Publication 560 - Retirement Plans For Small Business

Rate Table for Self-Employed

fit under the plan if the present value of the

A plan is top heavy for any plan year for

benefit is not greater than $5,000.

which the total value of accrued benefits or ac-

Column A

Column B

However, the distribution cannot be made

count balances of key employees is more than

If the plan contri-

Your

after the annuity starting date unless the partici-

60% of the total value of accrued benefits or

bution rate is:

rate is:

pant and the spouse (or surviving spouse of a

account balances of all employees. Additional

(shown as %)

(shown as decimal)

participant who died) consent in writing to the

requirements apply to a top-heavy plan primarily

distribution. If the present value is greater than

to provide minimum benefits or contributions for

1 . . . . . . . . . . . . . .

.009901

$5,000, the plan must have the written consent

non-key employees covered by the plan.

2 . . . . . . . . . . . . . .

.019608

of the participant and the spouse (or surviving

Most qualified plans, whether or not top

3 . . . . . . . . . . . . . .

.029126

4 . . . . . . . . . . . . . .

.038462

spouse) for any immediate distribution of the

heavy, must contain provisions that meet the

5 . . . . . . . . . . . . . .

.047619

benefit.

top-heavy requirements and will take effect in

6 . . . . . . . . . . . . . .

.056604

For distributions after December 31, 2001,

plan years in which the plans are top heavy.

7 . . . . . . . . . . . . . .

.065421

benefits attributable to rollover contributions and

These qualification requirements for top-heavy

8 . . . . . . . . . . . . . .

.074074

earnings on them can be ignored in determining

plans are explained in section 416 and its regu-

9 . . . . . . . . . . . . . .

.082569

the present value of these benefits.

lations.

10 . . . . . . . . . . . . .

.090909

SIMPLE 401(k) plan exception. The

Consolidation, merger, or transfer of assets

11 . . . . . . . . . . . . .

.099099

top-heavy plan requirements do not apply to

or liabilities. Your plan must provide that, in

12 . . . . . . . . . . . . .

.107143

SIMPLE 401(k) plans.

13 . . . . . . . . . . . . .

.115044

the case of any merger or consolidation with, or

14 . . . . . . . . . . . . .

.122807

transfer of assets or liabilities to, any other plan,

15* . . . . . . . . . . . . .

.130435*

each participant would (if the plan then termi-

16 . . . . . . . . . . . . .

.137931

nated) receive a benefit equal to or more than

17 . . . . . . . . . . . . .

.145299

the benefit he or she would have been entitled to

18 . . . . . . . . . . . . .

.152542

just before the merger, etc. (if the plan had then

19 . . . . . . . . . . . . .

.159664

terminated).

20 . . . . . . . . . . . . .

.166667

Benefits must not be assigned or alienated.

21 . . . . . . . . . . . . .

.173554

Your plan must provide that its benefits cannot

22 . . . . . . . . . . . . .

.180328

23 . . . . . . . . . . . . .

.186992

be assigned or alienated.

Table and

24 . . . . . . . . . . . . .

.193548

Exception for certain loans. A loan from

25* . . . . . . . . . . . . .

.200000*

the plan (not from a third party) to a participant or

Worksheets

*The deduction for annual employer contributions to a

beneficiary is not treated as an assignment or

SEP plan or a profit-sharing plan cannot be more than

alienation if the loan is secured by the

13.0435% of your net earnings (figured without

for the

deducting contributions for yourself) from the

participant’s accrued nonforfeitable benefit and

business that has the plan. If the plan is a money

is exempt from the tax on prohibited transac-

purchase pension plan, the deduction is limited to

tions under section 4975(d)(1) or would be ex-

20% of your net earnings.

Self-Employed

empt if the participant were a disqualified

person. A disqualified person is defined earlier

Example. You are a sole proprietor and

under Prohibited Transactions.

As discussed in chapters 2 and 4, if you are

have employees. If your plan’s contribution rate

Exception for qualified domestic relations

self-employed, you must use the following rate

is 10% of a participant’s compensation, your

order (QDRO). Compliance with a QDRO

table or rate worksheet and deduction work-

rate is 0.090909. Enter this rate in step 1 of the

does not result in a prohibited assignment or

sheet to figure your deduction for contributions

Deduction Worksheet for Self-Employed.

alienation of benefits. QDRO is defined in Publi-

you made for yourself to a SEP-IRA or qualified

Rate worksheet for self-employed. If your

cation 575.

plan.

plan’s contribution rate is not a whole percent-

Payments to an alternate payee under a

First, use either the rate table or rate work-

age (for example, 10

%), you cannot use the

QDRO before the participant attains age 59

sheet to find your reduced contribution rate.

Rate Table for Self-Employed. Use the following

are not subject to the 10% additional tax that

Then complete the deduction worksheet to fig-

worksheet instead.

would otherwise apply under certain circum-

ure your deduction for contributions.

stances. The interest of the alternate payee is

The table and the worksheets that fol-

Rate Worksheet for Self-Employed

not taken into account in determining whether a

low apply only to unincorporated em-

distribution to the participant is a lump-sum dis-

ployers who have only one defined

1) Plan contribution rate as a decimal

CAUTION

tribution. Benefits distributed to an alternate

(for example, 10

% = 0.105) . . . .

contribution plan, such as a profit-sharing plan.

payee under a QDRO can be rolled over tax free

2) Rate in line 1 plus 1 (for example,

A SEP plan is treated as a profit-sharing plan.

to an individual retirement account or to an indi-

0.105 + 1 = 1.105) . . . . . . . . . . .

vidual retirement annuity.

3) Self-employed rate as a decimal

Rate table for self-employed. If your plan’s

rounded to at least 3 decimal places

contribution rate is a whole percentage (for ex-

No benefit reduction for social security in-

(line 1 ÷ line 2) . . . . . . . . . . . . . .

ample, 12% rather than 12

%), you can use the

creases. Your plan must not permit a benefit

following table to find your reduced contribution

reduction for a post-separation increase in the

Figuring your deduction. Now that you have

rate. Otherwise, use the rate worksheet pro-

social security benefit level or wage base for any

your self-employed rate from either the rate ta-

vided later.

participant or beneficiary who is receiving bene-

ble or rate worksheet, you can figure your maxi-

First, find your plan contribution rate (the

fits under your plan, or who is separated from

mum deduction for contributions for yourself by

contribution rate stated in your plan) in Column

service and has nonforfeitable rights to benefits.

completing the following worksheet.

A of the table. Then read across to the rate

This rule also applies to plans supplementing

under Column B. Enter the rate from Column B

the benefits provided by other federal or state

Community property laws. If you reside in

in step 1 of the Deduction Worksheet for

laws.

a community property state and you are married

Self-Employed.

and filing a separate return, disregard commu-

Elective deferrals must be limited. If your

nity property laws for line 2 of the following

plan provides for elective deferrals, it must limit

worksheet. Enter on line 2 the total net profit you

those deferrals to the amount in effect for that

actually earned.

particular year. See Limit on Elective Deferrals,

earlier.

Top-heavy plan requirements. A top-heavy

plan is one that mainly favors partners, sole

proprietors, and other key employees.

Chapter 5 Table and Worksheets for the Self-Employed

Page 21

Publication 560 - Retirement Plans For Small Business - 2001 Page 21

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