Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

Taxact 1040x

Free E File Tax ReturnHow To File My 2012 Taxes For FreeWww.irs.gov/form1040xFree State Tax Return FileTurbo TaxAmend A Tax Return2009 State Tax FormsDo I File Taxes Past Years1040ez WorksheetHr Block EfileCan I File 2012 Taxes In 2013Income Tax Forms 1040ezH&r Block Taxcut Free File2012 Irs Form 1040File 2012 Taxes Free OnlineHow To Fill Out The 1040x FormIrs Instructions 1040ez 20122012 Form 1040ez1040x For 2012How To File 2011 Taxes Late1040 Ez Turbo TaxTax Amendment FormH&r Block Military Free File2011 Federal Income Tax FormsE File 2009 Tax ReturnHow To File A 1040Form10401040nr Ez Online FilingInstructions For 1040x 20121040 For 2010Free File 1040ezIllinois State Tax Forms 20111040 Forms2011 Tax TablesBest Online Tax Software For MilitaryHrblock LoginFree 2010 Tax Software Download1040 Ez Form 20122012 Irs Tax Forms 1040aDo I File Back Taxes Free

Taxact 1040x

Taxact 1040x 4. Taxact 1040x   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. Taxact 1040x Loan secured by benefits. Taxact 1040x Waiver of survivor benefits. Taxact 1040x Waiver of 30-day waiting period before annuity starting date. Taxact 1040x Involuntary cash-out of benefits not more than dollar limit. Taxact 1040x Exception for certain loans. Taxact 1040x Exception for QDRO. Taxact 1040x SIMPLE and safe harbor 401(k) plan exception. Taxact 1040x Setting Up a Qualified PlanAdopting a Written Plan Investing Plan Assets Minimum Funding RequirementDue dates. Taxact 1040x Installment percentage. Taxact 1040x Extended period for making contributions. Taxact 1040x 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. Taxact 1040x Caution: Form 5500-EZ not required. Taxact 1040x Form 5500. Taxact 1040x Electronic filing of Forms 5500 and 5500-SF. Taxact 1040x 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. Taxact 1040x dol. Taxact 1040x gov/ebsa/pdf/2013-5500. Taxact 1040x pdf www. Taxact 1040x dol. Taxact 1040x gov/ebsa/pdf/2013-5500-SF. Taxact 1040x pdf W-2 Wage and Tax Statement Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Taxact 1040x 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Taxact 1040x 1040 U. Taxact 1040x S. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x R. Taxact 1040x 10 plans. Taxact 1040x A sole proprietor or a partnership can set up one of these plans. Taxact 1040x A common-law employee or a partner cannot set up one of these plans. Taxact 1040x The plans described here can also be set up and maintained by employers that are corporations. Taxact 1040x All the rules discussed here apply to corporations except where specifically limited to the self-employed. Taxact 1040x The plan must be for the exclusive benefit of employees or their beneficiaries. Taxact 1040x These qualified plans can include coverage for a self-employed individual. Taxact 1040x As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. Taxact 1040x The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. Taxact 1040x Kinds of Plans There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. Taxact 1040x 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. Taxact 1040x Defined Contribution Plan A defined contribution plan provides an individual account for each participant in the plan. Taxact 1040x It provides benefits to a participant largely based on the amount contributed to that participant's account. Taxact 1040x Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. Taxact 1040x A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan. Taxact 1040x Profit-sharing plan. Taxact 1040x   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). Taxact 1040x 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. Taxact 1040x An employer may even make no contribution to the plan for a given year. Taxact 1040x   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. Taxact 1040x   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). Taxact 1040x Money purchase pension plan. Taxact 1040x   Contributions to a money purchase pension plan are fixed and are not based on your business profits. Taxact 1040x 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. Taxact 1040x This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits. Taxact 1040x Defined Benefit Plan A defined benefit plan is any plan that is not a defined contribution plan. Taxact 1040x Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Taxact 1040x Actuarial assumptions and computations are required to figure these contributions. Taxact 1040x Generally, you will need continuing professional help to have a defined benefit plan. Taxact 1040x Qualification Rules To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. Taxact 1040x 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. Taxact 1040x The following is a brief overview of important qualification rules that generally have not yet been discussed. Taxact 1040x It is not intended to be all-inclusive. Taxact 1040x See Setting Up a Qualified Plan , later. Taxact 1040x Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. Taxact 1040x 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. Taxact 1040x Plan assets must not be diverted. Taxact 1040x   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. Taxact 1040x As a general rule, the assets cannot be diverted to the employer. Taxact 1040x Minimum coverage requirement must be met. Taxact 1040x   To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following. Taxact 1040x 50 employees, or The greater of: 40% of all employees, or Two employees. Taxact 1040x If there is only one employee, the plan must benefit that employee. Taxact 1040x Contributions or benefits must not discriminate. Taxact 1040x   Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees. Taxact 1040x Contributions and benefits must not be more than certain limits. Taxact 1040x   Your plan must not provide for contributions or benefits that are more than certain limits. Taxact 1040x 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. Taxact 1040x These limits are discussed later in this chapter under Contributions. Taxact 1040x Minimum vesting standard must be met. Taxact 1040x   Your plan must satisfy certain requirements regarding when benefits vest. Taxact 1040x A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. Taxact 1040x A benefit is nonforfeitable if it cannot be lost upon the happening, or failure to happen, of any event. Taxact 1040x Special rules apply to forfeited benefit amounts. Taxact 1040x 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. Taxact 1040x   Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. Taxact 1040x Forfeitures must be used instead to reduce employer contributions. Taxact 1040x Participation. Taxact 1040x   In general, an employee must be allowed to participate in your plan if he or she meets both the following requirements. Taxact 1040x Has reached age 21. Taxact 1040x 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). Taxact 1040x A plan cannot exclude an employee because he or she has reached a specified age. Taxact 1040x Leased employee. Taxact 1040x   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. Taxact 1040x These rules include those in all the following areas. Taxact 1040x Nondiscrimination in coverage, contributions, and benefits. Taxact 1040x Minimum age and service requirements. Taxact 1040x Vesting. Taxact 1040x Limits on contributions and