Publication 560 - Retirement Plans For Small Business

1040 with a third party. If you check the “Yes”

starting a SEP, SIMPLE, or qualified plan. The

Catch-up contributions. For tax years be-

box above the signature area of your return, the

credit equals 50% of the cost to set up and

ginning after 2001, a plan can permit partici-

IRS can call the third party you designate to ask

administer the plan and educate employees

pants who are age 50 or over at the end of the

any questions that may arise during the

about the plan, up to a maximum of $500 per

plan year to also make catch-up contributions.

processing of your return. See your income tax

year for each of the first 3 years of the plan. You

The catch-up contribution limit for 2002 is

package for details.

can choose to start claiming the credit in the tax

$1,000. This limit increases by $1,000 each year

year before the tax year in which the plan be-

thereafter until it reaches $5,000 in 2006. The

New forms for determination letter requests.

comes effective.

limit is subject to cost-of-living increases after

The IRS has issued the following revised forms

2006. The catch-up contribution a participant

You must have had 100 or fewer employees

for filing requests for determination letters on

can make for a year cannot exceed the lesser of

who received at least $5,000 in compensation

qualified employee benefit plans.

the following amounts.

from you for the preceding year. At least one

•

participant must be a non-highly compensated

•

Form 5300, Application for Determination

The catch-up contribution limit.

employee. The employees generally cannot be

for Employee Benefit Plan (including col-

•

The excess of the participant’s compensa-

substantially the same employees for whom

lectively bargained plans formerly filed on

tion over the elective deferrals that are not

contributions were made or benefits accrued

Form 5303) (Rev. September 2001).

catch-up contributions.

under a plan of any of the following employers in

•

Schedule Q (Form 5300), Elective Deter-

the 3-tax-year period immediately before the

mination Requests (Rev. August 2001).

first year to which the credit applies.

SIMPLE plan salary reduction contributions.

•

The limit on salary reduction contributions to a

Form 5307, Application for Determination

1) You.

SIMPLE plan increases to $7,000 beginning in

for Adopters of Master or Proto-type or

2002 and then increases $1,000 each tax year

Volume Submitter Plans (Rev. September

2) A member of a controlled group that in-

thereafter until it reaches $10,000 in 2005. The

2001).

cludes you.

$10,000 figure is subject to adjustment after

•

Form 6406, Short Form Application for De-

3) A predecessor of (1) or (2).

2005 for cost-of-living increases.

termination for Minor Amendment of Em-

Catch-up contributions. For years begin-

The credit is part of the general business

ployee Benefit Plan (Rev. September

ning after 2001, a SIMPLE plan can permit par-

credit, which can be carried back or forward to

2001).

ticipants who are age 50 or over at the end of the

other tax years if it cannot be used in the current

year to make catch-up contributions. The

See chapter 6 for information on how to get

year. However, the part of the general business

catch-up contribution limit for 2002 is $500. This

forms.

credit attributable to the small employer pension

limit increases by $500 each year thereafter until

plan startup cost credit cannot be carried back to

New Form 5306 – A. The IRS has issued new

it reaches $2,500 in 2006. The limit is subject to

a tax year beginning before January 1, 2002.

Form 5306 – A, Application for Approval of Pro-

cost-of-living increases after 2006. The catch-up

You cannot deduct the part of the startup costs

totype Simplified Employee Pension (SEP) or

contributions a participant can make for a year

equal to the credit claimed for a tax year, but you

Savings Incentive Match Plan for Employees of

cannot exceed the lesser of the following

can choose not to claim the allowable credit for a

Small Employers (SIMPLE IRA Plan), to be

amounts.

tax year.

used by sponsors of prototype SEPs and proto-

•

The catch-up contribution limit.

type SIMPLE IRA plans to apply for opinion

Compensation limit. For years beginning af-

•

letters on these documents. The new form re-

ter December 31, 2001, the maximum compen-

The excess of the participant’s compensa-

places Form 5306 – SEP. See chapter 6 for in-

sation used for figuring contributions and

tion over the elective deferrals that are not

formation on how to get forms.

benefits increases to $200,000. This amount is

catch-up contributions.

subject to cost-of-living increases after 2002.

User fee. The user fee for requesting a deter-

Deduction limits. After 2001, certain deduc-

mination letter does not apply to certain re-

Important Changes

tion limits change as explained next.

quests made after December 31, 2001, by

Elective deferrals. For years beginning af-

employers who have 100 or fewer employees, at

for 2002

ter December 31, 2001, elective deferrals are

least one of whom is a non-highly compensated

not subject to the deduction limit that applies to

employee participating in the plan. See User fee

profit-sharing plans (discussed next). Also, elec-

Plan amendments to conform to the Eco-

under Setting Up a Qualified Plan in chapter 4.

tive deferrals are not taken into account when

nomic Growth and Tax Relief Reconciliation

figuring the amount you can deduct for employer

Limits on contributions and benefits. For

Act of 2001 (EGTRRA). Generally, master

contributions that are not elective deferrals.

years beginning after December 31, 2001, the

and prototype plans are amended by sponsoring

SEP and profit-sharing plans. For years

maximum annual benefit for a participant under

organizations. However, you may need to re-

beginning after December 31, 2001, your maxi-

a defined benefit plan increases to the lesser of

quest a determination letter regarding a master

mum deduction for contributions to a SEP or a

the following amounts.

or prototype plan you maintain that is a non-

profit-sharing plan increases to 25% of the com-

standardized plan if you make changes to adopt

•

100% of the participant’s average com-

pensation paid or accrued during the year to

some provisions of EGTRRA. Your request

pensation for his or her highest 3 consecu-

your eligible employees participating in the plan.

should be made on the appropriate form (gener-

tive calendar years.

Compensation for figuring the deduction for con-

ally Form 5300 or Form 5307). The request

•

tributions includes elective deferrals.

$160,000 (subject to cost-of-living in-

should be filed with Form 8717, User Fee for

Defined benefit plans. For plan years be-

creases after 2002).

Employee Plan Determination Letter Request,

ginning after December 31, 2001, your deduc-

and the applicable user fee. See User fee, later.

tion for contributions to a defined benefit plan

For years beginning after December 31, 2001,

Earned income of members of recognized

can be as much as the plan’s unfunded current

a defined contribution plan’s maximum annual

religious sects. For years beginning after De-

liability.

contributions and other additions (excluding

cember 31, 2001, earned income for retirement

earnings) to the account of a participant in-

Elective deferrals. The limit on elective defer-

plans includes amounts received for services by

creases to the lesser of the following amounts.

rals increases to $11,000 for tax years begin-

self-employed members of recognized religious

•

ning in 2002 and then increases $1,000 each tax

100% of the compensation actually paid to

sects opposed to social security benefits who

year thereafter until it reaches $15,000 in 2006.

the participant.

are exempt from self-employment tax.

These new limits will apply for participants in

•

$40,000 (subject to cost-of-living in-

Credit for startup costs. For costs paid or

SARSEPs, 401(k) plans (excluding SIMPLE

creases after 2002).

incurred in tax years beginning after December

plans), and deferred compensation plans of

31, 2001, for retirement plans established after

state or local governments and tax-exempt or-

For years beginning after December 31, 2001,

that date, you may be able to claim a tax credit

ganizations. The $15,000 figure is subject to

the maximum compensation that can be taken

for part of the ordinary and necessary costs of

cost-of-living increases after 2006.

into account for this limit increases to $200,000.

Page 2

Publication 560 - Retirement Plans For Small Business - 2001 Page 2

Related Articles

Related forms

Related Categories