) plan.
Qualified Roth Contribution
Program
Under this program, an eligible employee can designate
all or a portion of their elective deferrals as after-tax Roth
contributions. These contributions, which are made in lieu
of elective deferrals, are designated Roth contributions.
Unlike other elective deferrals, designated Roth contribu-
tions aren't excluded from an employee's gross income.
In addition, an eligible employee may be permitted to
designate certain nonelective contributions or matching
contributions as Roth contributions. These contributions
are also includible in an employee's gross income.
Designated Roth contributions, designated Roth non-
elective contributions, and designated Roth matching con-
tributions must be maintained in a separate Roth account.
However, qualified distributions from a Roth account are
excluded from an employee's gross income.
Elective Deferrals
Under a qualified Roth contribution program, the amount
of elective deferrals that an employee may designate as a
Roth contribution is limited to the maximum amount of
elective deferrals excludable from gross income for the
year (for 2023, $22,500 if under age 50 and $30,000 if age
50 or over; amounts increase in 2024 to $23,000 and
$30,500, respectively) less the total amount of the
employee's elective deferrals not designated as Roth con-
tributions.
Designated Roth contributions are treated the same as
pre-tax elective deferrals for most purposes, including:
•
The annual individual elective deferral limit (total of all
designated Roth contributions and traditional, pre-tax
elective deferrals) of $22,500 for 2023 ($23,000 for
2024), with an additional $7,500 if age 50 or over;
•
Determining the maximum employee and employer
annual contributions of the lesser of 100% of compen-
sation or $66,000 for 2023 ($69,000 for 2024);
•
Nondiscrimination testing;
•
Required distributions; and
•
Elective deferrals not taken into account for purposes
of deduction limits.
Qualified Distributions
A qualified distribution is a distribution that is made after
the employee's nonexclusion period and:
•
On or after the employee reaches age
59
1
/2,
•
On account of the employee's being disabled, or
•
On or after the employee's death.
An employee's nonexclusion period for a plan is the
5-tax-year period beginning with the earlier of the follow-
ing tax years.
•
The first tax year in which a contribution was made to
their Roth account in the plan.
•
If a rollover contribution was made to the employee's
designated Roth account from a designated Roth ac-
count previously established for the employee under
another plan, then the first tax year the employee
made a designated Roth contribution to the previously
established account.
Rollover. A rollover from another account can be made to
a designated Roth account in the same plan. For addi-
tional information on these in-plan Roth rollovers, see No-
tice 2010-84, 2010-51 I.R.B. 872, available at IRS.gov/irb/
2010-51_IRB/ar11.html; and Notice 2013-74, 2013-52
I.R.B. 819, available at IRS.gov/pub/irs-irbs/irb13-52_IRB.
A distribution from a designated Roth account can only be
rolled over to another designated Roth account or a Roth
IRA. Rollover amounts don't apply toward the annual de-
ferral limit.
Reporting Requirements
You must report a designated Roth contribution on Form
W-2. See the Form W-2 instructions for detailed informa-
tion.
You must report a designated Roth nonelective contri-
bution or a designated Roth matching contribution on
Form 1099-R for the year in which the contribution is
allocated. You must also report a distribution from a Roth
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account on Form 1099-R. See the Form 1099-R instruc-
tions
Distributions
Amounts paid to plan participants from a qualified plan are
called distributions. Distributions may be nonperiodic,
such as lump-sum distributions, or periodic, such as annu-
ity payments. Also, certain loans may be treated as distri-
butions. See Loans Treated as Distributions in Pub. 575.
Required Distributions
A qualified plan must provide that each participant will ei-
ther:
•
Receive their entire interest (benefits) in the plan by
the required beginning date (defined later), or
•
Begin receiving regular periodic distributions by the
required beginning date in annual amounts figured to
distribute the participant's entire interest (benefits)
over their life expectancy or over the joint life expect-
ancies of the participant and the designated benefi-
ciary (or over a shorter period).
These distribution rules apply individually to each quali-
fied plan. You can't satisfy the requirement for one plan by
taking a distribution from another. The plan must provide
that these rules override any inconsistent distribution op-
tions previously offered.
Minimum distribution. If the account balance of a quali-
fied plan participant is to be distributed (other than as an
annuity), the plan administrator must figure the minimum
amount required to be distributed each distribution calen-
dar year. This minimum is figured by dividing the account
balance by the applicable life expectancy. The plan ad-
ministrator can use the life expectancy tables in Pub.
590-B for this purpose. For more information on figuring
the minimum distribution, see Tax on Excess Accumula-
tion in Pub. 575.
Required beginning date. Generally, each participant
must receive their entire benefits in the plan or begin to re-
ceive periodic distributions of benefits from the plan by the
required beginning date.
A participant must begin to receive distributions from
their qualified retirement plan by April 1 of the first year af-
ter the later of the following years.
1. The calendar year in which the participant reaches
age 72 (if age 70
1
/2 was reached after December 31,
2019).
2. The calendar year in which he or she retires from em-
ployment with the employer maintaining the plan.
However, the plan may require the participant to begin re-
ceiving distributions by April 1 of the year after the partici-
pant reaches age 72 (if age 70
1
/2 was reached after De-
cember 31, 2019) even if the participant has not retired.
If the participant is a 5% owner of the employer main-
taining the plan, the participant must begin receiving distri-
butions by April 1 of the first year after the calendar year in
which the participant reached age 72 (if age 70
1
/2 was
reached after December 31, 2019). For more information,
see Tax on Excess Accumulation in Pub. 575 about distri-
butions prior to 2020.
Note. Individuals who reach age 72 after December
31, 2022, may delay receiving their required minimum dis-
tribution until April 1 of the year following the year in which
they reach age 73.
Distributions after the starting year. The distribution
required to be made by April 1 is treated as a distribution
for the starting year. (The starting year is the year in which
the participant meets (1) or (2) above, whichever applies.)
After the starting year, the participant must receive the re-
quired distribution for each year by December 31 of that
year. If no distribution is made in the starting year, required
distributions for 2 years must be made in the next year
(one by April 1 and one by December 31).
Distributions after participant's death. See Pub.
575 for the special rules covering distributions made after
the death of a participant.
Distributions From 401(k) Plans
Generally, distributions can't be made until one of the fol-
lowing occurs.
•
The employee retires, dies, becomes disabled, or oth-
erwise severs employment.
•
The plan ends and no other defined contribution plan
is established or continued.
•
In the case of a 401(k) plan that is part of a profit-shar-
ing plan, the employee reaches age 59
1
/2 or suffers fi-
nancial hardship. For the rules on hardship distribu-
tions, including the limits on them, see Regulations
section 1.401(k)-1(d).
•
The employee becomes eligible for a qualified reserv-
ist distribution (defined next).
Certain distributions listed above may be subject
to the tax on early distributions discussed later.
Qualified reservist distributions. A qualified reservist
distribution is a distribution from an IRA or an elective de-
ferral account made after September 11, 2001, to a mili-
tary reservist or a member of the National Guard who has
been called to active duty for at least 180 days or for an
indefinite period. All or part of a qualified reservist distribu-
tion can be repaid to an IRA. The additional 10% tax on
early distributions doesn't apply to a qualified reservist
distribution.
Tax Treatment of Distributions
Distributions from a qualified plan minus a prorated part of
any cost basis are subject to income tax in the year they
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are distributed. Because most recipients have no cost ba-
sis, a distribution is generally fully taxable. An exception is
a distribution that is properly rolled over as discussed un-
der Rollover next.
The tax treatment of distributions depends on whether
they are made periodically over several years or life (peri-
odic distributions) or are nonperiodic distributions. See
Taxation of Periodic Payments and Taxation of Nonperi-
odic Payments in Pub. 575 for a detailed description of
how distributions are taxed, including the 10-year tax op-
tion or capital gain treatment of a lump-sum distribution.
