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2011 Tax Preparation Software

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2011 Tax Preparation Software

2011 tax preparation software 4. 2011 tax preparation software   Qualified Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Kinds of PlansDefined Contribution Plan Defined Benefit Plan Qualification RulesEarly retirement. 2011 tax preparation software Loan secured by benefits. 2011 tax preparation software Waiver of survivor benefits. 2011 tax preparation software Waiver of 30-day waiting period before annuity starting date. 2011 tax preparation software Involuntary cash-out of benefits not more than dollar limit. 2011 tax preparation software Exception for certain loans. 2011 tax preparation software Exception for QDRO. 2011 tax preparation software SIMPLE and safe harbor 401(k) plan exception. 2011 tax preparation software Setting Up a Qualified PlanAdopting a Written Plan Investing Plan Assets Minimum Funding RequirementDue dates. 2011 tax preparation software Installment percentage. 2011 tax preparation software Extended period for making contributions. 2011 tax preparation software ContributionsEmployer Contributions Employee Contributions When Contributions Are Considered Made Employer DeductionDeduction Limits Deduction Limit for Self-Employed Individuals Where To Deduct Contributions Carryover of Excess Contributions Excise Tax for Nondeductible (Excess) Contributions Elective Deferrals (401(k) Plans)Limit on Elective Deferrals Automatic Enrollment Treatment of Excess Deferrals Qualified Roth Contribution ProgramElective Deferrals Qualified Distributions Reporting Requirements DistributionsRequired Distributions Distributions From 401(k) Plans Tax Treatment of Distributions Tax on Early Distributions Tax on Excess Benefits Excise Tax on Reversion of Plan Assets Notification of Significant Benefit Accrual Reduction Prohibited TransactionsTax on Prohibited Transactions Reporting RequirementsOne-participant plan. 2011 tax preparation software Caution: Form 5500-EZ not required. 2011 tax preparation software Form 5500. 2011 tax preparation software Electronic filing of Forms 5500 and 5500-SF. 2011 tax preparation software Topics - This chapter discusses: Kinds of plans Qualification rules Setting up a qualified plan Minimum funding requirement Contributions Employer deduction Elective deferrals (401(k) plans) Qualified Roth contribution program Distributions Prohibited transactions Reporting requirements Useful Items - You may want to see: Publications 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 3066 Have you had your Check-up this year? for Retirement Plans 3998 Choosing A Retirement Solution for Your Small Business 4222 401(k) Plans for Small Businesses 4530 Designated Roth Accounts under a 401(k), 403(b), or governmental 457(b) plans 4531 401(k) Plan Checklist 4674 Automatic Enrollment 401(k) Plans for Small Businesses 4806 Profit Sharing Plans for Small Businesses Forms (and Instructions) www. 2011 tax preparation software dol. 2011 tax preparation software gov/ebsa/pdf/2013-5500. 2011 tax preparation software pdf www. 2011 tax preparation software dol. 2011 tax preparation software gov/ebsa/pdf/2013-5500-SF. 2011 tax preparation software pdf W-2 Wage and Tax Statement Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. 2011 tax preparation software 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 2011 tax preparation software 1040 U. 2011 tax preparation software S. 2011 tax preparation software Individual Income Tax Return Schedule C (Form 1040) Profit or Loss From Business Schedule F (Form 1040) Profit or Loss From Farming 5300 Application for Determination for Employee Benefit Plan 5310 Application for Determination for Terminating Plan 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5330 Return of Excise Taxes Related to Employee Benefit Plans 5500 Annual Return/Report of Employee Benefit Plan. 2011 tax preparation software For copies of this form, go to: 5500-EZ Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan. 2011 tax preparation software For copies of this form, go to: 8717 User Fee for Employee Plan Determination Letter Request 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H. 2011 tax preparation software R. 2011 tax preparation software 10 plans. 2011 tax preparation software A sole proprietor or a partnership can set up one of these plans. 2011 tax preparation software A common-law employee or a partner cannot set up one of these plans. 2011 tax preparation software The plans described here can also be set up and maintained by employers that are corporations. 2011 tax preparation software All the rules discussed here apply to corporations except where specifically limited to the self-employed. 2011 tax preparation software The plan must be for the exclusive benefit of employees or their beneficiaries. 2011 tax preparation software These qualified plans can include coverage for a self-employed individual. 2011 tax preparation software As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. 2011 tax preparation software The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. 2011 tax preparation software Kinds of Plans There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. 2011 tax preparation software 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. 2011 tax preparation software Defined Contribution Plan A defined contribution plan provides an individual account for each participant in the plan. 2011 tax preparation software It provides benefits to a participant largely based on the amount contributed to that participant's account. 2011 tax preparation software Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. 2011 tax preparation software A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan. 2011 tax preparation software Profit-sharing plan. 2011 tax preparation software   Although it is called a “profit-sharing plan,” you do not actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed as discussed under Self-employed Individual, later). 2011 tax preparation software A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan is not fixed. 2011 tax preparation software An employer may even make no contribution to the plan for a given year. 2011 tax preparation software   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. 2011 tax preparation software   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). 2011 tax preparation software Money purchase pension plan. 2011 tax preparation software   Contributions to a money purchase pension plan are fixed and are not based on your business profits. 2011 tax preparation software 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. 2011 tax preparation software This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits. 2011 tax preparation software Defined Benefit Plan A defined benefit plan is any plan that is not a defined contribution plan. 2011 tax preparation software Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. 2011 tax preparation software Actuarial assumptions and computations are required to figure these contributions. 2011 tax preparation software Generally, you will need continuing professional help to have a defined benefit plan. 2011 tax preparation software Qualification Rules To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. 2011 tax preparation software Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. 2011 tax preparation software The following is a brief overview of important qualification rules that generally have not yet been discussed. 2011 tax preparation software It is not intended to be all-inclusive. 2011 tax preparation software See Setting Up a Qualified Plan , later. 2011 tax preparation software Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. 2011 tax preparation software A SIMPLE 401(k) plan is, however, not subject to the top-heavy plan rules and nondiscrimination rules if the plan satisfies the provisions discussed in chapter 3 under SIMPLE 401(k) Plan. 2011 tax preparation software Plan assets must not be diverted. 2011 tax preparation software   Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the benefit of employees and their beneficiaries. 2011 tax preparation software As a general rule, the assets cannot be diverted to the employer. 2011 tax preparation software Minimum coverage requirement must be met. 2011 tax preparation software   To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following. 2011 tax preparation software 50 employees, or The greater of: 40% of all employees, or Two employees. 2011 tax preparation software If there is only one employee, the plan must benefit that employee. 2011 tax preparation software Contributions or benefits must not discriminate. 2011 tax preparation software   Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees. 2011 tax preparation software Contributions and benefits must not be more than certain limits. 2011 tax preparation software   Your plan must not provide for contributions or benefits that are more than certain limits. 2011 tax preparation software The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. 2011 tax preparation software These limits are discussed later in this chapter under Contributions. 