benefits. Taxact 1040x Top-heavy plan requirements. Taxact 1040x Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you. Taxact 1040x Benefit payment must begin when required. Taxact 1040x   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. Taxact 1040x The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan. Taxact 1040x The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs. Taxact 1040x The plan year in which the participant separates from service. Taxact 1040x Early retirement. Taxact 1040x   Your plan can provide for payment of retirement benefits before the normal retirement age. Taxact 1040x 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. Taxact 1040x Satisfies the service requirement for the early retirement benefit. Taxact 1040x Separates from service with a nonforfeitable right to an accrued benefit. Taxact 1040x The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met. Taxact 1040x Required minimum distributions. Taxact 1040x   Special rules require minimum annual distributions from qualified plans, generally beginning after age  70½. Taxact 1040x See Required Distributions , under Distributions, later. Taxact 1040x Survivor benefits. Taxact 1040x   Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms. Taxact 1040x A qualified joint and survivor annuity for a vested participant who does not die before the annuity starting date. Taxact 1040x A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse. Taxact 1040x   The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met. Taxact 1040x The participant does not choose benefits in the form of a life annuity. Taxact 1040x 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. Taxact 1040x The plan is not a direct or indirect transferee of a plan that must provide automatic survivor benefits. Taxact 1040x Loan secured by benefits. Taxact 1040x   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. Taxact 1040x Waiver of survivor benefits. Taxact 1040x   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. Taxact 1040x The plan also must allow the participant to withdraw the waiver. Taxact 1040x The spouse's consent must be witnessed by a plan representative or notary public. Taxact 1040x Waiver of 30-day waiting period before annuity starting date. Taxact 1040x    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. Taxact 1040x   The waiver is allowed only if the distribution begins more than 7 days after the written explanation is provided. Taxact 1040x Involuntary cash-out of benefits not more than dollar limit. Taxact 1040x   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. Taxact 1040x   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. Taxact 1040x 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. Taxact 1040x   Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits. Taxact 1040x   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. Taxact 1040x A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. Taxact 1040x See Section 402(f) Notice under Distributions, later, for more details. Taxact 1040x Consolidation, merger, or transfer of assets or liabilities. Taxact 1040x   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. Taxact 1040x (if the plan had then terminated). Taxact 1040x Benefits must not be assigned or alienated. Taxact 1040x   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. Taxact 1040x Exception for certain loans. Taxact 1040x   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. Taxact 1040x A disqualified person is defined later in this chapter under Prohibited Transactions. Taxact 1040x Exception for QDRO. Taxact 1040x   Compliance with a QDRO (qualified domestic relations order) does not result in a prohibited assignment or alienation of benefits. Taxact 1040x   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. Taxact 1040x 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. Taxact 1040x No benefit reduction for social security increases. Taxact 1040x   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. Taxact 1040x This rule also applies to plans supplementing the benefits provided by other federal or state laws. Taxact 1040x Elective deferrals must be limited. Taxact 1040x   If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. Taxact 1040x See Limit on Elective Deferrals later in this chapter. Taxact 1040x Top-heavy plan requirements. Taxact 1040x   A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees. Taxact 1040x   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. Taxact 1040x Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan. Taxact 1040x   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. Taxact 1040x These qualification requirements for top-heavy plans are explained in section 416 and its regulations. Taxact 1040x SIMPLE and safe harbor 401(k) plan exception. Taxact 1040x   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. Taxact 1040x QACAs (discussed later) also are not subject to top-heavy requirements. Taxact 1040x Setting Up a Qualified Plan There are two basic steps in setting up a qualified plan. Taxact 1040x First you adopt a written plan. Taxact 1040x Then you invest the plan assets. Taxact 1040x You, the employer, are responsible for setting up and maintaining the plan. Taxact 1040x If you are self-employed, it is not necessary to have employees besides yourself to sponsor and set up a qualified plan. Taxact 1040x If you have employees, see Participation, under Qualification Rules, earlier. Taxact 1040x Set-up deadline. Taxact 1040x   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). Taxact 1040x Credit for startup costs. Taxact 1040x   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. Taxact 1040x For more information, see Credit for startup costs under Reminders, earlier. Taxact 1040x Adopting a Written Plan You must adopt a written plan. Taxact 1040x The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. Taxact 1040x Or it can be an individually designed plan. Taxact 1040x Written plan requirement. Taxact 1040x   To qualify, the plan you set up must be in writing and must be communicated to your employees. Taxact 1040x The plan's provisions must be stated in the plan. Taxact 1040x It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code. Taxact 1040x Master or prototype plans. Taxact 1040x   Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. Taxact 1040x Master and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals). Taxact 1040x 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. Taxact 1040x Under a prototype plan, a separate trust or custodial account is established for each employer. Taxact 1040x Plan providers. Taxact 1040x   The following organizations generally can provide IRS-approved master or prototype plans. Taxact 1040x Banks (including some savings and loan associations and federally insured credit unions). Taxact 1040x Trade or professional organizations. Taxact 1040x Insurance companies. Taxact 1040x Mutual funds. Taxact 1040x Individually designed plan. Taxact 1040x   If you prefer, you can set up an individually designed plan to meet specific needs. Taxact 1040x Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. Taxact 1040x You may need professional help for this. Taxact 1040x See Rev. Taxact 1040x Proc. Taxact 1040x 2014-6, 2014-1 I. Taxact 1040x R. Taxact 1040x B. Taxact 1040x 198, available at www. Taxact 1040x irs. Taxact 1040x gov/irb/2014-1_IRB/ar10. Taxact 