Note. A recipient of a distribution from a designated
Roth account will have a cost basis because designated
Roth contributions are made on an after-tax basis. Also, a
distribution from a designated Roth account is entirely tax
free if certain conditions are met. See Qualified distribu-
tions under Qualified Roth Contribution Program, earlier.
Rollover. The recipient of an eligible rollover distribution
from a qualified plan can defer the tax on it by rolling it
over into a traditional IRA or another eligible retirement
plan. However, it may be subject to withholding, as dis-
cussed under Withholding requirement, later. A rollover
can also be made to a Roth IRA, in which case any previ-
ously untaxed amounts are includible in gross income un-
less the rollover is from a designated Roth account.
Eligible rollover distribution. This is a distribution of
all or any part of an employee's balance in a qualified re-
tirement plan that isn't any of the following.
1. An RMD. See Required Distributions, earlier.
2. Any of a series of substantially equal payments made
at least once a year over any of the following periods.
a. The employee's life or life expectancy.
b. The joint lives or life expectancies of the employee
and beneficiary.
c. A period of 10 years or longer.
3. A hardship distribution.
4. Loans treated as distributions.
5. Dividends on employer securities.
6. The cost of any life insurance coverage provided un-
der a qualified retirement plan.
7. Similar items designated by the IRS in published guid-
ance. See, for example, the Instructions for Forms
1099-R and 5498.
Rollover of nontaxable amounts. You may be able to
roll over the nontaxable part of a distribution to another
qualified retirement plan or a section 403(b) plan, or to an
IRA. If the rollover is to a qualified retirement plan or a sec-
tion 403(b) plan that separately accounts for the taxable
and nontaxable parts of the rollover, the transfer must be
made through a direct (trustee-to-trustee) rollover. If the
rollover is to an IRA, the transfer can be made by any roll-
over method.
Note. A distribution from a designated Roth account
can be rolled over to another designated Roth account or
to a Roth IRA. If the rollover is to a Roth IRA, it can be rol-
led over by any rollover method, but if the rollover is to an-
other designated Roth account, it must be rolled over di-
rectly (trustee-to-trustee).
More information. For more information about roll-
overs, see Rollovers in Pubs. 575 and 590-A. For rules on
rolling over distributions that contain nontaxable amounts,
see Notice 2014-54, 2014-41 I.R.B. 670, available at
IRS.gov/irb/2014-41_IRB/ar11.html. For guidance on roll-
ing money into a qualified plan, see Revenue Ruling
2014-9, 2014-17 I.R.B. 975, available at IRS.gov/irb/
2014-17_IRB/ar05.html.
Withholding requirement. If, during a year, a qualified
plan pays to a participant one or more eligible rollover dis-
tributions (defined earlier) that are reasonably expected to
total $200 or more, the payor must withhold 20% of the
taxable portion of each distribution for federal income tax.
Exceptions. If, instead of having the distribution paid
to them, the participant chooses to have the plan pay it di-
rectly to an IRA or another eligible retirement plan (a direct
rollover), no withholding is required.
If the distribution isn't an eligible rollover distribution,
defined earlier, the 20% withholding requirement doesn't
apply. Other withholding rules apply to distributions that
aren't eligible rollover distributions, such as long-term peri-
odic distributions and required distributions (periodic or
nonperiodic). However, the participant can choose not to
have tax withheld from these distributions. If the partici-
pant doesn't make this choice, the following withholding
rules apply.
•
For periodic distributions, withholding is based on their
treatment as wages.
•
For nonperiodic distributions, 10% of the taxable part
is withheld.
Estimated tax payments. If no income tax is withheld
or not enough tax is withheld, the recipient of a distribution
may have to make estimated tax payments. For more in-
formation, see Withholding Tax and Estimated Tax in Pub.
575.
Section 402(f) notice. If a distribution is an eligible roll-
over distribution, as defined earlier, you must provide a
written notice to the recipient that explains the following
rules regarding such distributions.
1. That the distribution may be directly transferred to an
eligible retirement plan and information about which
distributions are eligible for this direct transfer.
2. That tax will be withheld from the distribution if it isn't
directly transferred to an eligible retirement plan.
3. That the distribution won't be subject to tax if transfer-
red to an eligible retirement plan within 60 days after
the date the recipient receives the distribution.
4. Certain other rules that may be applicable.
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Notice 2020-62, 2020-35 I.R.B. 476, available at,
IRS.gov/irb/2023–15_IRB, contains two updated safe har-
bor section 402(f) notices that plan administrators may
provide recipients of eligible rollover distributions.
Timing of notice. The notice must generally be provi-
ded no less than 30 days and no more than 180 days be-
fore the date of a distribution.
Method of notice. The written notice must be provi-
ded individually to each distributee of an eligible rollover
distribution. Posting of the notice isn't sufficient. However,
the written requirement may be satisfied through the use
of electronic media if certain additional conditions are met.
See Regulations section 1.401(a)-21.
Tax on failure to give notice. Failure to give a 402(f)
notice will result in a tax of $100 for each failure, with a to-
tal not exceeding $50,000 per calendar year. The tax
won't be imposed if it is shown that such failure is due to
reasonable cause and not to willful neglect.
Tax on Early Distributions
If a distribution is made to an employee under the plan be-
fore they reache age 59
1
/2, the employee may have to pay
a 10% additional tax on the distribution. This tax applies to
the amount received that the employee must include in in-
come.
Exceptions. The 10% tax won't apply if distributions be-
fore age 59
1
/2 are made in any of the following circumstan-
ces.
•
Made to a beneficiary (or to the estate of the em-
ployee) on or after the death of the employee.
•
Made due to the employee having a qualifying disabil-
ity.
•
Made as part of a series of substantially equal peri-
odic payments beginning after separation from service
and made at least annually for the life or life expect-
ancy of the employee or the joint lives or life expectan-
cies of the employee and their designated beneficiary.
(The payments under this exception, except in the
case of death or disability, must continue for at least 5
years or until the employee reaches age 59
1
/2, which-
ever is the longer period.)
•
Made to an employee after separation from service if
the separation occurred during or after the calendar
year in which the employee reached age 55.
•
Made to an alternate payee under a QDRO.
•
Made to an employee for medical care up to the
amount allowable as a medical expense deduction
(determined without regard to whether the employee
itemizes deductions).
•
Timely made to reduce excess contributions under a
401(k) plan.
•
Timely made to reduce excess employee or matching
employer contributions (excess aggregate contribu-
tions).
•
Timely made to reduce excess elective deferrals.
•
Made because of an IRS levy on the plan.
•
Made as a qualified reservist distribution.
•
Made as a permissible withdrawal from an EACA.
•
Made as a qualified birth or adoption distribution.
•
Made as a qualified disaster distribution.
•
Made to an individual who has been certified by a
physician as having a terminal illness.
•
Timely made to reduce excess IRA contributions pur-
suant to section 408(d)(4).
Reporting the tax. To report the tax on early distribu-
tions, file Form 5329. See the form instructions for addi-
tional information about this tax.
Tax on Excess Benefits
If you are or have been a 5% owner of the business main-
taining the plan, amounts you receive at any age that are
more than the benefits provided for you under the plan for-
mula are subject to an additional tax. This tax also applies
to amounts received by your successor. The tax is 10% of
the excess benefit includible in income.
To determine whether or not you are a 5% owner, see
section 416.
Reporting the tax. Include on Schedule 2 (Form 1040),
Part II, line 17j, any tax you owe for an excess benefit.
