Publication 560 - Retirement Plans For Small Business

ployee contributions are not deductible, the

years beginning after December 31, 2001, your

Where To Deduct

earnings on them are tax free until distributed in

deduction can be as much as the plan’s un-

Contributions

later years. Also, these contributions must sat-

funded current liability.

isfy the nondiscrimination test of section 401(m).

Deduct the contributions you make for your

See Notice 98 – 1 for further guidance and tran-

Deduction limit for multiple plans. If you

common-law employees on Schedule C (Form

sition relief relating to recent statutory amend-

contribute to both a defined contribution plan

1040), on Schedule F (Form 1040), on Form

ments to the nondiscrimination rules under

and a defined benefit plan and at least one

1065, U.S. Return of Partnership Income, Form

sections 401(k) and 401(m). Notice 98 – 1 is in

employee is covered by both plans, your deduc-

1120, U.S. Corporation Income Tax Return, on

Cumulative Bulletin 1998 – 1.

tion for those contributions is limited. Your de-

Form 1120 – A, U.S. Short – Form Corporation

duction cannot be more than the greater of the

Income Tax Return, or on Form 1120S, U.S.

following amounts.

Income Tax Return for an S Corporation, which-

•

ever applies.

Employer Deduction

25% of the compensation paid (or ac-

You take the deduction for contributions for

crued) during the year to your eligible em-

yourself on line 29 of Form 1040.

ployees participating in the plan. You must

You can usually deduct, subject to limits, contri-

If you are a partner, the partnership passes

reduce this 25% limit in figuring the deduc-

butions you make to a qualified plan, including

its deduction to you for the contributions it made

tion for contributions you make for your

those made for your own retirement. The contri-

for you. The partnership will report these contri-

own account.

butions (and earnings and gains on them) are

butions on Schedule K – 1 (Form 1065). You

•

generally tax free until distributed by the plan.

Your contributions to the defined benefit

deduct them on line 29 of Form 1040.

plans, but not more than the amount

Deduction Limits

needed to meet the year’s minimum fund-

Carryover of

ing standard for any of these plans.

Excess Contributions

The deduction limit for your contributions to a

qualified plan depends on the kind of plan you

For this rule, a SEP is treated as a

If you contribute more to the plans than you can

have.

separate profit-sharing (defined contri-

deduct for the year, you can carry over and

bution) plan.

CAUTION

deduct the difference in later years, combined

Defined contribution plans. The deduction

with your contributions for those years. Your

limit for a defined contribution plan depends on

combined deduction in a later year is limited to

whether it is a profit-sharing plan or a money

Deduction Limit for

25% of the participating employees’ compensa-

purchase pension plan.

Self-Employed Individuals

tion for that year. The limit is 15% (25% for years

Profit-sharing plan. Your deduction for

beginning after December 31, 2001) if you have

contributions to a profit-sharing plan cannot be

If you make contributions for yourself, you need

only profit-sharing plans (including SEPs). How-

more than 15% (25% for years beginning after

to make a special computation to figure your

ever, these percentage limits must be reduced

December 31, 2001) of the compensation paid

maximum deduction for these contributions.

to figure your maximum deduction for contribu-

(or accrued) during the year to your eligible

Compensation is your net earnings from

tions you make for yourself. See Deduction Limit

employees participating in the plan. You must

self-employment, defined in chapter 1. This defi-

for Self-Employed Individuals, earlier. The

reduce this limit in figuring the deduction for

nition takes into account both the following

amount you carry over and deduct may be sub-

contributions you make for your own account.

items.

ject to the excise tax discussed next.

See Deduction Limit for Self-Employed Individu-

•

Table 4 – 1 illustrates the carryover of excess

The deduction for one-half of your self-em-

als, later.

contributions to a profit-sharing plan.

ployment tax.

Money purchase pension plan. Your de-

•

The deduction for contributions on your

Excise Tax for

duction for contributions to a money purchase

behalf to the plan.

pension plan is generally limited to 25% of the

Nondeductible (Excess)

compensation paid (or accrued) during the year

Contributions

The deduction for your own contributions and

to your eligible employees. You must reduce this

your net earnings depend on each other. For this

25% limit in figuring the deduction for contribu-

If you contribute more than your deduction limit

reason, you determine the deduction for your

tions you make for yourself, as discussed later.

to a retirement plan, you have made nondeduct-

own contributions indirectly by reducing the con-

ible contributions and you may be liable for an

tribution rate called for in your plan. To do this,

Defined benefit plans. The deduction for

excise tax. In general, a 10% excise tax applies

use either the Rate Table for Self-Employed or

contributions to a defined benefit plan is based

to nondeductible contributions made to qualified

the Rate Worksheet for Self-Employed in chap-

on actuarial assumptions and computations.

pension, profit-sharing, stock bonus, or annuity

ter 5. Then figure your maximum deduction by

Consequently, an actuary must figure your de-

plans and to SEPs.

using the Deduction Worksheet for Self-Em-

duction limit.

ployed in chapter 5.

In figuring the deduction for contribu-

Special rule for self-employed individuals.

tions, you cannot take into account any

Multiple plans. The deduction limit for multi-

The 10% excise tax does not apply to any contri-

contributions or benefits that are more

ple plans (discussed earlier) also applies to con-

bution made to meet the minimum funding re-

CAUTION

than the limits discussed earlier under Limits on

tributions you make as an employer on your own

quirements in a money purchase pension plan

Contributions and Benefits. However, for plan

behalf.

or a defined benefit plan. Even if that contribu-

Table 4-1. Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000’s omitted)

Participants’

share of

Excess

required

Deductible

Excess

Total

contribution

limit for current

contribution

deduction

carryover

Participants’

(10% of annual

year (15% of

carryover

including

available at

Year

compensation

profit)

compensation)

Contribution

used*

carryovers

end of year

1998

$1,000

$100

$150

$100

1999

400

125

2000

500

2001

600

100

* There were no carryovers from years before 1998.

Chapter 4 Qualified Plans

Page 15

Publication 560 - Retirement Plans For Small Business - 2001 Page 15

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