1040x html, as annually updated, that may help you decide whether to apply for approval. Taxact 1040x Internal Revenue Bulletins are available on the IRS website at IRS. Taxact 1040x gov They are also available at most IRS offices and at certain libraries. Taxact 1040x User fee. Taxact 1040x   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. Taxact 1040x At least one of them must be a non-highly compensated employee participating in the plan. Taxact 1040x The fee does not apply to requests made by the later of the following dates. Taxact 1040x The end of the 5th plan year the plan is in effect. Taxact 1040x The end of any remedial amendment period for the plan that begins within the first 5 plan years. Taxact 1040x The request cannot be made by the sponsor of a prototype or similar plan the sponsor intends to market to participating employers. Taxact 1040x   For more information about whether the user fee applies, see Rev. Taxact 1040x Proc. Taxact 1040x 2014-8, 2014-1 I. Taxact 1040x R. Taxact 1040x B. Taxact 1040x 242, available at www. Taxact 1040x irs. Taxact 1040x gov/irb/2014-1_IRB/ar12. Taxact 1040x html, as may be annually updated; Notice 2003-49, 2003-32 I. Taxact 1040x R. Taxact 1040x B. Taxact 1040x 294, available at www. Taxact 1040x irs. Taxact 1040x gov/irb/2003-32_IRB/ar13. Taxact 1040x html; and Notice 2011-86, 2011-45 I. Taxact 1040x R. Taxact 1040x B. Taxact 1040x 698, available at www. Taxact 1040x irs. Taxact 1040x gov/irb/2011-45_IRB/ar11. Taxact 1040x html. Taxact 1040x Investing Plan Assets In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets. Taxact 1040x You can establish a trust or custodial account to invest the funds. Taxact 1040x You, the trust, or the custodial account can buy an annuity contract from an insurance company. Taxact 1040x Life insurance can be included only if it is incidental to the retirement benefits. Taxact 1040x You set up a trust by a legal instrument (written document). Taxact 1040x You may need professional help to do this. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x If anyone other than a trustee holds them, however, the contracts or certificates must state they are not transferable. Taxact 1040x Other plan requirements. Taxact 1040x   For information on other important plan requirements, see Qualification Rules , earlier in this chapter. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x For information on this funding requirement, see section 412 and its regulations. Taxact 1040x Quarterly installments of required contributions. Taxact 1040x   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. Taxact 1040x If you do not pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment. Taxact 1040x Due dates. Taxact 1040x   The due dates for the installments are 15 days after the end of each quarter. Taxact 1040x For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year). Taxact 1040x Installment percentage. Taxact 1040x   Each quarterly installment must be 25% of the required annual payment. Taxact 1040x Extended period for making contributions. Taxact 1040x   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. Taxact 1040x Contributions A qualified plan is generally funded by your contributions. Taxact 1040x However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. Taxact 1040x See Employee Contributions and Elective Deferrals later. Taxact 1040x Contributions deadline. Taxact 1040x   You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year. Taxact 1040x Self-employed individual. Taxact 1040x   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. Taxact 1040x Your net earnings must be from your personal services, not from your investments. Taxact 1040x 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. Taxact 1040x Employer Contributions There are certain limits on the contributions and other annual additions you can make each year for plan participants. Taxact 1040x There are also limits on the amount you can deduct. Taxact 1040x See Deduction Limits , later. Taxact 1040x Limits on Contributions and Benefits Your plan must provide that contributions or benefits cannot exceed certain limits. Taxact 1040x The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan. Taxact 1040x Defined benefit plan. Taxact 1040x   For 2013, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts. Taxact 1040x 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. Taxact 1040x $205,000 ($210,000 for 2014). Taxact 1040x Defined contribution plan. Taxact 1040x   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. Taxact 1040x 100% of the participant's compensation. Taxact 1040x $51,000 ($52,000 for 2014). Taxact 1040x   Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit. Taxact 1040x Employee Contributions Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Taxact 1040x Even though these employee contributions are not deductible, the earnings on them are tax free until distributed in later years. Taxact 1040x 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. Taxact 1040x See Regulations sections 1. Taxact 1040x 401(k)-2 and 1. Taxact 1040x 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). Taxact 1040x When Contributions Are Considered Made You generally apply your plan contributions to the year in which you make them. Taxact 1040x But you can apply them to the previous year if all the following requirements are met. Taxact 1040x You make them by the due date of your tax return for the previous year (plus extensions). Taxact 1040x The plan was established by the end of the previous year. Taxact 1040x The plan treats the contributions as though it had received them on the last day of the previous year. Taxact 1040x You do either of the following. Taxact 1040x You specify in writing to the plan administrator or trustee that the contributions apply to the previous year. Taxact 1040x You deduct the contributions on your tax return for the previous year. Taxact 1040x A partnership shows contributions for partners on Form 1065. Taxact 1040x Employer's promissory note. Taxact 1040x   Your promissory note made out to the plan is not a payment that qualifies for the deduction. Taxact 1040x Also, issuing this note is a prohibited transaction subject to tax. Taxact 1040x See Prohibited Transactions , later. Taxact 1040x Employer Deduction You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. Taxact 1040x The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. Taxact 1040x Deduction Limits The deduction limit for your contributions to a qualified plan depends on the kind of plan you have. Taxact 1040x Defined contribution plans. Taxact 1040x   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. Taxact 1040x If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. Taxact 1040x See Deduction Limit for Self-Employed Individuals , later. Taxact 1040x   When figuring the deduction limit, the following rules apply. Taxact 1040x Elective deferrals (discussed later) are not subject to the limit. Taxact 1040x Compensation includes elective deferrals. Taxact 1040x The maximum compensation that can be taken into account for each employee in 2013 is $255,000 ($260,000 for 2014). Taxact 1040x Defined benefit plans. Taxact 1040x   The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Taxact 1040x Consequently, an actuary must figure your deduction limit. Taxact 1040x    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. Taxact 1040x Table 4–1. