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Chapter 4
Qualified Plans(p11)


Useful items

You may want to see:

 575  Pension and Annuity Income
 590  Individual Retirement Arrangements (IRAs)
 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) or 403(b) Plan
 4531 401(k) Plan Checklist
 4674 Automatic Enrollment 401(k) Plans for Small Businesses
 4806 Profit-Sharing Plans for Small Business
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
 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. For copies of this form, go to:
 5500-EZ : Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan
 5500-SF : Short Form Annual Return/Report of Small Employee Benefit Plan. For copies of this form, go to:
 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. A sole proprietor or a partnership can set up one of these plans. A common-law employee or a partner cannot set up one of these plans. The plans described here can also be set up and maintained by employers that are corporations. All the rules discussed here apply to corporations except where specifically limited to the self-employed.
The plan must be for the exclusive benefit of employees or their beneficiaries. These qualified plans can include coverage for a self-employed individual.
As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Kinds of Plans(p12)

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

Defined Contribution Plan(p12)

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

Profit-sharing plan.(p12)

Although it is called a "profit-sharing plan," you do not actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed as discussed under "Self-employed Individual" later). A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan is not fixed. An employer may even make no contribution to the plan for a given year.
The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences.
In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later).

Money purchase pension plan.(p12)

Contributions to a money purchase pension plan are fixed and are not based on your business profits. For example, if the plan requires that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the plan is a money purchase pension plan. This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits.

Defined Benefit Plan(p12)

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