Lump-sum distribution. The amount subject to the ad-
ditional tax isn't eligible for the optional methods of figur-
ing income tax on a lump-sum distribution. The optional
methods are discussed under Lump-Sum Distributions in
Pub. 575.
Excise Tax on Reversion of Plan
Assets
A 20% or 50% excise tax is generally imposed on the
cash and fair market value of other property an employer
receives directly or indirectly from a qualified plan. If you
owe this tax, report it on Schedule I of Form 5330. See the
form instructions for more information.
Notification of Significant
Benefit Accrual Reduction
An employer or the plan will have to pay an excise tax if
both of the following occur.
•
A defined benefit plan or money purchase pension
plan is amended to provide for a significant reduction
in the rate of future benefit accrual.
•
The plan administrator fails to notify the affected indi-
viduals and the employee organizations representing
them of the reduction in writing.
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A plan amendment that eliminates or reduces any early
retirement benefit or retirement-type subsidy reduces the
rate of future benefit accrual.
The notice must be written in a manner calculated to be
understood by the average plan participant and must pro-
vide enough information to allow each individual to under-
stand the effect of the plan amendment. It must be provi-
ded within a reasonable time before the amendment takes
effect.
The tax is $100 per participant or alternate payee for
each day the notice is late. The total tax can't be more
than $500,000 during the tax year. It is imposed on the
employer or, in the case of a multiemployer plan, on the
plan.
Prohibited Transactions
Prohibited transactions are transactions between the plan
and a disqualified person that are prohibited by law. (How-
ever, see Exemption later.) If you are a disqualified person
who takes part in a prohibited transaction, you must pay a
tax (discussed later).
Prohibited transactions generally include the following
transactions.
1. A transfer of plan income or assets to, or use of them
by or for the benefit of, a disqualified person.
2. Any act of a fiduciary by which they deal with plan in-
come or assets in the fiduciary own interest.
3. The receipt of consideration by a fiduciary for their
own account from any party dealing with the plan in a
transaction that involves plan income or assets.
4. Any of the following acts between the plan and a dis-
qualified person.
a. Selling, exchanging, or leasing property.
b. Lending money or extending credit.
c. Furnishing goods, services, or facilities.
Exemption. Certain transactions are exempt from being
treated as prohibited transactions. For example, a prohibi-
ted transaction doesn't take place if you are a disqualified
person and receive any benefit to which you are entitled
as a plan participant or beneficiary. However, the benefit
must be figured and paid under the same terms as for all
other participants and beneficiaries. For other transactions
that are exempt, see section 4975 and the related regula-
tions.
Disqualified person. You are a disqualified person if you
are any of the following.
1. A fiduciary of the plan.
2. A person providing services to the plan.
3. An employer, any of whose employees are covered by
the plan.
4. An employee organization, any of whose members
are covered by the plan.
5. Any direct or indirect owner of 50% or more of any of
the following.
a. The combined voting power of all classes of stock
entitled to vote, or the total value of shares of all
classes of stock of a corporation that is an em-
ployer or employee organization described in (3)
or (4).
b. The capital interest or profits interest of a partner-
ship that is an employer or employee organization
described in (3) or (4).
c. The beneficial interest of a trust or unincorporated
enterprise that is an employer or an employee or-
ganization described in (3) or (4).
6. A member of the family of any individual described in
(1), (2), (3), or (5). (A member of a family is the
spouse, ancestor, or lineal descendant, or any spouse
of a lineal descendant.)
7. A corporation, partnership, trust, or estate of which (or
in which) any direct or indirect owner described in (1)
through (5) holds 50% or more of any of the following.
a. The combined voting power of all classes of stock
entitled to vote or the total value of shares of all
classes of stock of a corporation.
b. The capital interest or profits interest of a partner-
ship.
c. The beneficial interest of a trust or estate.
8. An officer, a director (or an individual having powers
or responsibilities similar to those of officers or direc-
tors), a 10%-or more shareholder, or a highly com-
pensated employee (earning 10%-or-more of the
yearly wages of an employer) of a person described in
(3), (4), (5), or (7).
9. A 10%-or more (in capital or profits) partner or joint
venturer of a person described in (3), (4), (5), or (7).
10.
Any disqualified person, as described in (1) through
(9) above, who is a disqualified person with respect to
any plan to which a section 501(c)(22) trust is permit-
ted to make payments under section 4223 of ERISA.
Tax on Prohibited Transactions
The initial tax on a prohibited transaction is 15% of the
amount involved for each year (or part of a year) in the tax
period. If the transaction isn't corrected within the tax pe-
riod, an additional tax of 100% of the amount involved is
imposed. For information on correcting the transaction,
see Correcting a prohibited transaction, later.
Both taxes are payable by any disqualified person who
participated in the transaction (other than a fiduciary act-
ing only as such). If more than one person takes part in
the transaction, each person can be jointly and severally
liable for the entire tax.
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Amount involved. The amount involved in a prohibited
transaction is the greater of the following amounts.
•
The money and fair market value of any property
given.
•
The money and fair market value of any property re-
ceived.
If services are performed, the amount involved is any
excess compensation given or received.
Tax period. The tax period starts on the transaction date
and ends on the earliest of the following days.
•
The day the IRS mails a notice of deficiency for the
tax.
•
The day the IRS assesses the tax.
•
The day the correction of the transaction is completed.
Payment of the 15% tax. Pay the 15% tax with Form
5330.
Correcting a prohibited transaction. If you are a dis-
qualified person who participated in a prohibited transac-
tion, you can avoid the 100% tax by correcting the trans-
action as soon as possible. Correcting the transaction
means undoing it as much as you can without putting the
plan in a worse financial position than if you had acted un-
der the highest fiduciary standards.
Correction period. If the prohibited transaction isn't
corrected during the tax period, you usually have an addi-
tional 90 days after the day the IRS mails a notice of defi-
ciency for the 100% tax to correct the transaction. This
correction period (the tax period plus the 90 days) can be
extended if either of the following occurs.
•
The IRS grants reasonable time needed to correct the
transaction.
•
You petition the Tax Court.
If you correct the transaction within this period, the IRS will
abate, credit, or refund the 100% tax.
Reporting Requirements
You may have to file an annual return/report by the last day
of the seventh month after the plan year ends. See the fol-
lowing list of forms to choose the right form for your plan.
Form 5500-SF. Form 5500-SF is a simplified annual re-
porting form. You can use Form 5500-SF if the plan meets
all the following conditions.
•
The plan is a small plan (generally, fewer than 100
participants at the beginning of the plan year).
•
The plan meets the conditions for being exempt from
the requirements that the plan's books and records be
audited by an independent qualified public account-
ant.
•
The plan has 100% of its assets invested in certain se-
cure investments with a readily determinable fair
value.
•
The plan holds no employer securities.
•
The plan isn't a multiemployer plan.
If your plan is required to file an annual return/report but
isn't eligible to file Form 5500-SF, the plan must file Form
5500 or 5500-EZ, as appropriate. For more details, see
the Instructions for Form 5500-SF.
Form 5500-EZ. You may be able to use Form 5500-EZ if
the plan is a one-participant plan, as defined below.
One-participant plan. Your plan is a one-participant
plan if either of the following is true.
•
The plan covers only you (or you and your spouse)
and you (or you and your spouse) own the entire busi-
ness (whether incorporated or unincorporated).
•
The plan covers only one or more partners (or part-
ner(s) and spouse(s)) in a business partnership.
A one-participant plan may not file an annual re-
turn on Form 5500. Every one-participant plan re-
quired to file an annual return must file either
Form 5500-EZ or 5500-SF. See the Instructions for Form
5500-EZ.
Form 5500-EZ not required. If your one-participant
plan (or plans) had total assets of $250,000 or less at the
end of the plan year, then you don't have to file Form
5500-EZ for that plan year. All plans should file a Form
5500-EZ for the final plan year to show that all plan assets
have been distributed.