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x Compensation is your net earnings from self-employment, defined in chapter 1. Taxact 1040x This definition takes into account both the following items. Taxact 1040x The deduction for the deductible part of your self-employment tax. Taxact 1040x The deduction for contributions on your behalf to the plan. Taxact 1040x The deduction for your own contributions and your net earnings depend on each other. Taxact 1040x For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. Taxact 1040x To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Taxact 1040x Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Taxact 1040x Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Taxact 1040x 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. Taxact 1040x Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Taxact 1040x (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership. Taxact 1040x ) 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. Taxact 1040x Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. Taxact 1040x For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. Taxact 1040x However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. Taxact 1040x See Deduction Limit for Self-Employed Individuals, earlier. Taxact 1040x The amount you carry over and deduct may be subject to the excise tax discussed next. Taxact 1040x Table 4-1, earlier, illustrates the carryover of excess contributions to a profit-sharing plan. Taxact 1040x 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. Taxact 1040x In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs. Taxact 1040x Special rule for self-employed individuals. Taxact 1040x   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. Taxact 1040x 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. Taxact 1040x See Minimum Funding Requirement , earlier. Taxact 1040x Reporting the tax. Taxact 1040x   You must report the tax on your nondeductible contributions on Form 5330. Taxact 1040x Form 5330 includes a computation of the tax. Taxact 1040x See the separate instructions for completing the form. Taxact 1040x 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. Taxact 1040x A plan with this type of arrangement is popularly known as a “401(k) plan. Taxact 1040x ” (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business. Taxact 1040x ) This contribution is called an “elective deferral” because participants choose (elect) to defer receipt of the money. Taxact 1040x In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans. Taxact 1040x A profit-sharing plan. Taxact 1040x A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date. Taxact 1040x Partnership. Taxact 1040x   A partnership can have a 401(k) plan. Taxact 1040x Restriction on conditions of participation. Taxact 1040x   The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service. Taxact 1040x Matching contributions. Taxact 1040x   If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. Taxact 1040x 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. Taxact 1040x Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions. Taxact 1040x Nonelective contributions. Taxact 1040x   You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. Taxact 1040x These are called nonelective contributions. Taxact 1040x Employee compensation limit. Taxact 1040x   No more than $255,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2013. Taxact 1040x This limit is $260,000 in 2014. Taxact 1040x SIMPLE 401(k) plan. Taxact 1040x   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. Taxact 1040x A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. Taxact 1040x For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3. Taxact 1040x Distributions. Taxact 1040x   Certain rules apply to distributions from 401(k) plans. Taxact 1040x See Distributions From 401(k) Plans , later. Taxact 1040x Limit on Elective Deferrals There is a limit on the amount an employee can defer each year under these plans. Taxact 1040x This limit applies without regard to community property laws. Taxact 1040x Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. Taxact 1040x For 2013 and 2014, the basic limit on elective deferrals is $17,500. Taxact 1040x This limit applies to all salary reduction contributions and elective deferrals. Taxact 1040x If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income. Taxact 1040x Catch-up contributions. Taxact 1040x   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. Taxact 1040x The catch-up contribution limit for 2013 and 2014 is $5,500. Taxact 1040x 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). Taxact 1040x However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Taxact 1040x The catch-up contribution limit. Taxact 1040x The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Taxact 1040x Treatment of contributions. Taxact 1040x   Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. Taxact 1040x Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. Taxact 1040x Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. Taxact 1040x Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Taxact 1040x Forfeiture. Taxact 1040x   Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals. Taxact 1040x Reporting on Form W-2. Taxact 1040x   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Taxact 1040x You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Taxact 1040x You must also include them in box 12. Taxact 1040x Mark the “Retirement plan” checkbox in box 13. Taxact 1040x For more information, see the Form W-2 instructions. Taxact 1040x Automatic Enrollment Your 401(k) plan can have an automatic enrollment feature. Taxact 1040x 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. Taxact 1040x These contributions are elective deferrals. Taxact 1040x An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). Taxact 1040x For more information, see Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses. Taxact 1040x Eligible automatic contribution arrangement. Taxact 1040x   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. Taxact 1040x This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). Taxact 1040x There is no required deferral percentage. Taxact 1040x Withdrawals. Taxact 1040x   Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met. Taxact 1040x The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA. Taxact 1040x The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon. Taxact 1040x   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. Taxact 1040x The additional 10% tax on early distributions will not apply to the distribution. Taxact 1040x Notice requirement. Taxact 1040x   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. