Publication 560 - Retirement Plans For Small Business

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5) Any direct or indirect owner of 50% or

Amount involved. The amount involved in a

The plan does not cover a business that is

prohibited transaction is the greater of the fol-

a member of an affiliated service group, a

more of any of the following.

lowing amounts.

controlled group of corporations, or a

a) The combined voting power of all clas-

group of businesses under common con-

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The money and fair market value of any

ses of stock entitled to vote, or the total

trol.

property given.

value of shares of all classes of stock of

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The plan does not cover a business that

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a corporation that is an employer or

The money and fair market value of any

leases employees.

employee organization described in (3)

property received.

or (4).

One-participant plan. Your plan is a

If services are performed, the amount in-

b) The capital interest or profits interest of

one-participant plan if, as of the first day of the

volved is any excess compensation given or

a partnership that is an employer or

plan year for which the form is filed, either of the

received.

employee organization described in (3)

following is true.

or (4).

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Taxable period. The taxable period starts on

The plan covers only you (or you and your

c) The beneficial interest of a trust or unin-

the transaction date and ends on the earliest of

spouse) and you (or you and your spouse)

corporated enterprise that is an em-

the following days.

own the entire business (whether incorpo-

ployer or an employee organization

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rated or unincorporated).

The day the IRS mails a notice of defi-

described in (3) or (4).

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ciency for the tax.

The plan covers only one or more partners

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(or partner(s) and spouse(s)) in a business

6) A member of the family of any individual

The day the IRS assesses the tax.

partnership.

described in (1), (2), (3), or (5). (A member

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The day the correction of the transaction is

of a family is the spouse, ancestor, lineal

completed.

Form 5500 – EZ not required. You do not

descendant, or any spouse of a lineal de-

have to file Form 5500 – EZ (or Form 5500) if you

scendant.)

meet the conditions mentioned above and either

Payment of the 15% tax. Pay the 15% tax

7) A corporation, partnership, trust, or estate

of the following conditions.

with Form 5330.

of which (or in which) any direct or indirect

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You have a one-participant plan that had

owner described in (1) through (5) holds

Correcting a prohibited transaction. If you

total plan assets of $100,000 or less at the

50% or more of any of the following.

are a disqualified person who participated in a

end of every plan year beginning after De-

prohibited transaction, you can avoid the 100%

cember 31, 1993.

a) The combined voting power of all clas-

tax by correcting the transaction as soon as

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ses of stock entitled to vote or the total

You have two or more one-participant

possible. Correcting the transaction means un-

value of shares of all classes of stock of

plans that together had total plan assets of

doing it as much as you can without putting the

a corporation.

$100,000 or less at the end of every plan

plan in a worse financial position than if you had

year beginning after December 31, 1993.

b) The capital interest or profits interest of

acted under the highest fiduciary standards.

a partnership.

Correction period. If the prohibited trans-

Example. You are a sole proprietor and

c) The beneficial interest of a trust or es-

action is not corrected during the taxable period,

your plan meets all the conditions for filing Form

tate.

you usually have an additional 90 days after the

5500 – EZ. The total plan assets are more than

day the IRS mails a notice of deficiency for the

$100,000. You should file Form 5500 – EZ.

8) An officer, director (or an individual having

100% tax to correct the transaction. This correc-

powers or responsibilities similar to those

tion period (the taxable period plus the 90 days)

All one-participant plans must file Form

of officers or directors), a 10% or more

can be extended if either of the following occurs.

5500 – EZ for their final plan year, even

shareholder, or highly compensated em-

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if the total plan assets have always

CAUTION

The IRS grants reasonable time needed to

ployee (earning 10% or more of the yearly

been less than $100,000. The final plan year is

correct the transaction.

wages of an employer) of a person de-

the year in which distribution of all plan assets is

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scribed in (3), (4), (5), or (7).

You petition the Tax Court.

completed.

9) A 10% or more (in capital or profits) part-

If you correct the transaction within this period,

ner or joint venturer of a person described

the IRS will abate, credit, or refund the 100%

Form 5500. If you do not meet the require-

in (3), (4), (5), or (7).

tax.

ments for filing Form 5500 – EZ, you must file

Form 5500.

10) Any disqualified person, as described in

(1) through (9) above, who is a disqualified

Schedule A (Form 5500). If any plan bene-

person with respect to any plan to which a

fits are provided by an insurance company, in-

Reporting

section 501(c)(22) trust is permitted to

surance service, or similar organization,

make payments under section 4223 of

complete and attach Schedule A (Form 5500),

Requirements

ERISA.

to Form 5500. Schedule A is not needed for a

plan that covers only one of the following.

You may have to file an annual return/report

Tax on Prohibited

form by the last day of the 7th month after the

1) An individual or an individual and spouse

plan year ends. See the following list of forms to

Transactions

who wholly own the trade or business,

choose the right form for your plan.

whether incorporated or unincorporated.

The initial tax on a prohibited transaction is 15%

2) Partners in a partnership or the partners

Form 5500 – EZ. You can use Form 5500 – EZ

of the amount involved for each year (or part of a

and their spouses.

if the plan meets all the following conditions.

year) in the taxable period. If the transaction is

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not corrected within the taxable period, an addi-

The plan is a one-participant plan, defined

Do not file a Schedule A (Form 5500)

tional tax of 100% of the amount involved is

below.

with a Form 5500 – EZ.

imposed. For information on correcting the

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CAUTION

The plan meets the minimum coverage re-

transaction, see Correcting a prohibited transac-

quirements of section 410(b) without being

tion, later.

combined with any other plan you may

Schedule B (Form 5500). For most defined

Both taxes are payable by any disqualified

have that covers other employees of your

benefit plans, complete and attach Schedule B

person who participated in the transaction (other

business.

(Form 5500), Actuarial Information, to Form

than a fiduciary acting only as such). If more

5500 or Form 5500 – EZ.

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than one person takes part in the transaction,

The plan only provides benefits for you,

each person can be jointly and severally liable

you and your spouse, or one or more part-

Schedule P (Form 5500). This schedule is

for the entire tax.

ners and their spouses.

used by a fiduciary (trustee or custodian) of a

Chapter 4 Qualified Plans

Page 19

Publication 560 - Retirement Plans For Small Business - 2001 Page 19

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