2011 tax preparation software Minimum vesting standard must be met. 2011 tax preparation software   Your plan must satisfy certain requirements regarding when benefits vest. 2011 tax preparation software A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. 2011 tax preparation software A benefit is nonforfeitable if it cannot be lost upon the happening, or failure to happen, of any event. 2011 tax preparation software Special rules apply to forfeited benefit amounts. 2011 tax preparation software In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions. 2011 tax preparation software   Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. 2011 tax preparation software Forfeitures must be used instead to reduce employer contributions. 2011 tax preparation software Participation. 2011 tax preparation software   In general, an employee must be allowed to participate in your plan if he or she meets both the following requirements. 2011 tax preparation software Has reached age 21. 2011 tax preparation software Has at least 1 year of service (2 years if the plan is not a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all his or her accrued benefit). 2011 tax preparation software A plan cannot exclude an employee because he or she has reached a specified age. 2011 tax preparation software Leased employee. 2011 tax preparation software   A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. 2011 tax preparation software These rules include those in all the following areas. 2011 tax preparation software Nondiscrimination in coverage, contributions, and benefits. 2011 tax preparation software Minimum age and service requirements. 2011 tax preparation software Vesting. 2011 tax preparation software Limits on contributions and benefits. 2011 tax preparation software Top-heavy plan requirements. 2011 tax preparation software Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you. 2011 tax preparation software Benefit payment must begin when required. 2011 tax preparation software   Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods. 2011 tax preparation software The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan. 2011 tax preparation software The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs. 2011 tax preparation software The plan year in which the participant separates from service. 2011 tax preparation software Early retirement. 2011 tax preparation software   Your plan can provide for payment of retirement benefits before the normal retirement age. 2011 tax preparation software If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if he or she meets both the following requirements. 2011 tax preparation software Satisfies the service requirement for the early retirement benefit. 2011 tax preparation software Separates from service with a nonforfeitable right to an accrued benefit. 2011 tax preparation software The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met. 2011 tax preparation software Required minimum distributions. 2011 tax preparation software   Special rules require minimum annual distributions from qualified plans, generally beginning after age  70½. 2011 tax preparation software See Required Distributions , under Distributions, later. 2011 tax preparation software Survivor benefits. 2011 tax preparation software   Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms. 2011 tax preparation software A qualified joint and survivor annuity for a vested participant who does not die before the annuity starting date. 2011 tax preparation software A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse. 2011 tax preparation software   The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met. 2011 tax preparation software The participant does not choose benefits in the form of a life annuity. 2011 tax preparation software The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies. 2011 tax preparation software The plan is not a direct or indirect transferee of a plan that must provide automatic survivor benefits. 2011 tax preparation software Loan secured by benefits. 2011 tax preparation software   If automatic survivor benefits are required for a spouse under a plan, he or she must consent to a loan that uses as security the accrued benefits in the plan. 2011 tax preparation software Waiver of survivor benefits. 2011 tax preparation software   Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. 2011 tax preparation software The plan also must allow the participant to withdraw the waiver. 2011 tax preparation software The spouse's consent must be witnessed by a plan representative or notary public. 2011 tax preparation software Waiver of 30-day waiting period before annuity starting date. 2011 tax preparation software    A plan may permit a participant to waive (with spousal consent) the 30-day minimum waiting period after a written explanation of the terms and conditions of a joint and survivor annuity is provided to each participant. 2011 tax preparation software   The waiver is allowed only if the distribution begins more than 7 days after the written explanation is provided. 2011 tax preparation software Involuntary cash-out of benefits not more than dollar limit. 2011 tax preparation software   A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit is not greater than $5,000. 2011 tax preparation software   However, the distribution cannot be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. 2011 tax preparation software If the present value is greater than $5,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit. 2011 tax preparation software   Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits. 2011 tax preparation software   A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. 2011 tax preparation software A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. 2011 tax preparation software See Section 402(f) Notice under Distributions, later, for more details. 2011 tax preparation software Consolidation, merger, or transfer of assets or liabilities. 2011 tax preparation software   Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit he or she would have been entitled to just before the merger, etc. 2011 tax preparation software (if the plan had then terminated). 2011 tax preparation software Benefits must not be assigned or alienated. 2011 tax preparation software   Your plan must provide that a participant's or beneficiary's benefits under the plan cannot be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgements or settlements against the participant for violations of plan rules. 2011 tax preparation software Exception for certain loans. 2011 tax preparation software   A loan from the plan (not from a third party) to a participant or beneficiary is not treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. 2011 tax preparation software A disqualified person is defined later in this chapter under Prohibited Transactions. 2011 tax preparation software Exception for QDRO. 2011 tax preparation software   Compliance with a QDRO (qualified domestic relations order) does not result in a prohibited assignment or alienation of benefits. 2011 tax preparation software   Payments to an alternate payee under a QDRO before the participant attains age 59½ are not subject to the 10% additional tax that would otherwise apply under certain circumstances. 2011 tax preparation software Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity. 2011 tax preparation software No benefit reduction for social security increases. 2011 tax preparation software   Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. 2011 tax preparation software This rule also applies to plans supplementing the benefits provided by other federal or state laws. 2011 tax preparation software Elective deferrals must be limited. 2011 tax preparation software   If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. 2011 tax preparation software See Limit on Elective Deferrals later in this chapter. 2011 tax preparation software Top-heavy plan requirements. 2011 tax preparation software   A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees. 2011 tax preparation software   A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. 2011 tax preparation software Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan. 2011 tax preparation software   Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. 2011 tax preparation software These qualification requirements for top-heavy plans are explained in section 416 and its regulations. 2011 tax preparation software SIMPLE and safe harbor 401(k) plan exception. 2011 tax preparation software   The top-heavy plan requirements do not apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. 2011 tax preparation software QACAs (discussed later) also are not subject to top-heavy requirements. 2011 tax preparation software Setting Up a Qualified Plan There are two basic steps in setting up a qualified plan. 2011 tax preparation software First you adopt a written plan. 2011 tax preparation software Then you invest the plan assets. 2011 tax preparation software You, the employer, are responsible for setting up and maintaining the plan. 2011 tax preparation software If you are self-employed, it is not necessary to have employees besides yourself to sponsor and set up a qualified plan. 2011 tax preparation software If you have employees, see Participation, under Qualification Rules, earlier. 