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x The notice also must explain how contributions will be invested in the absence of an investment election by the employee. Taxact 1040x Qualified automatic contribution arrangement. Taxact 1040x    A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. Taxact 1040x It contains an automatic enrollment feature, and mandatory employer contributions are required. Taxact 1040x If your plan includes a QACA, it will not be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). Taxact 1040x Additionally, your plan will not be subject to the actual contribution percentage (ACP) test if certain additional requirements are met. Taxact 1040x 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. Taxact 1040x In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). Taxact 1040x If an employee does not make an affirmative election, the default deferral percentage must meet the following conditions. Taxact 1040x It must be applied uniformly. Taxact 1040x It must not exceed 10%. Taxact 1040x It must be at least 3% in the first plan year it applies to an employee and through the end of the following year. Taxact 1040x It must increase to at least 4% in the following plan year. Taxact 1040x It must increase to at least 5% in the following plan year. Taxact 1040x It must increase to at least 6% in subsequent plan years. Taxact 1040x Matching or nonelective contributions. Taxact 1040x   Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms. Taxact 1040x Matching contributions. Taxact 1040x You must make matching contributions on behalf of each non-highly compensated employee in the following amounts. Taxact 1040x An amount equal to 100% of elective deferrals, up to 1% of compensation. Taxact 1040x An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation. Taxact 1040x Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. Taxact 1040x The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. Taxact 1040x Nonelective contributions. Taxact 1040x 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. Taxact 1040x Vesting requirements. Taxact 1040x   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. Taxact 1040x These contributions are subject to special withdrawal restrictions, discussed later. Taxact 1040x Notice requirements. Taxact 1040x   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. Taxact 1040x The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. Taxact 1040x 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. Taxact 1040x Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x The plan must then pay the employee that amount, plus earnings on the amount through the end of 2013, by April 15, 2014. Taxact 1040x Excess withdrawn by April 15. Taxact 1040x   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. Taxact 1040x However, any income earned in 2013 on the excess deferral taken out is taxable in the tax year in which it is taken out. Taxact 1040x The distribution is not subject to the additional 10% tax on early distributions. Taxact 1040x   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. Taxact 1040x   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. Taxact 1040x Excess not withdrawn by April 15. Taxact 1040x   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. Taxact 1040x In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Taxact 1040x 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. Taxact 1040x Reporting corrective distributions on Form 1099-R. Taxact 1040x   Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. Taxact 1040x For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498. Taxact 1040x Tax on excess contributions of highly compensated employees. Taxact 1040x   The law provides tests to detect discrimination in a plan. Taxact 1040x 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. Taxact 1040x Report the tax on Form 5330. Taxact 1040x The ADP test does not apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. Taxact 1040x Also, the ACP test does not apply to these plans if certain additional requirements are met. Taxact 1040x   The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Taxact 1040x 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. Taxact 1040x   See Regulations sections 1. Taxact 1040x 401(k)-2 and 1. Taxact 1040x 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). Taxact 1040x    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. Taxact 1040x Safe harbor 401(k) plan. Taxact 1040x 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. Taxact 1040x For your plan to be a safe harbor plan, you must meet the following conditions. Taxact 1040x Matching or nonelective contributions. Taxact 1040x You must make matching or nonelective contributions according to one of the following formulas. Taxact 1040x Matching contributions. Taxact 1040x You must make matching contributions according to the following rules. Taxact 1040x You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation. Taxact 1040x You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation. Taxact 1040x The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. Taxact 1040x Nonelective contributions. Taxact 1040x 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. Taxact 1040x These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions. Taxact 1040x Notice requirement. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x 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. Taxact 1040x An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years. Taxact 1040x 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. Taxact 1040x Rollover. Taxact 1040x   Beginning September 28, 2010, a rollover from another account can be made to a designated Roth account in the same plan. Taxact 1040x For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. Taxact 1040x R. Taxact 1040x B. Taxact 1040x 872, available at www. Taxact 1040x irs. Taxact 1040x gov/irb/2010-51_IRB/ar11. Taxact 1040x html, and Notice 2013-74. Taxact 1040x A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. Taxact 1040x Rollover amounts do not apply toward the annual deferral limit. Taxact 1040x 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. Taxact 1040x See the Form W-2 and 1099-R instructions for detailed information. Taxact 1040x Distributions Amounts paid to plan participants from a qualified plan are called distributions. Taxact 1040x Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Taxact 1040x Also, certain loans may be treated as distributions. Taxact 1040x See Loans Treated as Distributions in Publication 575. Taxact 1040x 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). Taxact 1040x These distribution rules apply individually to each qualified plan. Taxact 1040x You cannot satisfy the requirement for one plan by taking a distribution from another. Taxact 1040x The plan must provide that these rules override any inconsistent distribution options previously offered. Taxact 1040x Minimum distribution. Taxact 1040x   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. Taxact 1040x This minimum is figured by dividing the account balance by the applicable life expectancy. Taxact 1040x The plan administrator can use the life expectancy tables in Appendix C of Publication 590 for this purpose. Taxact 1040x For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575. Taxact 1040x Required beginning date. Taxact 1040x   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. Taxact 1040x   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. Taxact 1040x Calendar year in which he or she reaches age 70½. Taxact 1040x Calendar year in which he or she retires from employment with the employer maintaining the plan. Taxact 1040x 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. Taxact 1040x   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. Taxact 1040x For more information, see Tax on Excess Accumulation in Publication 575. Taxact 1040x Distributions after the starting year. Taxact 1040x   The distribution required to be made by April 