Previous Page: Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) - SIMPLE 401(k) Plan Next Page: Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) - Setting Up a Qualified Plan Use   to find additional occurrences of topic items.

taxmap/pubs/p560-011.htm#TXMP5be851aa Chapter 4 Qualified Plans(p11)

Qualified Plan

Useful items

You may want to see:

Qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H.R.10 plans. A sole proprietor or a partnership can set up a qualified plan. A common-law employee or a partner cannot set up a qualified plan. The plans described here can also be set up and maintained by employers that are corporations. All the rules discussed here apply to corporations except where specifically limited to the self-employed.

The plan must be for the exclusive benefit of employees or their beneficiaries. A qualified plan can include coverage for a self-employed individual.

As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

taxmap/pubs/p560-011.htm#TXMP35b34772 Kinds of Plans(p12)

Plans, Kinds

There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction, later.

taxmap/pubs/p560-011.htm#TXMP3dc5e25d Defined Contribution Plan(p12)

Defined Contribution Plan

A defined contribution plan provides an individual account for each participant in the plan. It provides benefits to a participant largely based on the amount contributed to that participant's account. Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan.

taxmap/pubs/p560-011.htm#TXMP67bdb0e7 Profit-sharing plan.(p12)

A profit-sharing plan is a plan for sharing your business profits with your employees. However, you do not have to make contributions out of net profits to have a profit-sharing plan.

The plan does not need to provide a definite formula for figuring the profits to be shared. But, if there is no formula, there must be systematic and substantial contributions.

The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences.

In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later).

Forfeitures under a profit-sharing plan can be allocated to the accounts of remaining participants in a nondiscriminatory way or they can be used to reduce your contributions.

taxmap/pubs/p560-011.htm#TXMP50d2983b Money purchase pension plan.(p12)

Contributions to a money purchase pension plan are fixed and are not based on your business profits. For example, if the plan requires that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the plan is a money purchase pension plan. This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits.

taxmap/pubs/p560-011.htm#TXMP036a3a82 Defined Benefit Plan(p12)

Defined Benefit Plan

A defined benefit plan is any plan that is not a defined contribution plan. Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions. Generally, you will need continuing professional help to have a defined benefit plan.

Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. Forfeitures must be used instead to reduce employer contributions.

Previous Page:  Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) - SIMPLE 401(k) Plan Next Page:  Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) - Setting Up a Qualified Plan Use   to find additional occurrences of topic items.