2011 tax preparation software Set-up deadline. 2011 tax preparation software   To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar-year employers). 2011 tax preparation software Credit for startup costs. 2011 tax preparation software   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a qualified plan that first became effective in 2013. 2011 tax preparation software For more information, see Credit for startup costs under Reminders, earlier. 2011 tax preparation software Adopting a Written Plan You must adopt a written plan. 2011 tax preparation software The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. 2011 tax preparation software Or it can be an individually designed plan. 2011 tax preparation software Written plan requirement. 2011 tax preparation software   To qualify, the plan you set up must be in writing and must be communicated to your employees. 2011 tax preparation software The plan's provisions must be stated in the plan. 2011 tax preparation software It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code. 2011 tax preparation software Master or prototype plans. 2011 tax preparation software   Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. 2011 tax preparation software Master and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals). 2011 tax preparation software Under a master plan, a single trust or custodial account is established, as part of the plan, for the joint use of all adopting employers. 2011 tax preparation software Under a prototype plan, a separate trust or custodial account is established for each employer. 2011 tax preparation software Plan providers. 2011 tax preparation software   The following organizations generally can provide IRS-approved master or prototype plans. 2011 tax preparation software Banks (including some savings and loan associations and federally insured credit unions). 2011 tax preparation software Trade or professional organizations. 2011 tax preparation software Insurance companies. 2011 tax preparation software Mutual funds. 2011 tax preparation software Individually designed plan. 2011 tax preparation software   If you prefer, you can set up an individually designed plan to meet specific needs. 2011 tax preparation software Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. 2011 tax preparation software You may need professional help for this. 2011 tax preparation software See Rev. 2011 tax preparation software Proc. 2011 tax preparation software 2014-6, 2014-1 I. 2011 tax preparation software R. 2011 tax preparation software B. 2011 tax preparation software 198, available at www. 2011 tax preparation software irs. 2011 tax preparation software gov/irb/2014-1_IRB/ar10. 2011 tax preparation software html, as annually updated, that may help you decide whether to apply for approval. 2011 tax preparation software Internal Revenue Bulletins are available on the IRS website at IRS. 2011 tax preparation software gov They are also available at most IRS offices and at certain libraries. 2011 tax preparation software User fee. 2011 tax preparation software   The fee mentioned earlier for requesting a determination letter does not apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. 2011 tax preparation software At least one of them must be a non-highly compensated employee participating in the plan. 2011 tax preparation software The fee does not apply to requests made by the later of the following dates. 2011 tax preparation software The end of the 5th plan year the plan is in effect. 2011 tax preparation software The end of any remedial amendment period for the plan that begins within the first 5 plan years. 2011 tax preparation software The request cannot be made by the sponsor of a prototype or similar plan the sponsor intends to market to participating employers. 2011 tax preparation software   For more information about whether the user fee applies, see Rev. 2011 tax preparation software Proc. 2011 tax preparation software 2014-8, 2014-1 I. 2011 tax preparation software R. 2011 tax preparation software B. 2011 tax preparation software 242, available at www. 2011 tax preparation software irs. 2011 tax preparation software gov/irb/2014-1_IRB/ar12. 2011 tax preparation software html, as may be annually updated; Notice 2003-49, 2003-32 I. 2011 tax preparation software R. 2011 tax preparation software B. 2011 tax preparation software 294, available at www. 2011 tax preparation software irs. 2011 tax preparation software gov/irb/2003-32_IRB/ar13. 2011 tax preparation software html; and Notice 2011-86, 2011-45 I. 2011 tax preparation software R. 2011 tax preparation software B. 2011 tax preparation software 698, available at www. 2011 tax preparation software irs. 2011 tax preparation software gov/irb/2011-45_IRB/ar11. 2011 tax preparation software html. 2011 tax preparation software Investing Plan Assets In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets. 2011 tax preparation software You can establish a trust or custodial account to invest the funds. 2011 tax preparation software You, the trust, or the custodial account can buy an annuity contract from an insurance company. 2011 tax preparation software Life insurance can be included only if it is incidental to the retirement benefits. 2011 tax preparation software You set up a trust by a legal instrument (written document). 2011 tax preparation software You may need professional help to do this. 2011 tax preparation software You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee. 2011 tax preparation software You do not need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. 2011 tax preparation software If anyone other than a trustee holds them, however, the contracts or certificates must state they are not transferable. 2011 tax preparation software Other plan requirements. 2011 tax preparation software   For information on other important plan requirements, see Qualification Rules , earlier in this chapter. 2011 tax preparation software Minimum Funding Requirement In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. 2011 tax preparation software Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. 2011 tax preparation software For information on this funding requirement, see section 412 and its regulations. 2011 tax preparation software Quarterly installments of required contributions. 2011 tax preparation software   If your plan is a defined benefit plan subject to the minimum funding requirements, you generally must make quarterly installment payments of the required contributions. 2011 tax preparation software If you do not pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment. 2011 tax preparation software Due dates. 2011 tax preparation software   The due dates for the installments are 15 days after the end of each quarter. 2011 tax preparation software For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year). 2011 tax preparation software Installment percentage. 2011 tax preparation software   Each quarterly installment must be 25% of the required annual payment. 2011 tax preparation software Extended period for making contributions. 2011 tax preparation software   Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8½ months after the end of that year. 2011 tax preparation software Contributions A qualified plan is generally funded by your contributions. 2011 tax preparation software However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. 2011 tax preparation software See Employee Contributions and Elective Deferrals later. 2011 tax preparation software Contributions deadline. 2011 tax preparation software   You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year. 2011 tax preparation software Self-employed individual. 2011 tax preparation software   You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. 2011 tax preparation software Your net earnings must be from your personal services, not from your investments. 2011 tax preparation software If you have a net loss from self-employment, you cannot make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation. 2011 tax preparation software Employer Contributions There are certain limits on the contributions and other annual additions you can make each year for plan participants. 2011 tax preparation software There are also limits on the amount you can deduct. 2011 tax preparation software See Deduction Limits , later. 2011 tax preparation software Limits on Contributions and Benefits Your plan must provide that contributions or benefits cannot exceed certain limits. 2011 tax preparation software The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan. 2011 tax preparation software Defined benefit plan. 2011 tax preparation software   For 2013, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts. 2011 tax preparation software 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. 2011 tax preparation software $205,000 ($210,000 for 2014). 2011 tax preparation software Defined contribution plan. 2011 tax preparation software   For 2013, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts. 2011 tax preparation software 100% of the participant's compensation. 2011 tax preparation software $51,000 ($52,000 for 2014). 