Publication 560 - Retirement Plans For Small Business

Other plan requirements. For information on

When Contributions

For 2002, the percentage in (1) increases to

100% and the amount in (2) increases to

other important plan requirements, see Qualifi-

Are Considered Made

$40,000. Also for 2002, the maximum compen-

cation Rules, later.

sation that can be taken into account for this limit

You generally apply your plan contributions to

is $200,000.

the year in which you make them. But you can

apply them to the previous year if all the follow-

Excess annual additions. Excess annual ad-

Minimum Funding

ing requirements are met.

ditions are the amounts contributed that are

more than the limits discussed previously. A

Requirement

1) You make them by the due date of your

plan can correct excess annual additions

tax return for the previous year (plus ex-

caused by any of the following actions.

tensions).

In general, if your plan is a money purchase

•

A reasonable error in estimating a

pension plan or a defined benefit plan, you must

2) The plan was established by the end of the

participant’s compensation.

actually pay enough into the plan to satisfy the

previous year.

•

minimum funding standard for each year. Deter-

A reasonable error in determining the

3) The plan treats the contributions as though

elective deferrals permitted (discussed

mining the amount needed to satisfy the mini-

it had received them on the last day of the

later).

mum funding standard is complicated. The

previous year.

•

amount is based on what should be contributed

Forfeitures allocated to participants’ ac-

4) You do either of the following.

under the plan formula using actuarial assump-

counts.

tions and formulas. For information on this fund-

a) You specify in writing to the plan ad-

ing requirement, see section 412 and its

Correcting excess annual additions. A

ministrator or trustee that the contribu-

regulations.

plan can provide for the correction of excess

tions apply to the previous year.

annual additions in the following ways.

b) You deduct the contributions on your

Quarterly installments of required contribu-

tax return for the previous year. (A part-

1) Allocate and reallocate the excess to other

tions. If your plan is a defined benefit plan

nership shows contributions for part-

participants in the plan to the extent of

subject to the minimum funding requirements,

ners on Schedule K (Form 1065),

their unused limits for the year.

you must make quarterly installment payments

Partners’ Shares of Income, Credits,

2) If these limits are exceeded, do one of the

of the required contributions. If you do not pay

Deductions, etc.)

following.

the full installments timely, you may have to pay

interest on any underpayment for the period of

a) Hold the excess in a separate account

Employer’s promissory note. Your promis-

the underpayment.

and allocate (and reallocate) it to par-

sory note made out to the plan is not a payment

ticipants’ accounts in the following year

Due dates. The due dates for the install-

that qualifies for the deduction. Also, issuing this

(or years) before making any contribu-

ments are 15 days after the end of each quarter.

note is a prohibited transaction subject to tax.

tions for that year (see also Carryover

See Prohibited Transactions, later.

For a calendar year plan, the installments are

of Excess Contributions, later).

due April 15, July 15, October 15, and January

Employer Contributions

15 (of the following year).

b) Return employee after-tax contributions

or elective deferrals (see Employee

Installment percentage. Each quarterly in-

There are certain limits on the contributions and

Contributions and Elective Deferrals

stallment must be 25% of the required annual

other annual additions you can make each year

(401(k) Plans), later).

payment.

for plan participants. There are also limits on the

amount you can deduct. See Deduction Limits,

Extended period for making contributions.

Tax treatment of returned contributions or

later.

Additional contributions required to satisfy the

distributed elective deferrals. The return of

minimum funding requirement for a plan year

employee after-tax contributions or the distribu-

will be considered timely if made by 8

months

tion of elective deferrals to correct excess an-

Limits on Contributions

after the end of that year.

nual additions is considered a corrective

and Benefits

payment rather than a distribution of accrued

benefits. The penalties for early distributions

Your plan must provide that contributions or

and excess distributions do not apply.

benefits cannot exceed certain limits. The limits

Contributions

These disbursements are not wages report-

differ depending on whether your plan is a de-

able on Form W – 2. You must report them on a

fined contribution plan or a defined benefit plan.

separate Form 1099 – R as follows.

A qualified plan is generally funded by your

Defined benefit plan. For 2001, the annual

•

contributions. However, employees participating

Report the total distribution, including em-

benefit for a participant under a defined benefit

in the plan may be permitted to make contribu-

ployee contributions, in box 1. If the distri-

plan cannot exceed the lesser of the following

tions.

bution includes any gain from the

amounts.

contribution, report the gain in box 2a. Re-

port the return of employee contributions

1) 100% of the participant’s average compen-

Contributions deadline. You can make de-

in box 5. Enter Code E in box 7.

sation for his or her highest 3 consecutive

ductible contributions for a tax year up to the due

•

calendar years.

date of your return (plus extensions) for that

Report a distribution of an elective deferral

in boxes 1 and 2a. Include any gain from

year.

2) $140,000 ($160,000 for 2002).

the contribution. Leave box 5 blank and

enter Code E in box 7.

Defined contribution plan. For 2001, a de-

Self-employed individual. You can make

fined contribution plan’s annual contributions

contributions on behalf of yourself only if you

Participants must report these amounts on the

and other additions (excluding earnings) to the

have net earnings (compensation) from self-em-

line for Total pensions and annuities on Form

account of a participant cannot exceed the

ployment in the trade or business for which the

1040 or Form 1040A, U.S. Individual Income

lesser of the following amounts.

plan was set up. Your net earnings must be from

Tax Return.

your personal services, not from your invest-

1) 25% of the compensation actually paid to

ments. If you have a net loss from self-employ-

Employee Contributions

the participant.

ment, you cannot make contributions for

2) $35,000.

yourself for the year, even if you can contribute

Participants may be permitted to make nonde-

for common-law employees based on their com-

The maximum compensation that can be taken

ductible contributions to a plan in addition to

pensation.

into account for this limit is $170,000.

your contributions. Even though these em-

Page 14

Chapter 4 Qualified Plans

Publication 560 - Retirement Plans For Small Business - 2001 Page 14

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