Example. You are a sole proprietor and your plan
meets all the conditions for filing Form 5500-EZ. The total
plan assets are more than $250,000. You must file Form
5500-EZ or 5500-SF.
All one-participant plans should file Form
5500-EZ for their final plan year. The final plan
year is the year in which distribution of all plan as-
sets is completed.
Form 5500. If you don't meet the requirements for fil-
ing Form 5500-EZ or 5500-SF and a return/report is re-
quired, you must file Form 5500.
Electronic filing of Forms 5500 and 5500-SF. All
Forms 5500 and 5500-SF are required to be filed electron-
ically with the Department of Labor through EFAST2.
One-participant plans have the option of filing Form
5500-SF electronically rather than filing a Form 5500-EZ
on paper with the IRS. For more information, see the in-
structions for Forms 5500 and 5500-SF, available at
EFAST.dol.gov.
Form 5310. If you terminate your plan and are the plan
sponsor or plan administrator, you can file Form 5310.
Your application must be accompanied by the appropriate
user fee and Form 8717.
CAUTION
!
CAUTION
!
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Form 8955-SSA. Form 8955-SSA is used to report par-
ticipants who are no longer covered by the plan but have a
deferred vested benefit under the plan.
Form 8955-SSA is filed with the IRS and can be filed
electronically through the FIRE (Filing Information Returns
Electronically) system.
More information. For more information about reporting
requirements, see the forms and their instructions.
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5.
Table and Worksheets
for the Self-Employed
As discussed in chapters 2 and 4, if you are self-em-
ployed, you must use the rate table or rate worksheet and
deduction worksheet to figure your deduction for contribu-
tions you made for yourself to a SEP-IRA or qualified plan.
First, use either the rate table or rate worksheet to find
your reduced contribution rate. Then, complete the deduc-
tion worksheet to figure your deduction for contributions.
The table and the worksheets in chapter 5 apply
only to self-employed individuals who have only
one defined contribution plan, such as a
profit-sharing plan. A SEP plan is treated as a profit-shar-
ing plan. However, don't use this worksheet for SARSEPs.
Rate Table for Self-Employed. If your plan's contribution
rate is a whole percentage (for example, 12% rather than
12
1
/2%), you can use the Rate Table for Self-Employed on
the next page to find your reduced contribution rate. Oth-
erwise, use the Rate Worksheet for Self-Employed provi-
ded below.
First, find your plan contribution rate (the contribution
rate stated in your plan) in Column A of the table. Then,
read across to the rate under Column A. Enter the rate
CAUTION
!
from Columnin step 4 of the Deduction Worksheet for
Self-Employed on this page.
Example. You are a sole proprietor with no employees.
If your plan's contribution rate is 10% of a participant's
compensation, your rate is 0.090909. Enter this rate on
step 4 of the Deduction Worksheet for Self-Employed on
this page.
Rate Worksheet for Self-Employed. If your plan's con-
tribution rate isn't a whole percentage (for example,
10
1
/2%), you can't use the Rate Table for Self-Employed.
Use the following worksheet instead.
Rate Worksheet for Self-Employed
1) Plan contribution rate as a decimal (for example, 10
1
/2% =
0.105) ..............................
2) Rate in line 1 plus 1 (for example, 0.105 + 1 = 1.105) .....
3) Self-employed rate as a decimal rounded to at least 3
decimal places (line 1 ÷ line 2) (for example, 0.105 ÷ 1.105 =
0.095) ..............................
Figuring your deduction. Now that you have your
self-employed rate from either the rate table or rate work-
sheet, you can figure your maximum deduction for contri-
butions for yourself by completing the Deduction Work-
sheet for Self-Employed.
Community property laws. If you reside in a com-
munity property state and you are married and filing a
separate return, disregard community property laws for
step 1 of the Deduction Worksheet for Self-Employed. En-
ter on step 1 the total net profit you actually earned.
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Deduction Worksheet for Self-Employed
Step 1
Enter your net profit from Schedule C (Form 1040), line 31; Schedule F (Form 1040), line 34;* or Schedule K-1 (Form 1065),* box 14,
code A.** For information on other income included in net profit from self-employment, see the Instructions for Schedule SE (Form
1040) ........................................................................
* Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b.
** General partners should reduce this amount by the same additional expenses
subtracted from box 14, code A, to determine the amount on line 1a or line 2 of
Schedule SE (Form 1040).
Step 2
Enter your deduction for self-employment tax from Schedule 1 (Form 1040), line 15 .............................
Step 3
Net earnings from self-employment. Subtract step 2 from step 1 ........................................
Step 4
Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for Self-Employed ........................
Step 5
Multiply step 3 by step 4 ..............................................................
Step 6
Multiply $330,000 by your plan contribution rate (not the reduced rate) .....................................
Step 7
Enter the smaller of step 5 or step 6 .......................................................
Step 8
Contribution dollar limit .............................................................. $66,000
• If you made any elective deferrals to your self-employed plan, go to step 9.
• Otherwise, skip steps 9 through 20 and enter the smaller of step 7 or step 8 on step 21.
Step 9
Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan for the 2023 plan year.
Don't enter more than $22,500 ..........................................................
Step 10
Subtract step 9 from step 8 ............................................................
Step 11
Subtract step 9 from step 3 ..............................................
Step 12
Enter one-half of step 11 .............................................................
Step 13
Enter the smallest of step 7, step 10, or step 12 ................................................
Step 14
Subtract step 13 from step 3 ............................................................
Step 15
Enter the smaller of step 9 or step 14 ......................................................
• If you made catch-up contributions, go to step 16.
• Otherwise, skip steps 16 through 18 and go to step 19.
Step 16
Subtract step 15 from step 14 ...........................................................
Step 17
Enter your catch-up contributions (including designated Roth contributions), if any. Don't enter more than $7,500 .............
Step 18
Enter the smaller of step 16 or step 17 ......................................................
Step 19
Add steps 13, 15, and 18 .............................................................
Step 20
Enter the amount of designated Roth contributions included on steps 9 and 17 ................................
Step 21
Subtract step 20 from step 19. This is your maximum deductible contribution ...............................
Next: Enter your actual contribution, not to exceed your maximum deductible contribution, on Schedule 1 (Form 1040), line 16.
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Rate Table for Self-Employed
Column A
If the plan contri-
bution rate is:
(shown as %)
Column B
Your
rate is:
(shown as decimal)
1 ...................... 0.009901
2 ...................... 0.019608
3 ...................... 0.029126
4 ...................... 0.038462
5 ...................... 0.047619
6 ...................... 0.056604
7 ...................... 0.065421
8 ...................... 0.074074
9 ...................... 0.082569
10 ..................... 0.090909
11 ..................... 0.099099
12 ..................... 0.107143
13 ..................... 0.115044
14 ..................... 0.122807
15 ..................... 0.130435
16 ..................... 0.137931
17 ..................... 0.145299
18 ..................... 0.152542
19 ..................... 0.159664
20 ..................... 0.166667
21 ..................... 0.173554
22 ..................... 0.180328
23 ..................... 0.186992
24 ..................... 0.193548
25* .................... 0.200000*
* The deduction for annual employer contributions (other than elective deferrals) to a SEP
plan, a profit-sharing plan, or a money purchase pension plan can't be more than 20% of
your net earnings (figured without deducting contributions for yourself) from the business
that has the plan.
Example. You are a sole proprietor with no employees.
The terms of your plan provide that you contribute 8
1
/2%
(0.085) of your compensation to your plan. Your net profit
from Schedule C (Form 1040), line 31, is $200,000. You
have no elective deferrals or catch-up contributions. Your
self-employment tax deduction on line 15 of Schedule 1
(Form 1040) is $11,792. See the filled-in portions of both
Schedule SE (Form 1040), and Form 1040, later.