1 is treated as a distribution for the starting year. Taxact 1040x (The starting year is the year in which the participant meets (1) or (2) above, whichever applies. Taxact 1040x ) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. Taxact 1040x 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). Taxact 1040x Distributions after participant's death. Taxact 1040x   See Publication 575 for the special rules covering distributions made after the death of a participant. Taxact 1040x Distributions From 401(k) Plans Generally, distributions cannot be made until one of the following occurs. Taxact 1040x The employee retires, dies, becomes disabled, or otherwise severs employment. Taxact 1040x The plan ends and no other defined contribution plan is established or continued. Taxact 1040x 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. Taxact 1040x For the rules on hardship distributions, including the limits on them, see Regulations section 1. Taxact 1040x 401(k)-1(d). Taxact 1040x The employee becomes eligible for a qualified reservist distribution (defined next). Taxact 1040x Certain distributions listed above may be subject to the tax on early distributions discussed later. Taxact 1040x Qualified reservist distributions. Taxact 1040x   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. Taxact 1040x All or part of a qualified reservist distribution can be recontributed to an IRA. Taxact 1040x The additional 10% tax on early distributions does not apply to a qualified reservist distribution. Taxact 1040x 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. Taxact 1040x Since most recipients have no cost basis, a distribution is generally fully taxable. Taxact 1040x An exception is a distribution that is properly rolled over as discussed under Rollover, next. Taxact 1040x The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. Taxact 1040x 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. Taxact 1040x Note. Taxact 1040x 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. Taxact 1040x Also, a distribution from a designated Roth account is entirely tax-free if certain conditions are met. Taxact 1040x See Qualified distributions under Qualified Roth Contribution Program, earlier. Taxact 1040x Rollover. Taxact 1040x   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. Taxact 1040x However, it may be subject to withholding as discussed under Withholding requirement, later. Taxact 1040x 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. Taxact 1040x Eligible rollover distribution. Taxact 1040x   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. Taxact 1040x A required minimum distribution. Taxact 1040x See Required Distributions , earlier. Taxact 1040x Any of a series of substantially equal payments made at least once a year over any of the following periods. Taxact 1040x The employee's life or life expectancy. Taxact 1040x The joint lives or life expectancies of the employee and beneficiary. Taxact 1040x A period of 10 years or longer. Taxact 1040x A hardship distribution. Taxact 1040x The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. Taxact 1040x See Employee Contributions , earlier, and Rollover of nontaxable amounts, next. Taxact 1040x Loans treated as distributions. Taxact 1040x Dividends on employer securities. Taxact 1040x The cost of any life insurance coverage provided under a qualified retirement plan. Taxact 1040x Similar items designated by the IRS in published guidance. Taxact 1040x See, for example, the Instructions for Forms 1099-R and 5498. Taxact 1040x Rollover of nontaxable amounts. Taxact 1040x   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. Taxact 1040x 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. Taxact 1040x If the rollover is to an IRA, the transfer can be made by any rollover method. Taxact 1040x Note. Taxact 1040x A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. Taxact 1040x 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). Taxact 1040x More information. Taxact 1040x   For more information about rollovers, see Rollovers in Pubs. Taxact 1040x 575 and 590. Taxact 1040x Withholding requirement. Taxact 1040x   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. Taxact 1040x Exceptions. Taxact 1040x   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. Taxact 1040x   If the distribution is not an eligible rollover distribution, defined earlier, the 20% withholding requirement does not apply. Taxact 1040x Other withholding rules apply to distributions that are not eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). Taxact 1040x However, the participant can choose not to have tax withheld from these distributions. Taxact 1040x If the participant does not make this choice, the following withholding rules apply. Taxact 1040x For periodic distributions, withholding is based on their treatment as wages. Taxact 1040x For nonperiodic distributions, 10% of the taxable part is withheld. Taxact 1040x Estimated tax payments. Taxact 1040x   If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. Taxact 1040x For more information, see Withholding Tax and Estimated Tax in Publication 575. Taxact 1040x Section 402(f) Notice. Taxact 1040x   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. Taxact 1040x That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer. Taxact 1040x That tax will be withheld from the distribution if it is not directly transferred to an eligible retirement plan. Taxact 1040x 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. Taxact 1040x Certain other rules that may be applicable. Taxact 1040x   Notice 2009-68, 2009-39 I. Taxact 1040x R. Taxact 1040x B. Taxact 1040x 423, available at www. Taxact 1040x irs. Taxact 1040x gov/irb/2009-39_IRB/ar14. Taxact 1040x html, contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions. Taxact 1040x If the plan allows in-plan Roth rollovers, the 402(f) notice must be amended to reflect this. Taxact 1040x Notice 2010-84 contains guidance on how to modify a 402(f) notice for in-plan Roth rollovers. Taxact 1040x Timing of notice. Taxact 1040x   The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution. Taxact 1040x Method of notice. Taxact 1040x   The written notice must be provided individually to each distributee of an eligible rollover distribution. Taxact 1040x Posting of the notice is not sufficient. Taxact 1040x However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. Taxact 1040x See Regulations section 1. Taxact 1040x 401(a)-21. Taxact 1040x Tax on failure to give notice. Taxact 1040x   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. Taxact 1040x The tax will not be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect. Taxact 1040x 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. Taxact 1040x This tax applies to the amount received that the employee must include in income. Taxact 1040x Exceptions. Taxact 1040x   The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. Taxact 1040x Made to a beneficiary (or to the estate of the employee) on or after the death of the employee. Taxact 1040x Made due to the employee having a qualifying disability. Taxact 1040x 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. Taxact 1040x (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. Taxact 1040x ) Made to an employee after separation from service if the separation occurred during o
Print - Click this link to Print this page