2011 tax preparation software   Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit. 2011 tax preparation software Employee Contributions Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. 2011 tax preparation software Even though these employee contributions are not deductible, the earnings on them are tax free until distributed in later years. 2011 tax preparation software Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. 2011 tax preparation software See Regulations sections 1. 2011 tax preparation software 401(k)-2 and 1. 2011 tax preparation software 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). 2011 tax preparation software When Contributions Are Considered Made You generally apply your plan contributions to the year in which you make them. 2011 tax preparation software But you can apply them to the previous year if all the following requirements are met. 2011 tax preparation software You make them by the due date of your tax return for the previous year (plus extensions). 2011 tax preparation software The plan was established by the end of the previous year. 2011 tax preparation software The plan treats the contributions as though it had received them on the last day of the previous year. 2011 tax preparation software You do either of the following. 2011 tax preparation software You specify in writing to the plan administrator or trustee that the contributions apply to the previous year. 2011 tax preparation software You deduct the contributions on your tax return for the previous year. 2011 tax preparation software A partnership shows contributions for partners on Form 1065. 2011 tax preparation software Employer's promissory note. 2011 tax preparation software   Your promissory note made out to the plan is not a payment that qualifies for the deduction. 2011 tax preparation software Also, issuing this note is a prohibited transaction subject to tax. 2011 tax preparation software See Prohibited Transactions , later. 2011 tax preparation software Employer Deduction You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. 2011 tax preparation software The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. 2011 tax preparation software Deduction Limits The deduction limit for your contributions to a qualified plan depends on the kind of plan you have. 2011 tax preparation software Defined contribution plans. 2011 tax preparation software   The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. 2011 tax preparation software If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. 2011 tax preparation software See Deduction Limit for Self-Employed Individuals , later. 2011 tax preparation software   When figuring the deduction limit, the following rules apply. 2011 tax preparation software Elective deferrals (discussed later) are not subject to the limit. 2011 tax preparation software Compensation includes elective deferrals. 2011 tax preparation software The maximum compensation that can be taken into account for each employee in 2013 is $255,000 ($260,000 for 2014). 2011 tax preparation software Defined benefit plans. 2011 tax preparation software   The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. 2011 tax preparation software Consequently, an actuary must figure your deduction limit. 2011 tax preparation software    In figuring the deduction for contributions, you cannot take into account any contributions or benefits that are more than the limits discussed earlier under Limits on Contributions and Benefits, earlier. 2011 tax preparation software Table 4–1. 2011 tax preparation software Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted) Year Participants' compensation Participants' share of required contribution (10% of annual profit) Deductible  limit for current year (25% of compensation) Contribution Excess contribution carryover used1 Total  deduction including carryovers Excess contribution carryover available at end of year 2010 $1,000 $100 $250 $100 $ 0 $100 $ 0 2011 400 165 100 165 0 100 65 2012 500 100 125 100 25 125 40 2013 600 100 150 100 40 140 0  1There were no carryovers from years before 2010. 2011 tax preparation software Deduction Limit for Self-Employed Individuals If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. 2011 tax preparation software Compensation is your net earnings from self-employment, defined in chapter 1. 2011 tax preparation software This definition takes into account both the following items. 2011 tax preparation software The deduction for the deductible part of your self-employment tax. 2011 tax preparation software The deduction for contributions on your behalf to the plan. 2011 tax preparation software The deduction for your own contributions and your net earnings depend on each other. 2011 tax preparation software For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. 2011 tax preparation software To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. 2011 tax preparation software Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. 2011 tax preparation software Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. 2011 tax preparation software For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120, or Form 1120S. 2011 tax preparation software Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. 2011 tax preparation software (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership. 2011 tax preparation software ) Carryover of Excess Contributions If you contribute more to the plans than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. 2011 tax preparation software Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. 2011 tax preparation software For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. 2011 tax preparation software However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. 2011 tax preparation software See Deduction Limit for Self-Employed Individuals, earlier. 2011 tax preparation software The amount you carry over and deduct may be subject to the excise tax discussed next. 2011 tax preparation software Table 4-1, earlier, illustrates the carryover of excess contributions to a profit-sharing plan. 2011 tax preparation software Excise Tax for Nondeductible (Excess) Contributions If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. 2011 tax preparation software In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs. 2011 tax preparation software Special rule for self-employed individuals. 2011 tax preparation software   The 10% excise tax does not apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. 2011 tax preparation software Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference is not subject to this excise tax. 2011 tax preparation software See Minimum Funding Requirement , earlier. 2011 tax preparation software Reporting the tax. 2011 tax preparation software   You must report the tax on your nondeductible contributions on Form 5330. 2011 tax preparation software Form 5330 includes a computation of the tax. 2011 tax preparation software See the separate instructions for completing the form. 2011 tax preparation software Elective Deferrals (401(k) Plans) Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. 2011 tax preparation software A plan with this type of arrangement is popularly known as a “401(k) plan. 2011 tax preparation software ” (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business. 2011 tax preparation software ) This contribution is called an “elective deferral” because participants choose (elect) to defer receipt of the money. 2011 tax preparation software In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans. 2011 tax preparation software A profit-sharing plan. 2011 tax preparation software A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date. 2011 tax preparation software Partnership. 2011 tax preparation software   A partnership can have a 401(k) plan. 2011 tax preparation software Restriction on conditions of participation. 2011 tax preparation software   The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service. 2011 tax preparation software Matching contributions. 2011 tax preparation software   If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. 2011 tax preparation software For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. 2011 tax preparation software Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions. 2011 tax preparation software Nonelective contributions. 2011 tax preparation software   You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. 2011 tax preparation software These are called nonelective contributions. 2011 tax preparation software Employee compensation limit. 2011 tax preparation software   No more than $255,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2013. 2011 tax preparation software This limit is $260,000 in 2014. 2011 tax preparation software SIMPLE 401(k) plan. 2011 tax preparation software   If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. 2011 tax preparation software A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. 2011 tax preparation software For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3. 2011 tax preparation software Distributions. 2011 tax preparation software   Certain rules apply to distributions from 401(k) plans. 