You figure your self-employed rate and maximum de-
duction for employer contributions you made for yourself
as follows.
See the filled-in Deduction Worksheet for Self-Em-
ployed later.
Rate Worksheet for Self-Employed
1) Plan contribution rate as a decimal (for example, 10
1
/2% =
0.105) ..............................
0.085
2) Rate in line 1 plus 1 (for example, 0.105 + 1 = 1.105) ..... 1.085
3) Self-employed rate as a decimal rounded to at least 3
decimal places (line 1 ÷ line 2) (for example, 0.105 ÷ 1.105 =
0.095) ..............................
0.078
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Deduction Worksheet for Self-Employed
Step 1
Enter your net profit from Schedule C (Form 1040), line 31; Schedule F (Form 1040), line 34;* or Schedule K-1 (Form 1065),* box 14,
code A.** For information on other income included in net profit from self-employment, see the Instructions for Schedule SE (Form
1040) ........................................................................
$200,000
* Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b.
** General partners should reduce this amount by the same additional expenses
subtracted from box 14, code A, to determine the amount on line 1a or line 2 of
Schedule SE (Form 1040).
Step 2
Enter your deduction for self-employment tax from Schedule 1 (Form 1040), line 15 ............................. 12,611
Step 3
Net earnings from self-employment. Subtract step 2 from step 1 ....................................... 187,389
Step 4
Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for Self-Employed ........................ 0.078
Step 5
Multiply step 3 by step 4 ............................................................. 14,616
Step 6
Multiply $330,000 by your plan contribution rate (not the reduced rate) .................................... 28,055
Step 7
Enter the smaller of step 5 or step 6 ...................................................... 14,616
Step 8
Contribution dollar limit .............................................................. $66,000
• If you made any elective deferrals to your self-employed plan, go to step 9.
• Otherwise, skip steps 9 through 20 and enter the smaller of step 7 or step 8 on step 21.
Step 9
Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan for the 2023 plan
year. Don't enter more than $22,500 .......................................................
N/A
Step 10
Subtract step 9 from step 8 ...........................................................
Step 11
Subtract step 9 from step 3 .............................................
Step 12
Enter one-half of step 11 .............................................................
Step 13
Enter the smallest of step 7, step 10, or step 12 ................................................
Step 14
Subtract step 13 from step 3 ...........................................................
Step 15
Enter the smaller of step 9 or step 14 ......................................................
• If you made catch-up contributions, go to step 16.
• Otherwise, skip steps 16 through 18 and go to step 19.
Step 16
Subtract step 15 from step 14 ..........................................................
Step 17
Enter your catch-up contributions (including designated Roth contributions), if any. Don't enter more than $7,500 .............
Step 18
Enter the smaller of step 16 or step 17 .....................................................
Step 19
Add steps 13, 15, and 18 .............................................................
Step 20
Enter the amount of designated Roth contributions included on steps 9 and 17 ...............................
Step 21
Subtract step 20 from step 19. This is your maximum deductible contribution .............................. $14,616
Next: Enter your actual contribution, not to exceed your maximum deductible contribution, on Schedule 1 (Form 1040), line 16.
Publication 560 (2023) Chapter 5 Table and Worksheets for the Self-Employed 37
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SCHEDULE SE
(Form 1040)
Department of the Treasury
Internal Revenue Service
Self-Employment Tax
Attach to Form 1040, 1040-SR, 1040-SS, or 1040-NR.
Go to www.irs.gov/ScheduleSE for instructions and the latest information.
OMB No. 1545-0074
2023
Attachment
Sequence No.
17
Name of person with self-employment income (as shown on Form 1040, 1040-SR, 1040-SS, or 1040-NR)
Social security number of person
with self-employment income
Part I Self-Employment Tax
Note: If your only income subject to self-employment tax is church employee income, see instructions for how to report your income
and the denition of church employee income.
A If you are a minister, member of a religious order, or Christian Science practitioner and you led Form 4361, but you had
$400 or more of other net earnings from self-employment, check here and continue with Part I . . .... ...
Skip lines 1a and 1b if you use the farm optional method in Part II. See instructions.
1 a Net farm prot or (loss) from Schedule F, line 34, and farm partnerships, Schedule K-1 (Form 1065),
box 14, code A . . .... ............. . . ..... ...
1a
b
If you received social security retirement or disability benets, enter the amount of Conservation Reserve
Program payments included on Schedule F, line 4b, or listed on Schedule K-1 (Form 1065), box 20, code AQ
1b
( )
Skip line 2 if you use the nonfarm optional method in Part II. See instructions.
2
Net prot or (loss) from Schedule C, line 31; and Schedule K-1 (Form 1065), box 14, code A (other than
farming). See instructions for other income to report or if you are a minister or member of a religious order
2
3 Combine lines 1a, 1b, and 2 . . ... . ... .... . . .......... 3
4 a If line 3 is more than zero, multiply line 3 by 92.35% (0.9235). Otherwise, enter amount from line 3 . 4a
Note: If line 4a is less than $400 due to Conservation Reserve Program payments on line 1b, see instructions.
b If you elect one or both of the optional methods, enter the total of lines 15 and 17 here . . ...
4b
c Combine lines 4a and 4b. If less than $400, stop; you don’t owe self-employment tax. Exception: If
less than $400 and you had church employee income, enter -0- and continue . . ... ...
4c
5 a Enter your church employee income from Form W-2. See instructions for
denition of church employee income . ... . . .... . . .
5a
b Multiply line 5a by 92.35% (0.9235). If less than $100, enter -0- . . ... . . ..... . 5b
6 Add lines 4c and 5b . . .... ............. . . ..... . 6
7 Maximum amount of combined wages and self-employment earnings subject to social security tax or
the 6.2% portion of the 7.65% railroad retirement (tier 1) tax for 2023 . . ... ... ...
7
160,200
8 a Total social security wages and tips (total of boxes 3 and 7 on Form(s) W-2)
and railroad retirement (tier 1) compensation. If $160,200 or more, skip lines
8b through 10, and go to line 11 . . ...... ... ....
8a
b Unreported tips subject to social security tax from Form 4137, line 10 . . . 8b
c Wages subject to social security tax from Form 8919, line 10 . . ... . 8c
d Add lines 8a, 8b, and 8c . . ... . ... .... . . ........... 8d
9 Subtract line 8d from line 7. If zero or less, enter -0- here and on line 10 and go to line 11 . . . . 9
10 Multiply the smaller of line 6 or line 9 by 12.4% (0.124) . . ... . . ......... 10
11 Multiply line 6 by 2.9% (0.029) . . .... . ............ . . ... 11
12 Self-employment tax. Add lines 10 and 11. Enter here and on Schedule 2 (Form 1040), line 4, or
Form 1040-SS, Part I, line 3 . . .... . ............ . . ...
12
13 Deduction for one-half of self-employment tax.
Multiply line 12 by 50% (0.50). Enter here and on Schedule 1 (Form 1040),
line 15 . . . ......... . .... .... ...
13
For Paperwork Reduction Act Notice, see your tax return instructions.
Cat. No. 11358Z Schedule SE (Form 1040) 2023
184,700
200,000
200,000
184,700
184,700
160,200
19,865
5,356
25,221
12,611
38 Chapter 5 Table and Worksheets for the Self-Employed Publication 560 (2023)
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6.
How To Get Tax Help
If you have questions about a tax issue, need help prepar-
ing your tax return, or want to download free publications,
forms, or instructions, go to IRS.gov to find resources that
can help you right away.