Understanding your CP14I Notice

You owe taxes and penalties because you didn't take out the minimum amount you had to from your traditional individual retirement arrangement (IRA). Or, you put into a tax-sheltered account more than you can legally.


What you need to do

  • Read your notice carefully — it'll explain how much you owe and how to pay it.
  • Pay the amount you owe by the date the notice asks.
  • Make a payment plan if you can't pay the full amount you owe.
  • Contact us if you disagree.

You may want to...


Answers to Common Questions

What is a traditional individual retirement arrangement (IRA)?
A traditional IRA is a retirement savings plan where the amount you put in is tax-deductable. The money you put in is usually not taxed until you take it out. A traditional IRA is not a Roth IRA or a SIMPLE IRA.

What is a Roth IRA?
A Roth IRA is a retirement plan where the amount you put in is taxable. But what the amount earns and what you take out is not taxable.

What is a SIMPLE IRA?
A SIMPLE IRA is a retirement plan sponsored by your employer. You put part of your pay into it. Your employer matches a certain amount of what you put in. You don't pay tax on what you and your employer put in until you take it out.

How much do I have to take out from my traditional IRA?
You must take out a minimum amount from your IRA starting at age 70½. The amount you have to take out is based on your life expectancy. Publication 590, Individual Retirement Arrangements (IRAs) has a life expectancy chart. You divide the money in your account by the years of your life expectancy. The result is the minimum amount you must take out. You don't have to take out a minimum amount from Roth IRAs.

Are there different types of tax-sheltered accounts?
The different types of tax-sheltered accounts, besides retirement accounts, could include saving accounts for educational or medical expenses.

What is the maximum amount I can contribute to a tax-sheltered account?
The maximum amount depends on the type of account.

What happens if I can't pay what I owe?
You can make a payment plan if you can’t pay the full amount you owe.

How can I make a payment plan?
Call us at the toll free number on the top right corner of your notice to talk about payment plans or learn more about them.

What should I do if I disagree with the notice?
Call us at the toll free number on the top right corner of your notice. Please have your paperwork (such as cancelled checks, amended return, etc.) ready when you call.

Am I charged interest on the money I owe?
Not if you pay the full amount you owe by the date on the payment coupon. However, interest adds up on the unpaid amount after that date.

