Retirement Plans  for Small Business

(SEP, SIMPLE, and 
Qualified Plans)

taxmap/pubs/p560-000.htm#TXMP323127ee What's New for 2007(p1)

taxmap/pubs/p560-000.htm#TXMP4c6d29d0
Rollovers by nonspouse beneficiaries.(p1)

For distributions after December 31, 2006, nonspouse designated beneficiaries may be able to make direct trustee-to-trustee transfers from eligible retirement plans of deceased employees to IRAs set up to receive such transfers. The transfer will be treated as an eligible rollover distribution and the receiving IRA will be treated as an inherited IRA.

taxmap/pubs/p560-000.htm#TXMP6f27b690
Rollover of after-tax contributions.(p1)

For tax years beginning after December 31, 2006, participants in a qualified plan or a section 403(b) plan can roll over after-tax contributions to another qualified plan or section 403(b) plan provided the rollover is made through a direct trustee-to-trustee transfer and the receiving plan separately accounts for the rollover.

taxmap/pubs/p560-000.htm#TXMP408351f2
Retirement savings contributions credit.(p1)

The retirement savings contribution credit, originally set to terminate after December 31, 2006, was made permanent in the Pension Protection Act of 2006. For further information see Retirement savings contributions credit in Reminders.

taxmap/pubs/p560-000.htm#TXMP7ccec469
Reporting requirements.(p2)

Under the Pension Protection Act of 2006, the requirements for filing annual returns with respect to one-participant retirement plans have been modified to ensure that such plans (and any other plans of the employer) with total assets of $250,000 or less as of the close of the plan year beginning on or after January 1, 2007, will not have to file a return for that year upon meeting the five conditions under Reporting Requirements on page 19.

Plans beginning on or before December 31, 2006, for which a Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, was required to be filed will not need to continue filing the Form 5500-EZ unless their total plan assets (for one or more one-participant plans, separately or together) exceed $250,000 at the close of the plan year beginning on or after January 1, 2007.

taxmap/pubs/p560-000.htm#TXMP5f1caf23
Compensation limit.(p2)

For 2007, the maximum compensation used for figuring contributions and benefits increases to $225,000. This amount increases to $230,000 in 2008.

taxmap/pubs/p560-000.htm#TXMP38eae55c
Elective deferrals.(p2)

The limit on elective deferrals increases to $15,500 for tax years beginning in 2007 and remains the same for 2008. These new limits will apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), and deferred compensation plans of state or local governments and tax-exempt organizations. The contribution limits are subject to cost-of-living increases after 2008.

taxmap/pubs/p560-000.htm#TXMP752e835c
Catch-up contributions.(p2)

A plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit for 2007 and 2008 is $5,000 for each year. The limit is subject to cost-of-living increases after 2008. The catch-up contributions a participant can make for a year cannot exceed the lesser of the following amounts.

• The catch-up contribution limit.
• The excess of the participant's compensation over the elective deferrals that are not catch-up contributions.

taxmap/pubs/p560-000.htm#TXMP76de000f
SIMPLE plan salary reduction contributions.(p2)

The limit on salary reduction contributions is $10,500 for 2007 and 2008.

taxmap/pubs/p560-000.htm#TXMP4aa7ce1a
Catch-up contributions.(p2)

A SIMPLE plan can permit participants who are age 50 or over at the end of the calendar year to make catch-up contributions. The catch-up contribution limit for 2007 and 2008 is $2,500 for each year. The limit is subject to cost-of-living increases after 2008. The catch-up contributions a participant can make for a year cannot exceed the lesser of the following amounts.

• The catch-up contribution limit.
• The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions.

taxmap/pubs/p560-000.htm#TXMP5d71c581 What's New for 2008(p2)

taxmap/pubs/p560-000.htm#TXMP1833c23d
Rollovers to Roth IRA.(p2)

Beginning January 1, 2008, a distribution from a qualified retirement plan can be rolled over to a Roth IRA, subject to the restrictions that currently apply to a rollover from a traditional IRA to a Roth IRA. For additional information on rollovers, see Pub. 590, Individual Retirement Arrangements (IRAs).

taxmap/pubs/p560-000.htm#TXMP078adca7 Reminders(p2)

taxmap/pubs/p560-000.htm#TXMP38bffbd5
Qualified reservist distributions.(p2)

The additional 10% tax on early distributions does not apply to a qualified reservist distribution. A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. All or part of a qualified reservist distribution can be recontributed to an IRA.

taxmap/pubs/p560-000.htm#TXMP58849f0a
Qualified Roth contribution program.(p2)

For tax years beginning after December 31, 2005, your 401(k) plan may allow an employee to contribute to a qualified Roth contribution program. Under this program, an employee can designate all or a portion of his or her elective deferrals as after-tax Roth contributions.

taxmap/pubs/p560-000.htm#TXMP197d549b
Credit for startup costs.(p2)

You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or qualified plan. The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. You can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

You must have had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year. At least one participant must be a non-highly compensated employee. The employees generally cannot be substantially the same employees for whom contributions were made or benefits accrued under a plan of any of the following employers in the 3-tax-year period immediately before the first year to which the credit applies.

1. You.
2. A member of a controlled group that includes you.
3. A predecessor of (1) or (2).

The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year. However, the part of the general business credit attributable to the small employer pension plan startup cost credit cannot be carried back to a tax year beginning before January 1, 2002. You cannot deduct the part of the startup costs equal to the credit claimed for a tax year, but you can choose not to claim the allowable credit for a tax year.