Preparing and filing your tax return. After receiving all
your wage and earnings statements (Forms W-2, W-2G,
1099-R, 1099-MISC, 1099-NEC, etc.); unemployment
compensation statements (by mail or in a digital format) or
other government payment statements (Form 1099-G);
and interest, dividend, and retirement statements from
banks and investment firms (Forms 1099), you have sev-
eral options to choose from to prepare and file your tax re-
turn. You can prepare the tax return yourself, see if you
qualify for free tax preparation, or hire a tax professional to
prepare your return.
Free options for tax preparation. Your options for pre-
paring and filing your return online or in your local com-
munity, if you qualify, include the following.
•
Free File. This program lets you prepare and file your
federal individual income tax return for free using soft-
ware or Free File Fillable Forms. However, state tax
12,611
14,616
Schedule 1 (Form 1040) 2023
Page 2
Part II Adjustments to Income
11 Educator expenses ... ......... ............... 11
12 Certain business expenses of reservists, performing artists, and fee-basis government
ofcials. Attach Form 2106 ... ......... ............ 12
13 Health savings account deduction. Attach Form 8889 ...... ........ 13
14 Moving expenses for members of the Armed Forces. Attach Form 3903 ...... . 14
15 Deductible part of self-employment tax. Attach Schedule SE ...... ..... 15
16 Self-employed SEP, SIMPLE, and qualied plans ...... .......... 16
17 Self-employed health insurance deduction ...... ............ 17
18 Penalty on early withdrawal of savings . . .......... ........ 18
19a Alimony paid ... ......... ................. 19a
b Recipient’s SSN ... ......... ..........
c
Date of original divorce or separation agreement (see instructions):
20 IRA deduction ... ......... ................. 20
21 Student loan interest deduction ... ......... .......... 21
22 Reserved for future use .........................
22
23 Archer MSA deduction ... ......... ............. 23
24 Other adjustments:
a Jury duty pay (see instructions) ... ......... . .
24a
b Deductible expenses related to income reported on line 8l from the
rental of personal property engaged in for prot ...... . .
24b
c Nontaxable amount of the value of Olympic and Paralympic medals
and USOC prize money reported on line 8m ..........
24c
d Reforestation amortization and expenses . .......... 24d
e Repayment of supplemental unemployment benets under the Trade
Act of 1974 ...... ...... ..........
24e
f Contributions to section 501(c)(18)(D) pension plans ...... . 24f
g Contributions by certain chaplains to section 403(b) plans .... 24g
h Attorney fees and court costs for actions involving certain unlawful
discrimination claims (see instructions) . . ..........
24h
i Attorney fees and court costs you paid in connection with an award
from the IRS for information you provided that helped the IRS detect
tax law violations ...... ... ..........
24i
j Housing deduction from Form 2555 ... ......... . 24j
k
Excess deductions of section 67(e) expenses from Schedule K-1 (Form
1041) . ... ... . . ... . ... ... . . . . .
24k
z Other adjustments. List type and amount:
24z
25 Total other adjustments. Add lines 24a through 24z ...... ......... 25
26 Add lines 11 through 23 and 25. These are your adjustments to income. Enter here and on
Form 1040, 1040-SR, or 1040-NR, line 10 ............ ......
26
Schedule 1 (Form 1040) 2023
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preparation may not be available through Free File. Go
to IRS.gov/FreeFile to see if you qualify for free online
federal tax preparation, e-filing, and direct deposit or
payment options.
•
VITA. The Volunteer Income Tax Assistance (VITA)
program offers free tax help to people with
low-to-moderate incomes, persons with disabilities,
and limited-English-speaking taxpayers who need
help preparing their own tax returns. Go to IRS.gov/
VITA, download the free IRS2Go app, or call
800-906-9887 for information on free tax return prepa-
ration.
•
TCE. The Tax Counseling for the Elderly (TCE) pro-
gram offers free tax help for all taxpayers, particularly
those who are 60 years of age and older. TCE volun-
teers specialize in answering questions about pen-
sions and retirement-related issues unique to seniors.
Go to IRS.gov/TCE, download the free IRS2Go app, or
call 888-227-7669 for information on free tax return
preparation.
•
MilTax. Members of the U.S. Armed Forces and quali-
fied veterans may use MilTax, a free tax service of-
fered by the Department of Defense through Military
OneSource. For more information, go to
MilitaryOneSource (MilitaryOneSource.Mil/Tax).
Also, the IRS offers Free Fillable Forms, which can
be completed online and then e-filed regardless of in-
come.
Using online tools to help prepare your return. Go to
IRS.gov/Tools for the following.
•
The Earned Income Tax Credit Assistant (IRS.gov/
EITCAssistant) determines if you’re eligible for the
earned income credit (EIC).
•
The Online EIN Application (IRS.gov/EIN) helps you
get an employer identification number (EIN) at no
cost.
•
The Tax Withholding Estimator (IRS.gov/W4App)
makes it easier for you to estimate the federal income
tax you want your employer to withhold from your pay-
check. This is tax withholding. See how your withhold-
ing affects your refund, take-home pay, or tax due.
•
The First-Time Homebuyer Credit Account Look-up
(IRS.gov/HomeBuyer) tool provides information on
your repayments and account balance.
•
The Sales Tax Deduction Calculator (IRS.gov/
SalesTax) figures the amount you can claim if you
itemize deductions on Schedule A (Form 1040).
Getting answers to your tax questions. On
IRS.gov, you can get up-to-date information on
current events and changes in tax law.
•
IRS.gov/Help: A variety of tools to help you get an-
swers to some of the most common tax questions.
•
IRS.gov/ITA: The Interactive Tax Assistant, a tool that
will ask you questions and, based on your input, pro-
vide answers on a number of tax law topics.
•
IRS.gov/Forms: Find forms, instructions, and publica-
tions. You will find details on the most recent tax
changes and interactive links to help you find answers
to your questions.
•
You may also be able to access tax information in your
e-filing software.
Need someone to prepare your tax return? There are
various types of tax return preparers, including enrolled
agents, certified public accountants (CPAs), accountants,
and many others who don’t have professional credentials.
If you choose to have someone prepare your tax return,
choose that preparer wisely. A paid tax preparer is:
•
Primarily responsible for the overall substantive accu-
racy of your return,
•
Required to sign the return, and
•
Required to include their preparer tax identification
number (PTIN).
Although the tax preparer always signs the return,
you're ultimately responsible for providing all the
information required for the preparer to accurately
prepare your return and for the accuracy of every item re-
ported on the return. Anyone paid to prepare tax returns
for others should have a thorough understanding of tax
matters. For more information on how to choose a tax pre-
parer, go to Tips for Choosing a Tax Preparer on IRS.gov.
Employers can register to use Business Services On-
line. The Social Security Administration (SSA) offers on-
line service at SSA.gov/employer for fast, free, and secure
online W-2 filing options to CPAs, accountants, enrolled
agents, and individuals who process Form W-2, Wage
and Tax Statement, and Form W-2c, Corrected Wage and
Tax Statement.
IRS social media. Go to IRS.gov/SocialMedia to see the
various social media tools the IRS uses to share the latest
information on tax changes, scam alerts, initiatives, prod-
ucts, and services. At the IRS, privacy and security are our
highest priority. We use these tools to share public infor-
mation with you. Don’t post your social security number
(SSN) or other confidential information on social media
sites. Always protect your identity when using any social
networking site.
The following IRS YouTube channels provide short, in-
formative videos on various tax-related topics in English,
Spanish, and ASL.
•
Youtube.com/irsvideos.
•
Youtube.com/irsvideosmultilingua.
•
Youtube.com/irsvideosASL.
Watching IRS videos. The IRS Video portal
(IRSVideos.gov) contains video and audio presentations
for individuals, small businesses, and tax professionals.
