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Retirement Plans for Self-Employed People
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Are you self-employed? Did you know you have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans?
Here are highlights of a few of your retirement plan options.
Savings Incentive Match Plan for Employees (SIMPLE IRA Plan)
- You can put all your net earnings from self-employment in the plan: up to $11,500 (plus an additional $2,500 if you’re 50 or older) in salary reduction contributions and either a 2% fixed contribution or a 3% matching contribution.
- Establish the plan:
- complete
- Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – for Use With a Designated Financial Institution,
- Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – Not for Use With a Designated Financial Institution, or
- an IRS-approved “prototype SIMPLE IRA plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and
- open a SIMPLE IRA through a bank or another financial institution.
- Set up a SIMPLE IRA plan at any time January 1 through October 1. If you became self-employed after October 1, you can set up a SIMPLE IRA plan for the year as soon as administratively feasible after your business starts.
Simplified Employee Pension (SEP)
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Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $49,000.
- Establish the plan:
- complete
- Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement, or
- an IRS-approved “prototype SEP plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and
- open a SEP-IRA through a bank or other financial institution.
Set up the SEP plan for a year as late as the due date (including extensions) of your income tax return for that year.
401(k) Plan
- Make salary deferrals up to $16,500 (plus an additional $5,500 if you’re 50 or older) of your compensation from the business either on a pre-tax basis or as a designated Roth contribution.
- Contribute up to an additional 25% of your net earnings from self-employment (not including contributions for yourself), up to $49,000 including salary deferrals.
- Tailor the plan to allow you access to the money in the plan through loans and hardship distributions.
- A one-participant 401(k) plan is sometimes referred to as a “solo-401(k),” “individual 401(k)” or “uni-401(k).” It is generally the same as other 401(k) plans, but because there are no other employees, other than the spouse, that work for the business, it is exempt from discrimination testing.
Other Defined Contribution Plans
- Profit-sharing plan: allows you to decide how much to contribute on an annual basis, up to 25% of compensation (not including contributions for yourself) or $49,000.
- Money purchase plan: requires you to contribute a fixed percentage of your income every year, up to 25% of compensation (not including contributions for yourself), according to a formula stated in the plan.
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Traditional pension plan with a stated annual benefit you will receive at retirement, usually based on salary and years of service.
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Benefit may also be defined based on a cash balance formula in a hypothetical individual account (a cash balance plan).
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Maximum annual benefit can be up to $195,000.
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Contributions are calculated by an actuary based on the benefit you set and other factors (your age, expected returns on plan investments, etc.); no other annual contribution limit applies.
Retirement plans for self-employed people were formerly referred to as “Keogh plans” after the law that first allowed unincorporated businesses to sponsor retirement plans. Since the law no longer distinguishes between corporate and other plan sponsors, the term is seldom used.
Dollar figures are for 2011 and are subject to annual cost-of-living adjustments.
Related articles
- Self Directed Brokerage Accounts (401k-plan-blog.com)
- SBO 401K for Partnership Businesses: Easy Method of Making Retirement Contributions (401k-plan-blog.com)
- 100% Contributions with Solo 401k (401k-plan-blog.com)
IRS Patrol: IRS Announces Pension Plan Limitations for 2011
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Sorry readers, I’m a day late posting this cost of living adjustment for 2011 pension plans and retirement related stuff. As noted below, things haven’t changed much. No surprise there.
WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2011. In general, these limits will either remain unchanged, or the inflation adjustments for 2011 will be small. Highlights include:
- The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government’s Thrift Savings Plan remains unchanged at $16,500.
- The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.
- The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.
- The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $56,500 for married couples filing jointly, up from $55,500 in 2010; $42,375 for heads of household, up from $41,625; and $28,250 for married individuals filing separately and for singles, up from $27,750.
