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Publication 560


A qualified plan is generally funded by your contributions. However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. See Employee Contributions and Elective Deferrals later.

Contributions deadline.(p14)

You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year.

Self-employed individual.(p14)

You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. Your net earnings must be from your personal services, not from your investments. If you have a net loss from self-employment, you cannot make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation.

Employer Contributions(p14)

There are certain limits on the contributions and other annual additions you can make each year for plan participants. There are also limits on the amount you can deduct. See Deduction Limits, later.

Limits on Contributions
and Benefits(p14)

Your plan must provide that contributions or benefits cannot exceed certain limits. The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan.

Defined benefit plan.(p14)

For 2012, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts.
  1. 100% of the participant's average compensation for his or her highest 3 consecutive calendar years.
  2. $200,000.

Defined contribution plan.(p14)

For 2012, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts.
  1. 100% of the participant's compensation.
  2. $50,000.
Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit.

Employee Contributions(p15)

Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Even though these employee contributions are not deductible, the earnings on them are tax free until distributed in later years. Also, these contributions must satisfy the nondiscrimination test of section 401(m). See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).

When Contributions
Are Considered Made(p15)

You generally apply your plan contributions to the year in which you make them. But you can apply them to the previous year if all the following requirements are met.
  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 received them on the last day of the previous year.
  4. You do either of the following.
    1. You specify in writing to the plan administrator or trustee that the contributions apply to the previous year.
    2. You deduct the contributions on your tax return for the previous year. A partnership shows contributions for partners on Schedule K (Form 1065), Partners' Distributive Share Items.

Employer's promissory note.(p15)

Your promissory note made out to the plan is not a payment that qualifies for the deduction. Also, issuing this note is a prohibited transaction subject to tax. See Prohibited Transactions, later.