Online tax information in other languages. You can
find information on IRS.gov/MyLanguage if English isn’t
your native language.
CAUTION
!
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Free Over-the-Phone Interpreter (OPI) Service. The
IRS is committed to serving taxpayers with limited-English
proficiency (LEP) by offering OPI services. The OPI Serv-
ice is a federally funded program and is available at Tax-
payer Assistance Centers (TACs), other IRS offices, and
every VITA/TCE return site. The OPI Service is accessible
in more than 350 languages.
Accessibility Helpline available for taxpayers with
disabilities. Taxpayers who need information about ac-
cessibility services can call 833-690-0598. The Accessi-
bility Helpline can answer questions related to current and
future accessibility products and services available in al-
ternative media formats (for example, braille, large print,
audio, etc.). The Accessibility Helpline does not have ac-
cess to your IRS account. For help with tax law, refunds, or
account-related issues, go to IRS.gov/LetUsHelp.
Note. Form 9000, Alternative Media Preference, or
Form 9000(SP) allows you to elect to receive certain types
of written correspondence in the following formats.
•
Standard Print.
•
Large Print.
•
Braille.
•
Audio (MP3).
•
Plain Text File (TXT).
•
Braille Ready File (BRF).
Disasters. Go to IRS.gov/DisasterRelief to review the
available disaster tax relief.
Getting tax forms and publications. Go to IRS.gov/
Forms to view, download, or print all of the forms, instruc-
tions, and publications you may need. Or you can go to
IRS.gov/OrderForms to place an order.
Getting tax publications and instructions in eBook
format. Download and view most tax publications and in-
structions (including the Instructions for Form 1040) on
mobile devices as eBooks at IRS.gov/eBooks.
IRS eBooks have been tested using Apple's iBooks for
iPad. Our eBooks haven’t been tested on other dedicated
eBook readers, and eBook functionality may not operate
as intended.
Access your online account (individual taxpayers
only). Go to IRS.gov/Account to securely access infor-
mation about your federal tax account.
•
View the amount you owe and a breakdown by tax
year.
•
See payment plan details or apply for a new payment
plan.
•
Make a payment or view 5 years of payment history
and any pending or scheduled payments.
•
Access your tax records, including key data from your
most recent tax return, and transcripts.
•
View digital copies of select notices from the IRS.
•
Approve or reject authorization requests from tax pro-
fessionals.
•
View your address on file or manage your communica-
tion preferences.
Get a transcript of your return. With an online account,
you can access a variety of information to help you during
the filing season. You can get a transcript, review your
most recently filed tax return, and get your adjusted gross
income. Create or access your online account at IRS.gov/
Account.
Tax Pro Account. This tool lets your tax professional
submit an authorization request to access your individual
taxpayer IRS online account. For more information, go to
IRS.gov/TaxProAccount.
Using direct deposit. The safest and easiest way to re-
ceive a tax refund is to e-file and choose direct deposit,
which securely and electronically transfers your refund di-
rectly into your financial account. Direct deposit also
avoids the possibility that your check could be lost, stolen,
destroyed, or returned undeliverable to the IRS. Eight in
10 taxpayers use direct deposit to receive their refunds. If
you don’t have a bank account, go toIRS.gov/
DirectDeposit for more information on where to find a bank
or credit union that can open an account online.
Reporting and resolving your tax-related identity
theft issues.
•
Tax-related identity theft happens when someone
steals your personal information to commit tax fraud.
Your taxes can be affected if your SSN is used to file a
fraudulent return or to claim a refund or credit.
•
The IRS doesn’t initiate contact with taxpayers by
email, text messages (including shortened links), tele-
phone calls, or social media channels to request or
verify personal or financial information. This includes
requests for personal identification numbers (PINs),
passwords, or similar information for credit cards,
banks, or other financial accounts.
•
Go to IRS.gov/IdentityTheft, the IRS Identity Theft
Central webpage, for information on identity theft and
data security protection for taxpayers, tax professio-
nals, and businesses. If your SSN has been lost or
stolen or you suspect you’re a victim of tax-related
identity theft, you can learn what steps you should
take.
•
Get an Identity Protection PIN (IP PIN). IP PINs are
six-digit numbers assigned to eligible taxpayers to
help prevent the misuse of their SSNs on fraudulent
federal income tax returns. When you have an IP PIN,
it prevents someone else from filing a tax return with
your SSN. To learn more, go to IRS.gov/IPPIN.
Ways to check on the status of your refund.
•
Go to IRS.gov/Refunds.
•
Download the official IRS2Go app to your mobile de-
vice to check your refund status.
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•
Call the automated refund hotline at 800-829-1954.
The IRS can’t issue refunds before mid-February
for returns that claimed the EIC or the additional
child tax credit (ACTC). This applies to the entire
refund, not just the portion associated with these credits.
Making a tax payment. Payments of U.S. tax must be
remitted to the IRS in U.S. dollars. Digital assets are not
accepted. Go to IRS.gov/Payments for information on how
to make a payment using any of the following options.
•
IRS Direct Pay: Pay your individual tax bill or estimated
tax payment directly from your checking or savings ac-
count at no cost to you.
•
Debit Card, Credit Card, or Digital Wallet: Choose an
approved payment processor to pay online or by
phone.
•
Electronic Funds Withdrawal: Schedule a payment
when filing your federal taxes using tax return prepara-
tion software or through a tax professional.
•
Electronic Federal Tax Payment System: Best option
for businesses. Enrollment is required.
•
Check or Money Order: Mail your payment to the ad-
dress listed on the notice or instructions.
•
Cash: You may be able to pay your taxes with cash at
a participating retail store.
•
Same-Day Wire: You may be able to do same-day
wire from your financial institution. Contact your finan-
cial institution for availability, cost, and time frames.
Note. The IRS uses the latest encryption technology to
ensure that the electronic payments you make online, by
phone, or from a mobile device using the IRS2Go app are
safe and secure. Paying electronically is quick, easy, and
faster than mailing in a check or money order.
What if I can’t pay now? Go to IRS.gov/Payments for
more information about your options.
•
Apply for an online payment agreement (IRS.gov/
OPA) to meet your tax obligation in monthly install-
ments if you can’t pay your taxes in full today. Once
you complete the online process, you will receive im-
mediate notification of whether your agreement has
been approved.
•
Use the Offer in Compromise Pre-Qualifier to see if
you can settle your tax debt for less than the full
amount you owe. For more information on the Offer in
Compromise program, go to IRS.gov/OIC.
Filing an amended return. Go to IRS.gov/Form1040X
for information and updates.
Checking the status of your amended return. Go to
IRS.gov/WMAR to track the status of Form 1040-X amen-
ded returns.
It can take up to 3 weeks from the date you filed
your amended return for it to show up in our sys-
tem, and processing it can take up to 16 weeks.
CAUTION
!
CAUTION
!
Understanding an IRS notice or letter you’ve re-
ceived. Go to IRS.gov/Notices to find additional informa-
tion about responding to an IRS notice or letter.
Responding to an IRS notice or letter. You can now
upload responses to all notices and letters using the
Document Upload Tool. For notices that require additional
action, taxpayers will be redirected appropriately on
IRS.gov to take further action. To learn more about the
tool, go to IRS.gov/Upload.
Note. You can use Schedule LEP (Form 1040), Re-
quest for Change in Language Preference, to state a pref-
erence to receive notices, letters, or other written commu-
nications from the IRS in an alternative language. You may
not immediately receive written communications in the re-
quested language. The IRS’s commitment to LEP taxpay-
ers is part of a multi-year timeline that began providing
translations in 2023. You will continue to receive communi-
cations, including notices and letters, in English until they
are translated to your preferred language.