Below are details on both the unchanged and adjusted limitations.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
The limitations that are adjusted by reference to Section 415(d) generally will remain unchanged for 2011. This is because the cost-of-living index for the quarter ended Sept. 30, 2010, while greater than the cost-of-living index for the quarter ended Sept. 30, 2009, is less than the cost-of-living index for the quarter ended Sept. 30, 2008, and, following the procedures under the Social Security Act for adjusting benefit amounts, any decline in the applicable index cannot result in a reduced limitation. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will be $16,500 for 2011, which is the same amount as for 2009 and 2010. This limitation affects elective deferrals to Section 401(k) plans, Section 403(b) plans, and the federal government’s Thrift Savings Plan.
Effective Jan. 1, 2011, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) remains unchanged at $195,000. Pursuant to section 1.415(d)-1(a)(2)(ii) of the Income Tax Regulations, the adjustment to the limitation under a defined benefit plan under section 415(b)(1)(B) is determined using a special rule that takes into account that the cost-of-living indexes for the quarter ended Sept. 30, 2009, and for the quarter ended Sept. 30, 2010, were both less than the cost-of-living index for the quarter ended Sept. 30, 2008, and that the cost-of-living index for the quarter ended Sept. 30, 2010, is greater than the cost-of-living index for the quarter ended Sept. 30, 2009. For a participant who separated from service before Jan. 1, 2010, the participant’s limitation under a defined benefit plan under section 415(b)(1)(B) is unchanged (i.e., the adjustment factor is 1.0000). For a participant who separated from service during 2010, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2011 is computed by multiplying the participant’s 2010 compensation limitation by 1.0118 in order to reflect changes in the cost-of-living index from the quarter ended Sept. 30, 2009, to the quarter ended Sept. 30, 2010.
The limitation for defined contribution plans under Section 415(c)(1)(A) remains unchanged for 2011 at $49,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2011 are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $16,500.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains unchanged at $245,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $160,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period remains unchanged at $985,000, while the dollar amount used to determine the lengthening of the 5 year distribution period remains unchanged at $195,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $110,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, remains unchanged at $360,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $16,500.
The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes remains unchanged at $95,000. The compensation amount under Section 1.61 21(f)(5)(iii) remains unchanged at $195,000.
The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2011 are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $33,500 to $34,000; the limitation under Section 25B(b)(1)(B) is increased from $36,000 to $36,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $55,500 to $56,500.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $25,125 to $25,500; the limitation under Section 25B(b)(1)(B) is increased from $27,000 to $27,375; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $41,625 to $42,375.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $16,750 to $17,000; the limitation under Section 25B(b)(1)(B) is increased from $18,000 to $18,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $27,750 to $28,250.
The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,000.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $89,000 to $90,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) remains unchanged at $56,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $167,000 to $169,000.
The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $167,000 to $169,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $105,000 to $107,000.
The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under section 430(c)(2)(D) has been made is increased from $1,000,000 to $1,014,000.
Related Item: Revenue Procedure 2010-40 contains certain inflation adjusted tax items for tax year 2011.
Related Articles
- 5 Ways Retirement Tax Breaks Will Change in 2011 (money.usnews.com)
- IRS limits on 401k, catchup and IRA contributions unchanged in 2011 (oregonlive.com)
- Personal Finance Daily: Contribution limits on 401(k)s won’t rise in 2011 (marketwatch.com)
- The Basics of a Traditional IRA (turbotax.intuit.com)
- No inflation means no increase in IRA, 401(k) contribution limits next year (sfgate.com)
- Pension Insurance Limits Won’t Grow in 2011 (money.usnews.com)
Avoid a Compliance Examination of Your Retirement Plan by Completing Your 401(K) Compliance Check Questionnaire
By Stacie Clifford Kitts, CPA
Are you one of the lucky employers who will receive a letter from the IRS Employee Plans Compliance Unit (EPCU) ? Well, if you have a retirement plan and you are among the 1200 employers selected to complete the 401(k) Compliance Check Questionnaire you will receive your notice this week explaining how to complete it. The notice will direct you to a website asking you to respond to the following topics:
- Demographics
- Participation
- Employer and employee contributions
- Top-heavy and nondiscrimination testing
- Distributions and plan loans
- Other plan operations
- Automatic contribution arrangements
- Designated Roth features
- IRS voluntary compliance and correction programs
- Plan administration
And what if you don’t respond – Well look forward to further action including a possible audit of your plan by the EPCU.
