Publication 560 - Retirement Plans For Small Business

tion is more than your earned income from the

your 401(k) plan. For example, the plan might

Excess withdrawn by April 15. If the em-

trade or business for which the plan is set up, the

provide that you will contribute 50 cents for each

ployee takes out the excess deferral by April 15,

difference is not subject to this excise tax. See

dollar your participating employees choose to

2002, it is not reported again by including it in the

Minimum Funding Requirement, earlier.

defer under your 401(k) plan.

employee’s gross income for 2002. However,

any income earned on the excess deferral taken

Exception. If contributions to one or more de-

Nonelective contributions. You can, under a

out is taxable in the tax year in which it is taken

fined contribution plans are not deductible only

qualified 401(k) plan, also make contributions

out. The distribution is not subject to the addi-

(other than matching contributions) for your par-

because they are more than the combined plan

tional 10% tax on early distributions.

ticipating employees without giving them the

deduction limit, the 10% excise tax does not

If the employee takes out part of the excess

choice to take cash instead.

apply to the extent the difference is not more

deferral and the income on it, the distribution is

than the greater of the following amounts.

treated as made proportionately from the excess

Employee compensation limit. No more

•

deferral and the income.

6% of the participants’ compensation for

than $170,000 ($200,000 for 2002) of the

Even if the employee takes out the excess

the year.

employee’s compensation can be taken into ac-

deferral by April 15, the amount is considered

•

count when figuring contributions.

The sum of employer matching contribu-

contributed for satisfying (or not satisfying) the

tions and the elective deferrals to a 401(k)

nondiscrimination requirements of the plan. See

SIMPLE 401(k) plan. If you had 100 or fewer

plan.

Contributions or benefits must not discriminate,

employees who earned $5,000 or more in com-

later, under Qualification Rules.

pensation during the preceding year, you may

Reporting the tax. You must report the tax on

be able to set up a SIMPLE 401(k) plan. A

your nondeductible contributions on Form 5330.

SIMPLE 401(k) plan is not subject to the nondis-

Excess not withdrawn by April 15. If the

Form 5330 includes a computation of the tax.

crimination and top-heavy plan requirements

employee does not take out the excess deferral

See the separate instructions for completing the

discussed later under Qualification Rules. For

by April 15, 2002, the excess, though taxable in

form.

details about SIMPLE 401(k) plans, see

2001, is not included in the employee’s cost

SIMPLE 401(k) Plan in chapter 3.

basis in figuring the taxable amount of any even-

tual benefits or distributions under the plan. In

Limit on Elective Deferrals

effect, an excess deferral left in the plan is taxed

Elective Deferrals

twice, once when contributed and again when

distributed. Also, if the entire deferral is allowed

There is a limit on the amount an employee can

(401(k) Plans)

to stay in the plan, the plan may not be a quali-

defer each year under these plans. This limit

fied plan.

applies without regard to community property

Your qualified plan can include a cash or de-

laws. Your plan must provide that your employ-

ferred arrangement (401(k) plan) under which

ees cannot defer more than the limit that applies

Reporting corrective distributions on Form

participants can choose to have you contribute

for a particular year. For 2001, the basic limit on

1099 – R. Report corrective distributions of ex-

part of their before-tax compensation to the plan

elective deferrals is $10,500. (For 2002, this limit

cess deferrals (including any earnings) on Form

rather than receive the compensation in cash.

increases to $11,000 and participants who are

1099 – R. For specific information about report-

(As a participant in the plan, you can contribute

age 50 or over can make a catch-up contribution

ing corrective distributions, see the 2001 In-

part of your before-tax net earnings from the

of up to $1,000.) If, in conjunction with other

structions for Forms 1099, 1098, 5498, and

business.) This contribution is called an “elective

plans, the deferral limit is exceeded, the differ-

W – 2G.

deferral” because participants choose (elect) to

ence is included in the employee’s gross in-

set aside the money, and they defer the tax on

come.

Tax on excess contributions of highly com-

the money until it is distributed to them.

pensated employees. The law provides tests

Self-employed individual’s matching contri-

In general, a qualified plan can include a

to detect discrimination in a plan. If tests, such

butions. Matching contributions to a 401(k)

401(k) plan only if the qualified plan is one of the

as the actual deferral percentage test (ADP test)

plan on behalf of a self-employed individual are

following plans.

(see section 401(k)(3)) and the actual contribu-

not subject to the limit on elective deferrals.

•

tion percentage test (ACP test) (see section

A profit-sharing plan.

These matching contributions receive the same

401(m)(2)), show that contributions for highly

•

treatment as the matching contributions for

A money purchase pension plan in exis-

compensated employees are more than the test

other employees.

tence on June 27, 1974, that included a

limits for these contributions, the employer may

salary reduction arrangement on that date.

have to pay a 10% excise tax. Report the tax on

Treatment of contributions. Your contribu-

Form 5330.

tions to a 401(k) plan are generally deductible by

The tax for the year is 10% of the excess

Automatic enrollment in a 401(k) plan. Your

you and tax free to participating employees until

contributions for the plan year ending in your tax

401(k) plan can have an automatic enrollment

distributed from the plan. Participating employ-

year. Excess contributions are elective defer-

feature. Under this feature, you can automati-

ees have a nonforfeitable right to the accrued

rals, employee contributions, or employer

cally reduce an employee’s pay by a fixed per-

benefit resulting from these contributions. Defer-

matching or nonelective contributions that are

centage and contribute that amount to the

rals are included in wages for social security,

more than the amount permitted under the ADP

401(k) plan on his or her behalf unless the em-

Medicare, and federal unemployment (FUTA)

test or the ACP test.

ployee affirmatively chooses not to have his or

tax.

her pay reduced or chooses to have it reduced

See Notice 98 – 1 for further guidance and

by a different percentage. These contributions

Reporting on Form W – 2. You must report

transition relief relating to recent statutory

qualify as elective deferrals. For more informa-

the total deferred in boxes 3, 5, and 12 of your

amendments to the nondiscrimination rules

tion about 401(k) plans with an automatic enroll-

employee’s Form W – 2. See the Form W – 2

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

ment feature, see Revenue Ruling 2000 – 8 in

instructions.

is in Cumulative Bulletin 1998 – 1.

Internal Revenue Bulletin 2000 – 7.

Treatment of

Partnership. A partnership can have a 401(k)

Excess Deferrals

plan.

Distributions

If the total of an employee’s deferrals is more

Restriction on conditions of participation.

than the limit for 2001, the employee can have

Amounts paid to plan participants from a quali-

The plan cannot require, as a condition of par-

the difference (called an excess deferral) paid

fied plan are called distributions. Distributions

ticipation, that an employee complete more than

out of any of the plans that permit these distribu-

may be nonperiodic, such as lump-sum distribu-

1 year of service.

tions. He or she must notify the plan by March 1,

tions, or periodic, such as annuity payments.

Matching contributions. If your plan permits,

2002, of the amount to be paid from each plan.

Also, certain loans may be treated as distribu-

you can make matching contributions for an

The plan must then pay the employee that

tions. See Loans Treated as Distributions in

employee who makes an elective deferral to

amount by April 15, 2002.

Publication 575.

Page 16

Chapter 4 Qualified Plans

Publication 560 - Retirement Plans For Small Business - 2001 Page 16

Related Articles

Related forms

Related Categories