Contacting your local TAC office. Keep in mind, many
questions can be answered on IRS.gov without visiting an
IRS TAC. Go to IRS.gov/LetUsHelp for the topics people
ask about most. If you still need help, IRS TACs provide
tax help when a tax issue can’t be handled online or by
phone. All TACs now provide service by appointment, so
you’ll know in advance that you can get the service you
need without long wait times. Before you visit, go to
IRS.gov/TACLocator to find the nearest TAC and to check
hours, available services, and appointment options. Or, on
the IRS2Go app, under the Stay Connected tab, choose
the Contact Us option and click on “Local Offices.”
The Taxpayer Advocate
Service (TAS) Is Here To Help
You
What is TAS? TAS is an independent organization
within the IRS that helps taxpayers and protects taxpayer
rights. Their job is to ensure that every taxpayer is treated
fairly and that you know and understand your rights under
the Taxpayer Bill of Rights.
How can you learn about your taxpayer rights? The
Taxpayer Bill of Rights describes 10 basic rights that all
taxpayers have when dealing with the IRS. Go to
TaxpayerAdvocate.IRS.gov to help you understand what
these rights mean to you and how they apply. These are
your rights. Know them. Use them.
What can TAS do for you? TAS can help you resolve
problems that you can’t resolve with the IRS. And their
service is free. If you qualify for their assistance, you will
be assigned to one advocate who will work with you
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throughout the process and will do everything possible to
resolve your issue. TAS can help you if:
•
Your problem is causing financial difficulty for you,
your family, or your business;
•
You face (or your business is facing) an immediate
threat of adverse action; or
•
You’ve tried repeatedly to contact the IRS but no one
has responded, or the IRS hasn’t responded by the
date promised.
How can you reach TAS? TAS has offices in every
state, the District of Columbia, and Puerto Rico. To find
your advocate’s number:
•
Go to TaxpayerAdvocate.IRS.gov/Contact-Us;
•
Download Pub. 1546, The Taxpayer Advocate Service
Is Your Voice at the IRS, available at IRS.gov/pub/irs-
pdf/p1546.pdf;
•
Call the IRS toll free at 800-TAX-FORM
(800-829-3676) to order a copy of Pub. 1546;
•
Check your local directory; or
•
Call TAS toll free at 877-777-4778.
How else does TAS help taxpayers? TAS works to re-
solve large-scale problems that affect many taxpayers. If
you know of one of these broad issues, report it to TAS at
IRS.gov/SAMS. Be sure to not include any personal tax-
payer information.
Low Income Taxpayer Clinics (LITCs)
LITCs are independent from the IRS and TAS. LITCs rep-
resent individuals whose income is below a certain level
and need to resolve tax problems with the IRS, such as
audits, appeals, and tax collection disputes. In addition,
LITCs can provide information about taxpayer rights and
responsibilities in different languages for individuals who
speak English as a second language. Services are offered
for free or a small fee for eligible taxpayers. To find an
LITC near you, go to TaxpayerAdvocate.IRS.gov/LITC or
see IRS Pub. 4134, Low Income Taxpayer Clinic List, at
IRS.gov/pub/irs-pdf/p4134.pdf.
To help us develop a more useful index, please let us know if you have ideas for index entries.
See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
Index
401(k) Plan:
Elective Deferrals 24
Safe harbor 26
A
Annual additions 5
Annual benefits 5
Assistance (See Tax help)
Automatic Enrollment 25
B
Business, definition 5
C
Common-law employee 5
Compensation 5
Contribution:
Defined 6
Limits:
Qualified plans 22
SEP-IRAs 9
SIMPLE IRA plan 14
D
Deduction:
Defined 6
Deduction Worksheet for
Self-Employed 34
Defined benefit plan:
Deduction limits 23
Limits on contributions 22
Defined contribution plan:
Automatic Enrollment 25
Deduction limits 23
Eligible automatic contribution
arrangement 25
Forfeitures 25
Limits on contributions 22
Money purchase pension plan 18
Profit-sharing plan 18
Qualified automatic contribution
arrangement 25
Definitions you need to know 5
Disqualified person 31
Distributions (withdrawals) 16
E
EACA 25
Earned income 6
Eligible automatic contribution
arrangement 25
Employees:
Eligible 8
Excludable 8
Highly compensated 6
Leased 6
Employer:
Defined 6
Excess Deferrals 26
Excise tax 30
Nondeductible (excess)
contributions 23
Reduced benefit accrual 30
SEP excess contributions 10
Excludable employees 13
F
Form:
1040 23, 30
1099-R 26
5304–SIMPLE 14
5305–S 14
5305–SA 14
5305–SEP 8
5305–SIMPLE 14
5310 32
5329 30
5330 24, 26, 30, 32
5500 32
5500-EZ 32
Form W-2 16
Schedule K (Form 1065) 23
H
Highly compensated employee 6
K
Keogh plans (See Qualified plans)
L
Leased employee 6
N
Net earnings from
self-employment 6
Notification requirements 14
P
Participant, definition 7
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Participation 19
Partner, definition 7
Publications (See Tax help)
Q
QACA 25
Qualified automatic contribution
arrangement 25
Qualified Plan, definition 7
Qualified plans 17
Assignment of benefits 20
Benefits starting date 19
Contributions 22, 23
Deduction limits 23
Deduction Worksheet for
Self-Employed 34
Deductions 22
Deferrals 24, 25
Defined benefit plan 18
Defined contribution plan 18
Distributions 28
Minimum 28
Required beginning date 28
Rollover 29
Tax on excess benefits 30
Tax on premature 30
Tax treatment 28
Elective Deferrals 24
Limits 24
Employee nondeductible
contributions 22
Excess Deferrals 26
Investing plan assets 21
Kinds of plans 18
Leased employees 19
Minimum requirements:
Coverage 18
Funding 21
Vesting 19
Prohibited transactions 31
Qualification rules 18
Rate Table for Self-Employed 34
Rate Worksheet for
Self-Employed 34
Reporting requirements 32
Setting up 20
Qualified Plans:
Survivor benefits 19
Qualified Roth Contribution
Program 27
R
Rate Table for Self-Employed 34
Rate Worksheet for
Self-Employed 34
Required distributions 28
Rollovers 29
S
Safe harbor 401(k) plan 26
Salary reduction arrangement 11
Salary Reduction Simplified
Employee Pension(SARSEP) 10
SARSEP:
ADP test 10
Section 402(f) notice 29
Self-employed individual 7
SEP plans:
Deduction Worksheet for
Self-Employed 34
Rate Table for Self-Employed 34
Rate Worksheet for
Self-Employed 34
Reporting and Disclosure 12
SEP-IRAs:
Contributions 9
Deductible contributions 9, 10
Carryover of excess
contributions 10
Deduction limits 9
Limits for self-employed 10
When to deduct 10
Where to deduct 10
Distributions (withdrawals) 12
Eligible employee 8
Excludable employees 8
SIMPLE IRA plan:
Compensation 13
Contributions 14
Deductions 15
Distributions(withdrawals) 16
Employee election period 14
Employer matching
contributions 15
Excludable employees 13
Notification requirements 14
When to deduct contributions 16
SIMPLE plans 13, 16
SIMPLE 401(k) 16
SIMPLE IRA plan 13
Simplified employee pension
(SEP) 10
Salary reduction arrangement:
Compensation of self-employed
individuals 11
Employee compensation 11
Who can have a SARSEP 10
SEP-IRA contributions 8
Setting up a SEP 8
Sixty-day employee election
period 14
Sole proprietor, definition 7
T
Tax help 39
U
User fee 21
W
Worksheets:
Deduction Worksheet for
Self-Employed 34
Rate Worksheet for
Self-Employed 34
44 Publication 560 (2023)