For more information, you can check out the “Retirement News For Employers” spring 2010 newsletter. I have included a copy of it at my Client Resource Center just look under the file named Pension Audit Resources.
If you have questions about completing the form, you should consult with your plan administrator for assistance.
IRS Presents: Can You Get An Additional Tax Credit for Contributions To Your Retirement Plan?
If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit. Here are six things you need to know about the Retirement Savings Contributions Credit:
1. Income Limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and income of:
- Single, married filing separately, or qualifying widow(er), with income up to $27,750
- Head of Household, with income up to $41,625
- Married Filing Jointly, with income up to $55,500
2. Eligibility requirements To be eligible for the credit you must have been born before January 2, 1992, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.
3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.
4. Distributions When figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date – including extensions – for filing the return for the credit year.
5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.
6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.
For more information, review IRS Publication 590, Individual Retirement Arrangements (IRAs), Publication 4703, Retirement Savings Contributions Credit, and Form 8880. Publications and forms can be downloaded at IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).
Links:
- Form 8880, Credit for Qualified Retirement Savings Contributions (PDF 46K)
- Form 1040, U.S. Individual Income Tax Return (PDF 176K)
- Form 1040A, U.S. Individual Income Tax Return (PDF 136K)
- Publication 590, Individual Retirement Arrangements (IRAs) (PDF 449K)
- Tax Topic 610
Pension Plan – 2010 Limits
WASHINGTON — The Internal Revenue Service [yesterday] announced cost‑of‑living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2010.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost‑of‑living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
The limitations that are adjusted by reference to Section 415(d) will remain unchanged for 2010. This is because the cost-of-living index for the quarter ended September 30, 2009, is less than the cost-of-living index for the quarter ended September 30, 2008, and, following the procedures under the Social Security Act for adjusting benefit amounts, any decline in the applicable index cannot result in a reduced limitation. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will be $16,500 for 2010, which is the same amount as for 2009. This limitation affects elective deferrals to Section 401(k) plans and to the Federal Government’s Thrift Savings Plan, among other plans.
Effective January 1, 2010, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remains unchanged at $195,000. For participants who separated from service before January 1, 2010, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2009, by 1.0000.
The limitation for defined contribution plans under Section 415(c)(1)(A) remains unchanged for 2010 at $49,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2010 are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $16,500.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains unchanged at $245,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $160,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5‑year distribution period remains unchanged at $985,000, while the dollar amount used to determine the lengthening of the 5‑year distribution period remains unchanged at $195,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $110,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost‑of‑living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, remains unchanged at $360,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $16,500.
The compensation amounts under Section 1.61‑21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes remains unchanged at $95,000. The compensation amount under Section 1.61‑21(f)(5)(iii) remains unchanged at $195,000.
The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2010 are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $33,000 to $33,500; the limitation under Section 25B(b)(1)(B) remains unchanged at $36,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), remains unchanged at $55,500.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $24,750 to $25,125; the limitation under Section 25B(b)(1)(B) remains unchanged at $27,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), remains unchanged at $41,625.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $16,500 to $16,750; the limitation under Section 25B(b)(1)(B) remains unchanged at $18,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), remains unchanged at $27,750.
The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,000.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) remains unchanged at $89,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $55,000 to $56,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $166,000 to $167,000.
The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $166,000 to $167,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) remains unchanged at $105,000.
Learn How to Fix Retirement Plan Errors
By Stacie Clifford Kitts, CPA
For example – Eligible compensation is calculated incorrectly, a payroll run misses the employee contribution deferral, or you forget to timely remit participant contributions to the plan administrator.