2011 tax preparation software See Distributions From 401(k) Plans , later. 2011 tax preparation software Limit on Elective Deferrals There is a limit on the amount an employee can defer each year under these plans. 2011 tax preparation software This limit applies without regard to community property laws. 2011 tax preparation software Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. 2011 tax preparation software For 2013 and 2014, the basic limit on elective deferrals is $17,500. 2011 tax preparation software This limit applies to all salary reduction contributions and elective deferrals. 2011 tax preparation software If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income. 2011 tax preparation software Catch-up contributions. 2011 tax preparation software   A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. 2011 tax preparation software The catch-up contribution limit for 2013 and 2014 is $5,500. 2011 tax preparation software Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the $17,500 limit, the actual deferral percentage (ADP) test limit of section 401(k)(3), or the plan limit (if any). 2011 tax preparation software However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. 2011 tax preparation software The catch-up contribution limit. 2011 tax preparation software The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. 2011 tax preparation software Treatment of contributions. 2011 tax preparation software   Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. 2011 tax preparation software Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. 2011 tax preparation software Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. 2011 tax preparation software Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. 2011 tax preparation software Forfeiture. 2011 tax preparation software   Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals. 2011 tax preparation software Reporting on Form W-2. 2011 tax preparation software   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. 2011 tax preparation software You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. 2011 tax preparation software You must also include them in box 12. 2011 tax preparation software Mark the “Retirement plan” checkbox in box 13. 2011 tax preparation software For more information, see the Form W-2 instructions. 2011 tax preparation software Automatic Enrollment Your 401(k) plan can have an automatic enrollment feature. 2011 tax preparation software Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage. 2011 tax preparation software These contributions are elective deferrals. 2011 tax preparation software An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). 2011 tax preparation software For more information, see Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses. 2011 tax preparation software Eligible automatic contribution arrangement. 2011 tax preparation software   Under an eligible automatic contribution arrangement (EACA), a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. 2011 tax preparation software This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). 2011 tax preparation software There is no required deferral percentage. 2011 tax preparation software Withdrawals. 2011 tax preparation software   Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met. 2011 tax preparation software The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA. 2011 tax preparation software The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon. 2011 tax preparation software   If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. 2011 tax preparation software The additional 10% tax on early distributions will not apply to the distribution. 2011 tax preparation software Notice requirement. 2011 tax preparation software   Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. 2011 tax preparation software The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of his or her rights and obligations under the EACA. 2011 tax preparation software The notice must include an explanation of the employee's right to elect not to have elective contributions made on his or her behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. 2011 tax preparation software The notice also must explain how contributions will be invested in the absence of an investment election by the employee. 2011 tax preparation software Qualified automatic contribution arrangement. 2011 tax preparation software    A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. 2011 tax preparation software It contains an automatic enrollment feature, and mandatory employer contributions are required. 2011 tax preparation software If your plan includes a QACA, it will not be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). 2011 tax preparation software Additionally, your plan will not be subject to the actual contribution percentage (ACP) test if certain additional requirements are met. 2011 tax preparation software Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. 2011 tax preparation software In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). 2011 tax preparation software If an employee does not make an affirmative election, the default deferral percentage must meet the following conditions. 2011 tax preparation software It must be applied uniformly. 2011 tax preparation software It must not exceed 10%. 2011 tax preparation software It must be at least 3% in the first plan year it applies to an employee and through the end of the following year. 2011 tax preparation software It must increase to at least 4% in the following plan year. 2011 tax preparation software It must increase to at least 5% in the following plan year. 2011 tax preparation software It must increase to at least 6% in subsequent plan years. 2011 tax preparation software Matching or nonelective contributions. 2011 tax preparation software   Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms. 2011 tax preparation software Matching contributions. 2011 tax preparation software You must make matching contributions on behalf of each non-highly compensated employee in the following amounts. 2011 tax preparation software An amount equal to 100% of elective deferrals, up to 1% of compensation. 2011 tax preparation software An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation. 2011 tax preparation software Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. 2011 tax preparation software The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. 2011 tax preparation software Nonelective contributions. 2011 tax preparation software You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation. 2011 tax preparation software Vesting requirements. 2011 tax preparation software   All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. 2011 tax preparation software These contributions are subject to special withdrawal restrictions, discussed later. 2011 tax preparation software Notice requirements. 2011 tax preparation software   Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA, within a reasonable period before each plan year. 2011 tax preparation software The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. 2011 tax preparation software The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. 2011 tax preparation software Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. 2011 tax preparation software The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA. 2011 tax preparation software Treatment of Excess Deferrals If the total of an employee's deferrals is more than the limit for 2013, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. 2011 tax preparation software He or she must notify the plan by April 15, 2014 (or an earlier date specified in the plan), of the amount to be paid from each plan. 2011 tax preparation software The plan must then pay the employee that amount, plus earnings on the amount through the end of 2013, by April 15, 2014. 2011 tax preparation software Excess withdrawn by April 15. 2011 tax preparation software   If the employee takes out the excess deferral by April 15, 2014, it is not reported again by including it in the employee's gross income for 2014. 2011 tax preparation software However, any income earned in 2013 on the excess deferral taken out is taxable in the tax year in which it is taken out. 2011 tax preparation software The distribution is not subject to the additional 10% tax on early distributions. 2011 tax preparation software   If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income. 2011 tax preparation software   Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans. 2011 tax preparation software Excess not withdrawn by April 15. 2011 tax preparation software   If the employee does not take out the excess deferral by April 15, 2014, the excess, though taxable in 2013, is not included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. 2011 tax preparation software In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. 2011 tax preparation software Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified. 2011 tax preparation software Reporting corrective distributions on Form 1099-R. 2011 tax preparation software   Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. 2011 tax preparation software For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498. 