To take the credit, get Form 8881, Credit for Small Employer Pension Plan Startup Costs, and the instructions.

taxmap/pubs/p560-000.htm#TXMP2994f56a
User fee.(p2)

The user fee for requesting a determination letter does not apply to certain requests made by employers who have 100 or fewer employees, at least one of whom is a non-highly compensated employee participating in the plan. See User fee under Setting Up a Qualified Plan in chapter 4.

taxmap/pubs/p560-000.htm#TXMP57b3eea0
Retirement savings contributions credit.(p2)

Retirement plan participants (including self-employed individuals) who make contributions to their plan may qualify for the retirement savings contributions credit. The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10% or as high as 50%, depending on the participant's adjusted gross income. The credit also depends on the participant's filing status. Form 8880, Credit for Qualified Retirement Savings Contributions, and the instructions explain how to claim the credit. In addition, the income limits for the credit are subject to indexing for inflation.

taxmap/pubs/p560-000.htm#TXMP28e5e9aa
Photographs of missing children.(p2)

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

taxmap/pubs/p560-000.htm#TXMP0b3b6e6e
Introduction

This publication discusses retirement plans you can set up and maintain for yourself and your employees. In this publication, "you" refers to the employer. See chapter 1 for the definition of the term employer and the definitions of other terms used in this publication. This publication covers the following types of retirement plans.

• SEP (simplified employee pension) plans.
• SIMPLE (savings incentive match plan for employees) plans.
• Qualified plans (also called H.R. 10 plans or Keogh plans when covering self-employed individuals), including 401(k) plans.

SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. You can deduct contributions you make to the plan for your employees. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. You can also deduct trustees' fees if contributions to the plan do not cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan.

Under a 401(k) plan, employees can have you contribute limited amounts of their before-tax (after-tax, in the case of a qualified Roth contribution program) pay to the plan. These amounts (and the earnings on them) are generally tax free until your employees receive distributions from the plan or, in the case of a qualified distribution from a designated Roth account, completely tax free.

taxmap/pubs/p560-000.htm#TXMP45dfcf57 What this publication covers.(p3)

This publication contains the information you need to understand the following topics.

• What type of plan to set up.
• How to set up a plan.
• How much you can contribute to a plan.
• How much of your contribution is deductible.
• How to treat certain distributions.
• How to report information about the plan to the IRS and your employees.

taxmap/pubs/p560-000.htm#TXMP382c1347 Basic features of retirement plans.(p3)

Basic features of SEP, SIMPLE, and qualified plans are discussed below. The key rules for SEP, SIMPLE, and qualified plans are outlined in Table 1.

taxmap/pubs/p560-000.htm#TXMP2d0104c3 SEP plans.(p3)

SEPs provide a simplified method for you to make contributions to a retirement plan for your employees. Instead of setting up a profit-sharing or money purchase plan with a trust, you can adopt a SEP agreement and make contributions directly to a traditional individual retirement account or a traditional individual retirement annuity (SEP-IRA) set up for each eligible employee.

taxmap/pubs/p560-000.htm#TXMP58cb64ec SIMPLE plans.(p3)

A SIMPLE plan can be set up by an employer who had 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year and who meets certain other requirements. Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective contributions. The two types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE 401(k) plan.

taxmap/pubs/p560-000.htm#TXMP742bfbe5 Qualified plans.(p3)

The qualified plan rules are more complex than the SEP plan and SIMPLE plan rules. However, there are advantages to qualified plans, such as increased flexibility in designing plans and increased contribution and deduction limits in some cases.

taxmap/pubs/p560-000.htm#TXMP23d743a6 What this publication does not cover.(p3)

Although the purpose of this publication is to provide general information about retirement plans you can set up for your employees, it does not contain all the rules and exceptions that apply to these plans. You may also need professional help and guidance.

Also, this publication does not cover all the rules that may be of interest to employees. For example, it does not cover the following topics.

• The comprehensive IRA rules an employee needs to know. These rules are covered in Pub. 590, Individual Retirement Arrangements (IRAs).
• The comprehensive rules that apply to distributions from retirement plans. These rules are covered in Pub. 575, Pension and Annuity Income.

taxmap/pubs/p560-000.htm#TXMP51236875 Comments and suggestions.(p4)

We welcome your comments about this publication and your suggestions for future editions.

You can write to us at the following address:

Internal Revenue Service 
TE/GE and Specialty Forms and Publications Branch 
SE:W:CAR:MP:T:T 
1111 Constitution Ave. NW, IR-6526 
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put "Publications Comment" on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.

taxmap/pubs/p560-000.htm#TXMP75ba833d Tax questions.(p4)

If you own a business and have questions about starting a pension plan, an existing plan, or filing Form 5500, Annual Return/Report of Employee Benefit Plan, visit www.irs.gov or call our Tax Exempt/Government Entities Customer Account Services at 1-877-829-5500. Assistance is available Monday through Friday. If you have questions about a traditional or Roth IRA or any individual income tax issues, you should call 1-800-829-1040. We cannot answer tax questions at the address listed above.

taxmap/pubs/p560-000.htm#TXMP0c15e625 Ordering forms and publications.(p4)

Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the National Distribution Center at the address shown under How To Get Tax Help in the back of this publication.

taxmap/pubs/p560-000.htm#TXMP2475702e
Note.All references to "section" in the following discussions are to sections of the Internal Revenue Code (which can be found at most libraries) unless otherwise indicated.

Previous Page:  Publication 556 - Examination of Returns, Appeal Rights, and Claims for Refund - How To Get Tax Help Next Page:  Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) - Definitions You Need To Know Use   to find additional occurrences of topic items.