Publication 560 - Retirement Plans For Small Business

•

The plan must be for the exclusive benefit of

based on earned income derived from business

Insurance companies.

employees or their beneficiaries. A qualified

profits.

•

Mutual funds.

plan can include coverage for a self-em-

ployed individual. A self-employed individual is

Defined Benefit Plan

Individually designed plan. If you prefer, you

treated as both an employer and an employee.

can set up an individually designed plan to meet

A defined benefit plan is any plan that is not a

As an employer, you can usually deduct,

specific needs. Although advance IRS approval

defined contribution plan. Contributions to a de-

subject to limits, contributions you make to a

is not required, you can apply for approval by

fined benefit plan are based on what is needed

qualified plan, including those made for your

paying a fee and requesting a determination

to provide definitely determinable benefits to

own retirement. The contributions (and earnings

letter. You may need professional help for this.

plan participants. Actuarial assumptions and

and gains on them) are generally tax free until

computations are required to figure these contri-

The following revenue procedure and an-

distributed by the plan.

butions. Generally, you will need continuing pro-

nouncement may help you decide whether to

fessional help to have a defined benefit plan.

apply for approval.

Forfeitures under a defined benefit plan can-

•

Revenue Procedure 2001 – 6 in Internal

Kinds of Plans

not be used to increase the benefits any em-

Revenue Bulletin 2001 – 1.

ployee would otherwise receive under the plan.

•

Forfeitures must be used instead to reduce em-

Announcement 2001 – 77 in Internal Reve-

There are two basic kinds of qualified plans —

ployer contributions.

nue Bulletin 2001 – 30.

defined contribution plans and defined benefit

plans — and different rules apply to each. You

can have more than one qualified plan, but your

Internal Revenue Bulletins are avail-

contributions to all the plans must not total more

Setting Up a

able on the IRS web site at

than the overall limits discussed under Contribu-

They are also available

tions and Employer Deduction, later.

Qualified Plan

at most IRS offices and at certain libraries.

Defined Contribution Plan

User fee. The fee mentioned earlier for re-

There are two basic steps in setting up a quali-

questing a determination letter does not apply to

fied plan. First you adopt a written plan. Then

A defined contribution plan provides an individ-

certain requests made after December 31,

you invest the plan assets.

ual account for each participant in the plan. It

2001, by employers who have 100 or fewer

You, the employer, are responsible for set-

provides benefits to a participant largely based

employees, at least one of whom is a non-highly

ting up and maintaining the plan.

on the amount contributed to that participant’s

compensated employee participating in the

account. Benefits are also affected by any in-

If you are self-employed, it is not nec-

plan. The fee does not apply to requests made

TIP

come, expenses, gains, losses, and forfeitures

essary to have employees besides

by the later of the following dates.

of other accounts that may be allocated to an

yourself to sponsor and set up a quali-

•

account. A defined contribution plan can be ei-

fied plan. If you have employees, see Partici-

The end of the 5th plan year the plan is in

ther a profit-sharing plan or a money purchase

pation, under Qualification Rules, later.

effect.

pension plan.

•

The end of any remedial amendment pe-

Set-up deadline. To take a deduction for con-

riod for the plan that begins within the first

Profit-sharing plan. A profit-sharing plan is a

tributions for a tax year, your plan must be set up

5 plan years.

plan for sharing your business profits with your

(adopted) by the last day of that year (December

employees. However, you do not have to make

The request cannot be made by the sponsor of a

31 for calendar year employers).

contributions out of net profits to have a

prototype or similar plan the sponsor intends to

profit-sharing plan.

market to participating employers.

Adopting a Written Plan

The plan does not need to provide a definite

formula for figuring the profits to be shared. But,

Investing Plan Assets

You must adopt a written plan. The plan can be

if there is no formula, there must be systematic

an IRS-approved master or prototype plan of-

and substantial contributions.

In setting up a qualified plan, you arrange how

fered by a sponsoring organization. Or it can be

the plan’s funds will be used to build its assets.

The plan must provide a definite formula for

an individually designed plan.

allocating the contribution among the partici-

•

You can establish a trust or custodial ac-

Written plan requirement. To qualify, the

pants and for distributing the accumulated funds

count to invest the funds.

plan you set up must be in writing and must be

to the employees after they reach a certain age,

•

communicated to your employees. The plan’s

after a fixed number of years, or upon certain

You, the trust, or the custodial account

provisions must be stated in the plan. It is not

other occurrences.

can buy an annuity contract from an insur-

sufficient for the plan to merely refer to a require-

In general, you can be more flexible in mak-

ance company. Life insurance can be in-

ment of the Internal Revenue Code.

ing contributions to a profit-sharing plan than to

cluded only if it is incidental to the

a money purchase pension plan (discussed

retirement benefits.

Master or prototype plans. Most qualified

next) or a defined benefit plan (discussed later).

•

You, the trust, or the custodial account

plans follow a standard form of plan (a master or

But the maximum deductible contribution may

prototype plan) approved by the IRS. Master

can buy face-amount certificates from an

be less under a profit-sharing plan (see Limits on

and prototype plans are plans made available by

insurance company. These certificates are

Contributions and Benefits, later).

plan providers for adoption by employers (in-

treated like annuity contracts.

Forfeitures under a profit-sharing plan can

cluding self-employed individuals). Under a

be allocated to the accounts of remaining partici-

master plan, a single trust or custodial account is

You set up a trust by a legal instrument (writ-

pants in a nondiscriminatory way or they can be

established, as part of the plan, for the joint use

ten document). You may need professional help

used to reduce your contributions.

of all adopting employers. Under a prototype

to do this.

plan, a separate trust or custodial account is

You can set up a custodial account with a

Money purchase pension plan. Contribu-

established for each employer.

bank, savings and loan association, credit

tions to a money purchase pension plan are

union, or other person who can act as the plan

fixed and are not based on your business profits.

Plan providers. The following organiza-

trustee.

For example, if the plan requires that contribu-

tions generally can provide IRS-approved

You do not need a trust or custodial account,

tions be 10% of the participants’ compensation

master or prototype plans.

although you can have one, to invest the plan’s

without regard to whether you have profits (or

•

Banks (including some savings and loan

funds in annuity contracts or face-amount certifi-

the self-employed person has earned income),

associations and federally insured credit

cates. If anyone other than a trustee holds them,

the plan is a money purchase pension plan. This

unions).

applies even though the compensation of a

however, the contracts or certificates must state

•

self-employed individual as a participant is

Trade or professional organizations.

they are not transferable.

Chapter 4 Qualified Plans

Page 13

Publication 560 - Retirement Plans For Small Business - 2001 Page 13

Related Articles

Related forms

Related Categories