2011 tax preparation software Tax on excess contributions of highly compensated employees. 2011 tax preparation software   The law provides tests to detect discrimination in a plan. 2011 tax preparation software If tests, such as the actual deferral percentage test (ADP test) (see section 401(k)(3)) and the actual contribution percentage test (ACP test) (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. 2011 tax preparation software Report the tax on Form 5330. 2011 tax preparation software The ADP test does not apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. 2011 tax preparation software Also, the ACP test does not apply to these plans if certain additional requirements are met. 2011 tax preparation software   The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. 2011 tax preparation software Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test. 2011 tax preparation software   See Regulations sections 1. 2011 tax preparation software 401(k)-2 and 1. 2011 tax preparation software 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). 2011 tax preparation software    If the plan fails the ADP or ACP testing, and the failure is not corrected by the end of the next plan year, the plan can be disqualified. 2011 tax preparation software Safe harbor 401(k) plan. 2011 tax preparation software If you meet the requirements for a safe harbor 401(k) plan, you do not have to satisfy the ADP test, nor the ACP test, if certain additional requirements are met. 2011 tax preparation software For your plan to be a safe harbor plan, you must meet the following conditions. 2011 tax preparation software Matching or nonelective contributions. 2011 tax preparation software You must make matching or nonelective contributions according to one of the following formulas. 2011 tax preparation software Matching contributions. 2011 tax preparation software You must make matching contributions according to the following rules. 2011 tax preparation software You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation. 2011 tax preparation software You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation. 2011 tax preparation software The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. 2011 tax preparation software Nonelective contributions. 2011 tax preparation software You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation. 2011 tax preparation software These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions. 2011 tax preparation software Notice requirement. 2011 tax preparation software You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan, within a reasonable period before the plan year. 2011 tax preparation software The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan. 2011 tax preparation software Qualified Roth Contribution Program Under this program an eligible employee can designate all or a portion of his or her elective deferrals as after-tax Roth contributions. 2011 tax preparation software Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. 2011 tax preparation software However, unlike other elective deferrals, designated Roth contributions are not excluded from employees' gross income, but qualified distributions from a Roth account are excluded from employees' gross income. 2011 tax preparation software Elective Deferrals Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2013 and 2014, $17,500 if under age 50 and $23,000 if age 50 or over) less the total amount of the employee's elective deferrals not designated as Roth contributions. 2011 tax preparation software Designated Roth deferrals are treated the same as pre-tax elective deferrals for most purposes, including: The annual individual elective deferral limit (total of all designated Roth contributions and traditional, pre-tax elective deferrals) of $17,500 for 2013 and 2014, with an additional $5,500 if age 50 or over for 2013 and 2014, Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $51,000 for 2013 ($52,000 for 2014), Nondiscrimination testing, Required distributions, and Elective deferrals not taken into account for purposes of deduction limits. 2011 tax preparation software Qualified Distributions A qualified distribution is a distribution that is made after the employee's nonexclusion period and: On or after the employee attains age   59½, On account of the employee's being disabled, or On or after the employee's death. 2011 tax preparation software An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years. 2011 tax preparation software The first tax year in which the employee made a contribution to his or her Roth account in the plan, or If a rollover contribution was made to the employee's designated Roth account from a designated Roth account previously established for the employee under another plan, then the first tax year the employee made a designated Roth contribution to the previously established account. 2011 tax preparation software Rollover. 2011 tax preparation software   Beginning September 28, 2010, a rollover from another account can be made to a designated Roth account in the same plan. 2011 tax preparation software For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. 2011 tax preparation software R. 2011 tax preparation software B. 2011 tax preparation software 872, available at www. 2011 tax preparation software irs. 2011 tax preparation software gov/irb/2010-51_IRB/ar11. 2011 tax preparation software html, and Notice 2013-74. 2011 tax preparation software A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. 2011 tax preparation software Rollover amounts do not apply toward the annual deferral limit. 2011 tax preparation software Reporting Requirements You must report a contribution to a Roth account on Form W-2 and a distribution from a Roth account on Form 1099-R. 2011 tax preparation software See the Form W-2 and 1099-R instructions for detailed information. 2011 tax preparation software Distributions Amounts paid to plan participants from a qualified plan are called distributions. 2011 tax preparation software Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. 2011 tax preparation software Also, certain loans may be treated as distributions. 2011 tax preparation software See Loans Treated as Distributions in Publication 575. 2011 tax preparation software Required Distributions A qualified plan must provide that each participant will either: Receive his or her entire interest (benefits) in the plan by the required beginning date (defined later), or Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant's entire interest (benefits) over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary (or over a shorter period). 2011 tax preparation software These distribution rules apply individually to each qualified plan. 2011 tax preparation software You cannot satisfy the requirement for one plan by taking a distribution from another. 2011 tax preparation software The plan must provide that these rules override any inconsistent distribution options previously offered. 2011 tax preparation software Minimum distribution. 2011 tax preparation software   If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. 2011 tax preparation software This minimum is figured by dividing the account balance by the applicable life expectancy. 2011 tax preparation software The plan administrator can use the life expectancy tables in Appendix C of Publication 590 for this purpose. 2011 tax preparation software For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575. 2011 tax preparation software Required beginning date. 2011 tax preparation software   Generally, each participant must receive his or her entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date. 2011 tax preparation software   A participant must begin to receive distributions from his or her qualified retirement plan by April 1 of the first year after the later of the following years. 2011 tax preparation software Calendar year in which he or she reaches age 70½. 2011 tax preparation software Calendar year in which he or she retires from employment with the employer maintaining the plan. 2011 tax preparation software However, the plan may require the participant to begin receiving distributions by April 1 of the year after the participant reaches age 70½ even if the participant has not retired. 2011 tax preparation software   If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 70½. 2011 tax preparation software For more information, see Tax on Excess Accumulation in Publication 575. 2011 tax preparation software Distributions after the starting year. 2011 tax preparation software   The distribution required to be made by April 1 is treated as a distribution for the starting year. 2011 tax preparation software (The starting year is the year in which the participant meets (1) or (2) above, whichever applies. 2011 tax preparation software ) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. 2011 tax preparation software If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31). 2011 tax preparation software Distributions after participant's death. 2011 tax preparation software   See Publication 575 for the special rules covering distributions made after the death of a participant. 