When errors occur, its important to make sure you understand how to correct the problem by using the Voluntary Correction Program (“VCP”).
Here is a list of the top ten failures found in the VCP program:
1. Failure to amend the plan for tax law changes by the end of the period required by the law.
This results in a plan failing to operate in accordance with the current law because the plan document has not been amended to affect such change. Currently, the most common law changes that employers have failed to amend their plans for are GUST*, the good faith amendments for EGTRRA** and the Final and Temporary regulations under section 401(a)(9).
2. Failure to follow the plan’s definition of compensation for determining contributions.
Usually, certain types of compensation are excluded, such as bonuses, commissions, or overtime, or certain types of compensation are included where they should have been excluded. This failure can result in participants receiving allocations to their accounts that are either greater than or less than the amount they should have received.
3. Failure to include eligible employees in the plan or the failure to exclude ineligible employees from the plan.
This often occurs in a controlled group situation after a merger or acquisition. Where otherwise eligible employees are excluded, the excluded employees don’t receive an allocation of contributions to which they are entitled. Where ineligible employees are included in the plan, the employer has made additional contributions which it did not need to make to the plan.
4. Failure to satisfy plan loan provisions.
Loan failures often result from the plan sponsor’s failure to withhold loan payments. Where a plan fails to collect loan repayments from participants, the loan is considered defaulted and the participant should be taxed on the loan in the year of default.
5. Impermissible in-service withdrawals.
These requests relate to both defined benefit and contribution plans. The law provides that distributions to participants can be made upon certain events or the attainment of a specific age. This failure involves the circumstance where a distribution is made to a participant where the law or plan terms do not permit a distribution.
6. Failure to satisfy IRC 401(a)(9) minimum distribution rules.
The law requires that a participant receive a distribution when they attain a certain age. This failure involves the plan not making distributions to participants where they have attained the age for required distributions under the law. The law requires that the participant pay an excise tax of 50% on the amount of required distribution if it is not made timely. The Service will, in appropriate cases, waive the excise tax if the plan sponsor requests the waiver in appropriate situations.
7. Employer eligibility failure.
This occurs when an employer adopts a plan that it legally is not permitted to adopt. Common situations are where a government adopts a 401(k) plan or a tax-exempt entity (other than a 501(c)(3) entity or a public educational organization) adopts a 403(b) plan.
8. Failure to pass the ADP/ACP nondiscrimination tests under IRC 401(k) and 401(m).
This failure could result from the employer not using the correct compensation or where the employer excluded eligible employees who elected not to participate in the 401(k) plan.
9. Failure to properly provide the minimum top-heavy benefit or contribution under IRC 416 to non-key employees.
The law requires that if the account balances or accrued benefits of key employees (typically, owners) comprises a substantial portion of the assets of the plan (generally, 60% of plan assets), non-key employees are entitled to receive a minimum benefit or contribution.
10. Failure to satisfy the limits of IRC 415.
Once you have identified an error, you can refer to the following “Fix-It Guides” published by the IRS.
SARSEP Fix-It Guide(User-friendly version is available.)
SEP Fix-It Guide(User-friendly version is available.)
SIMPLE IRA Plan Fix-It Guide(User-friendly version is available.)
2009 Pension Plan Limits
Revenue Ruling 2009-02 provides the covered compensation tables under section 401 of the Code for the year 2009 for use in determining contributions to defined benefit plans and permitted disparity. Revenue Ruling 2009-02 will appear in IRB 2009-2, dated Jan. 12, 2009.
Withholding Adjustment Options for Pension Plans
WASHINGTON — As part of a wider outreach effort to educate taxpayers about the benefits they will receive under the American Recovery and Reinvestment Act, the Internal Revenue Service today released new withholding adjustment procedures for pension plans.
In February, the IRS issued revised withholding tables incorporating the Making Work Pay Tax Credit, one of the key provisions of the American Recovery and Reinvestment Act. That change resulted in more take home pay for more than 120 million American households and provided an immediate economic stimulus. The new procedure for pensions will make withholding more accurate for pension recipients.