2011 tax preparation software Distributions From 401(k) Plans Generally, distributions cannot be made until one of the following occurs. 2011 tax preparation software The employee retires, dies, becomes disabled, or otherwise severs employment. 2011 tax preparation software The plan ends and no other defined contribution plan is established or continued. 2011 tax preparation software In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 59½ or suffers financial hardship. 2011 tax preparation software For the rules on hardship distributions, including the limits on them, see Regulations section 1. 2011 tax preparation software 401(k)-1(d). 2011 tax preparation software The employee becomes eligible for a qualified reservist distribution (defined next). 2011 tax preparation software Certain distributions listed above may be subject to the tax on early distributions discussed later. 2011 tax preparation software Qualified reservist distributions. 2011 tax preparation software   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. 2011 tax preparation software All or part of a qualified reservist distribution can be recontributed to an IRA. 2011 tax preparation software The additional 10% tax on early distributions does not apply to a qualified reservist distribution. 2011 tax preparation software Tax Treatment of Distributions Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. 2011 tax preparation software Since most recipients have no cost basis, a distribution is generally fully taxable. 2011 tax preparation software An exception is a distribution that is properly rolled over as discussed under Rollover, next. 2011 tax preparation software The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. 2011 tax preparation software See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Publication 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution. 2011 tax preparation software Note. 2011 tax preparation software A recipient of a distribution from a designated Roth account will have a cost basis since designated Roth contributions are made on an after-tax basis. 2011 tax preparation software Also, a distribution from a designated Roth account is entirely tax-free if certain conditions are met. 2011 tax preparation software See Qualified distributions under Qualified Roth Contribution Program, earlier. 2011 tax preparation software Rollover. 2011 tax preparation software   The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. 2011 tax preparation software However, it may be subject to withholding as discussed under Withholding requirement, later. 2011 tax preparation software A rollover can also be made to a Roth IRA, in which case, any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account. 2011 tax preparation software Eligible rollover distribution. 2011 tax preparation software   This is a distribution of all or any part of an employee's balance in a qualified retirement plan that is not any of the following. 2011 tax preparation software A required minimum distribution. 2011 tax preparation software See Required Distributions , earlier. 2011 tax preparation software Any of a series of substantially equal payments made at least once a year over any of the following periods. 2011 tax preparation software The employee's life or life expectancy. 2011 tax preparation software The joint lives or life expectancies of the employee and beneficiary. 2011 tax preparation software A period of 10 years or longer. 2011 tax preparation software A hardship distribution. 2011 tax preparation software The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. 2011 tax preparation software See Employee Contributions , earlier, and Rollover of nontaxable amounts, next. 2011 tax preparation software Loans treated as distributions. 2011 tax preparation software Dividends on employer securities. 2011 tax preparation software The cost of any life insurance coverage provided under a qualified retirement plan. 2011 tax preparation software Similar items designated by the IRS in published guidance. 2011 tax preparation software See, for example, the Instructions for Forms 1099-R and 5498. 2011 tax preparation software Rollover of nontaxable amounts. 2011 tax preparation software   You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. 2011 tax preparation software If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. 2011 tax preparation software If the rollover is to an IRA, the transfer can be made by any rollover method. 2011 tax preparation software Note. 2011 tax preparation software A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. 2011 tax preparation software If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee). 2011 tax preparation software More information. 2011 tax preparation software   For more information about rollovers, see Rollovers in Pubs. 2011 tax preparation software 575 and 590. 2011 tax preparation software Withholding requirement. 2011 tax preparation software   If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax. 2011 tax preparation software Exceptions. 2011 tax preparation software   If, instead of having the distribution paid to him or her, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover), no withholding is required. 2011 tax preparation software   If the distribution is not an eligible rollover distribution, defined earlier, the 20% withholding requirement does not apply. 2011 tax preparation software Other withholding rules apply to distributions that are not eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). 2011 tax preparation software However, the participant can choose not to have tax withheld from these distributions. 2011 tax preparation software If the participant does not make this choice, the following withholding rules apply. 2011 tax preparation software For periodic distributions, withholding is based on their treatment as wages. 2011 tax preparation software For nonperiodic distributions, 10% of the taxable part is withheld. 2011 tax preparation software Estimated tax payments. 2011 tax preparation software   If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. 2011 tax preparation software For more information, see Withholding Tax and Estimated Tax in Publication 575. 2011 tax preparation software Section 402(f) Notice. 2011 tax preparation software   If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions. 2011 tax preparation software That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer. 2011 tax preparation software That tax will be withheld from the distribution if it is not directly transferred to an eligible retirement plan. 2011 tax preparation software That the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution. 2011 tax preparation software Certain other rules that may be applicable. 2011 tax preparation software   Notice 2009-68, 2009-39 I. 2011 tax preparation software R. 2011 tax preparation software B. 2011 tax preparation software 423, available at www. 2011 tax preparation software irs. 2011 tax preparation software gov/irb/2009-39_IRB/ar14. 2011 tax preparation software html, contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions. 2011 tax preparation software If the plan allows in-plan Roth rollovers, the 402(f) notice must be amended to reflect this. 2011 tax preparation software Notice 2010-84 contains guidance on how to modify a 402(f) notice for in-plan Roth rollovers. 2011 tax preparation software Timing of notice. 2011 tax preparation software   The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution. 2011 tax preparation software Method of notice. 2011 tax preparation software   The written notice must be provided individually to each distributee of an eligible rollover distribution. 2011 tax preparation software Posting of the notice is not sufficient. 2011 tax preparation software However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. 2011 tax preparation software See Regulations section 1. 2011 tax preparation software 401(a)-21. 2011 tax preparation software Tax on failure to give notice. 2011 tax preparation software   Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. 2011 tax preparation software The tax will not be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect. 2011 tax preparation software Tax on Early Distributions If a distribution is made to an employee under the plan before he or she reaches age 59½, the employee may have to pay a 10% additional tax on the distribution. 2011 tax preparation software This tax applies to the amount received that the employee must include in income. 2011 tax preparation software Exceptions. 2011 tax preparation software   The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. 2011 tax preparation software Made to a beneficiary (or to the estate of the employee) on or after the death of the employee. 2011 tax preparation software Made due to the employee having a qualifying disability. 2011 tax preparation software Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary. 2011 tax preparation software (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period. 2011 tax preparation software ) Made to an employee after separation from service if the separation occurred during o
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Historical Highlights of the IRS

1862 - President Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses. The measure created a Commissioner of Internal Revenue and the nation's first income tax. It levied a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000.

1867 - Heeding public opposition to the income tax, Congress cut the tax rate. From 1868 until 1913, 90 percent of all revenue came from taxes on liquor, beer, wine and tobacco.

1872 - Income tax repealed.

1894 - The Wilson Tariff Act revived the income tax and an income tax division within the Bureau of Internal Revenue was created.

1895 - Supreme Court ruled the new income tax unconstitutional on the grounds that it was a direct tax and not apportioned among the states on the basis of population. The income tax division was disbanded.

1909 - President Taft recommended Congress propose a constitutional amendment that would give the government the power to tax incomes without apportioning the burden among the states in line with population. Congress also levied a 1 percent tax on net corporate incomes of more than $5,000.

1913 - As the threat of war loomed, Wyoming became the 36th and last state needed to ratify the 16th Amendment. The amendment stated, "Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." Later, Congress adopted a 1 percent tax on net personal income of more than $3,000 with a surtax of 6 percent on incomes of more than $500,000. It also repealed the 1909 corporate income tax. The first Form 1040 was introduced.

1918 - The Revenue Act of 1918 raised even greater sums for the World War I effort. It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77 percent.

1919 - The states ratified the 18th Amendment, barring the manufacture, sale or transport of intoxicating beverages. Congress passed the Volstead Act, which gave the Commissioner of Internal Revenue the primary responsibility for enforcement of Prohibition. Eleven years later, the Department of Justice assumed primary prohibition enforcement duties.

1931 - The IRS Intelligence Unit used an undercover agent to gather evidence against gangster Al Capone. Capone was convicted of tax evasion and sentenced to 11 years.

1933 - Prohibition repealed. IRS again assumed responsibility for alcohol taxation the following year and for administering the National Firearms Act. Later, tobacco tax enforcement was added.

1942 - The Revenue Act of 1942, hailed by President Roosevelt as "the greatest tax bill in American history," passed Congress. It increased taxes and the number of Americans subject to the income tax. It also created deductions for medical and investment expenses.

1943 - Congress passed the Current Tax Payment Act, which required employers to withhold taxes from employees' wages and remit them quarterly.

1944 - Congress passed the Individual Income Tax Act, which created the standard deductions on Form 1040.

1952 - President Truman proposed his Reorganization Plan No. 1, which replaced the patronage system at the IRS with a career civil service system. It also decentralized service to taxpayers and sought to restore public confidence in the agency.

1953 - President Eisenhower endorsed Truman's reorganization plan and changed the name of the agency from the Bureau of Internal Revenue to the Internal Revenue Service.

1954 - The filing deadline for individual tax returns changed from March 15 to April 15.

1961 - The Computer Age began at IRS with the dedication of the National Computer Center at Martinsburg, W.Va.

1965 - IRS instituted its first toll-free telephone site.

1972 - The Alcohol, Tobacco and Firearms Division separated from the IRS to become the independent Bureau of Alcohol, Tobacco and Firearms.

1974 - Congress passed the Employee Retirement and Income Security Act, which gave regulatory responsibilities for employee benefit plans to the IRS.

1986 - Limited electronic filing began. President Reagan signed the Tax Reform Act, the most significant piece of tax legislation in 30 years. It contained 300 provisions and took three years to implement. The Act codified the federal tax laws for the third time since the Revenue Act of 1918.

1992 - Taxpayers who owed money were allowed to file returns electronically.

1998 - Congress passed the IRS Restructuring and Reform Act, which expanded taxpayer rights and called for reorganizing the agency into four operating divisions aligned according to taxpayer needs.

2000 - IRS enacted reforms, ending its geographic-based structure and instituting four major operating divisions: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business and Tax Exempt and Government Entities. It was the most sweeping change at the IRS since the 1953 reorganization.

2001 - IRS administered a mid-year tax refund program to provide advance payments of a tax rate reduction.

2003 - IRS administered another mid-year refund program, this time providing an advance payment of an increase in the Child Tax Credit. Electronic filing reached a new high - 52.9 million tax returns, more than 40 percent of all individual returns.

Page Last Reviewed or Updated: 12-Feb-2014

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