While the newly announced procedures apply only to pension payments, the IRS is gearing up for a wider outreach campaign to educate pensioners and other taxpayers about the withholding tables and Recovery payments. The IRS will work with partner groups to provide taxpayers information to make sure they have the appropriate withholding for their situation. The IRS will also work on developing a variety of information products, including brochures, video and audio material to help educate taxpayers.
The change announced today will help some pensioners avoid a smaller refund next spring or even a balance due in limited situations. A wide variety of factors, such as outside jobs and other earned income, can affect how much, if any, withholding is needed by people receiving a pension to satisfy their annual tax liability. The optional adjustment procedure which may be used by those paying pensions is available in Notice 1036-P, Additional Withholding for Pensions for 2009. The on-line version of Publication 15-T, New Wage Withholding and Advance Earned Income Credit Payment Tables, will be updated and available next week.
Pension payors are not required to use this new procedure and may continue to use only the February 2009 withholding tables. For plans that adopt the new procedure, withholding on pension payments will be automatically adjusted with no action needed by pensioners. The IRS is also encouraging pension payors who choose to implement the new withholding adjustment procedures to contact retirees who previously submitted a Form W-4P, Withholding Certificate for Pension or Annuity Payments, requesting additional withholding after the February withholding tables were issued.
Those who should pay particular attention to their withholding include married couples with two incomes, individuals with multiple jobs, dependents, some Social Security recipients who work and workers who do not have valid Social Security Numbers. Depending on their personal situation, some people could have less withheld from their paychecks than they need or want. People who believe their current withholding is not appropriate for their personal situation can perform a quick check by using the IRS withholding calculator on IRS.gov. Any necessary adjustments can be made by filing a revised Form W-4, Employee’s Withholding Allowance Certificate, with their employer.
For more information visit IRS.gov. Taxpayers and payors can download forms and publications from IRS.gov or request a free copy by calling toll free 1-800-TAX-FORM (1-800-829-3676).
2008 Pension Plan Limits
IR-2007-171, Oct. 18, 2007
WASHINGTON — The Internal Revenue Service today announced cost of living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2008.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the Commissioner annually adjust these limits for cost of living increases.
Many of the pension plan limitations will change for 2008 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, for others, the limitation will remain unchanged. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $15,500. This limitation affects elective deferrals to Section 401(k) plans and to the Federal Government’s Thrift Savings Plan, among other plans.
Effective January 1, 2008, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $180,000 to $185,000. For participants who separated from service before January 1, 2008, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2007, by 1.0236.
The limitation for defined contribution plans under Section 415(c)(1)(A) is increased from $45,000 to $46,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). These dollar amounts and the adjusted amounts are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $15,500.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $225,000 to $230,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $145,000 to $150,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $915,000 to $935,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $180,000 to $185,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $100,000 to $105,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,000. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $335,000 to $345,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $500.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $10,500.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $15,500.
The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes remains unchanged at $90,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $180,000 to $185,000.
The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). These dollar amounts and the adjustments are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing a joint return is increased from $31,000 to $32,000; the limitation under Section 25B(b)(1)(B) is increased from $34,000 to $34,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), from $52,000 to $53,000.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $23,250 to $24,000; the limitation under Section 25B(b)(1)(B) is increased from $25,500 to $25,875; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), from $39,000 to $39,750.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $15,500 to $16,000; the limitation under Section 25B(b)(1)(B) is increased from $17,000 to $17,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), from $26,000 to $26,500.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $83,000 to $85,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $52,000 to $53,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $156,000 to $159,000.
The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for taxpayers filing a joint return or as a qualifying widow(er) is increased from $156,000 to $159,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $99,000 to $101,000.
Administrators of defined benefit or defined contribution plans that have received favorable determination letters should not request new determination letters solely because of yearly amendments to adjust maximum limitations in the plans.
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