Will I receive a penalty if I can't pay the full amount?
Yes, you'll receive a late payment penalty. Call us at the number on your notice if you can't pay the full amount because of financial problems. We may be able to remove the penalty.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 

Page Last Reviewed or Updated: 14-Mar-2014

The Taxact 1040x

Taxact 1040x 3. Taxact 1040x   Savings Incentive Match Plans for Employees (SIMPLE) Table of Contents Introduction What Is a SIMPLE Plan?Eligible Employees How Are Contributions Made? How Much Can Be Contributed on Your Behalf?Matching contributions less than 3%. Taxact 1040x Traditional IRA mistakenly moved to SIMPLE IRA. Taxact 1040x When Can You Withdraw or Use Assets?Are Distributions Taxable? Introduction This chapter is for employees who need information about savings incentive match plans for employees (SIMPLE plans). Taxact 1040x It explains what a SIMPLE plan is, contributions to a SIMPLE plan, and distributions from a SIMPLE plan. Taxact 1040x Under a SIMPLE plan, SIMPLE retirement accounts for participating employees can be set up either as: Part of a 401(k) plan, or A plan using IRAs (SIMPLE IRA). Taxact 1040x This chapter only discusses the SIMPLE plan rules that relate to SIMPLE IRAs. Taxact 1040x See chapter 3 of Publication 560 for information on any special rules for SIMPLE plans that do not use IRAs. Taxact 1040x If your employer maintains a SIMPLE plan, you must be notified, in writing, that you can choose the financial institution that will serve as trustee for your SIMPLE IRA and that you can roll over or transfer your SIMPLE IRA to another financial institution. Taxact 1040x See Rollovers and Transfers Exception, later under When Can You Withdraw or Use Assets. Taxact 1040x What Is a SIMPLE Plan? A SIMPLE plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. Taxact 1040x See chapter 3 of Publication 560 for information on the requirements employers must satisfy to set up a SIMPLE plan. Taxact 1040x A SIMPLE plan is a written agreement (salary reduction agreement) between you and your employer that allows you, if you are an eligible employee (including a self-employed individual), to choose to: Reduce your compensation (salary) by a certain percentage each pay period, and Have your employer contribute the salary reductions to a SIMPLE IRA on your behalf. Taxact 1040x These contributions are called salary reduction contributions. Taxact 1040x All contributions under a SIMPLE IRA plan must be made to SIMPLE IRAs, not to any other type of IRA. Taxact 1040x The SIMPLE IRA can be an individual retirement account or an individual retirement annuity, described in chapter 1. Taxact 1040x Contributions are made on behalf of eligible employees. Taxact 1040x (See Eligible Employees below. Taxact 1040x ) Contributions are also subject to various limits. Taxact 1040x (See How Much Can Be Contributed on Your Behalf , later. Taxact 1040x ) In addition to salary reduction contributions, your employer must make either matching contributions or nonelective contributions. Taxact 1040x See How Are Contributions Made , later. Taxact 1040x You may be able to claim a credit for contributions to your SIMPLE plan. Taxact 1040x For more information, see chapter 4. Taxact 1040x Eligible Employees You must be allowed to participate in your employer's SIMPLE plan if you: Received at least $5,000 in compensation from your employer during any 2 years prior to the current year, and Are reasonably expected to receive at least $5,000 in compensation during the calendar year for which contributions are made. Taxact 1040x Self-employed individual. Taxact 1040x   For SIMPLE plan purposes, the term employee includes a self-employed individual who received earned income. Taxact 1040x Excludable employees. Taxact 1040x   Your employer can exclude the following employees from participating in the SIMPLE plan. Taxact 1040x Employees whose retirement benefits are covered by a collective bargaining agreement (union contract). Taxact 1040x Employees who are nonresident aliens and received no earned income from sources within the United States. Taxact 1040x Employees who would not have been eligible employees if an acquisition, disposition, or similar transaction had not occurred during the year. Taxact 1040x Compensation. Taxact 1040x   For purposes of the SIMPLE plan rules, your compensation for a year generally includes the following amounts. Taxact 1040x Wages, tips, and other pay from your employer that is subject to income tax withholding. Taxact 1040x Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457) plans, SEP plans, and SIMPLE plans. Taxact 1040x Self-employed individual compensation. Taxact 1040x   For purposes of the SIMPLE plan rules, if you are self-employed, your compensation for a year is your net earnings from self-employment (Schedule SE (Form 1040), Section A, line 4, or Section B, line 6) before subtracting any contributions made to a SIMPLE IRA on your behalf. Taxact 1040x   For these purposes, net earnings from self-employment include services performed while claiming exemption from self-employment tax as a member of a group conscientiously opposed to social security benefits. Taxact 1040x How Are Contributions Made? Contributions under a salary reduction agreement are called salary reduction contributions. Taxact 1040x They are made on your behalf by your employer. Taxact 1040x Your employer must also make either matching contributions or nonelective contributions. Taxact 1040x Salary reduction contributions. Taxact 1040x   During the 60-day period before the beginning of any year, and during the 60-day period before you are eligible, you can choose salary reduction contributions expressed either as a percentage of compensation, or as a specific dollar amount (if your employer offers this choice). Taxact 1040x You can choose to cancel the election at any time during the year. Taxact 1040x   Salary reduction contributions are also referred to as “elective deferrals. Taxact 1040x ”   Your employer cannot place restrictions on the contributions amount (such as by limiting the contributions percentage), except to comply with the salary reduction contributions limit, discussed under How Much Can Be Contributed on Your Behalf, later. Taxact 1040x Matching contributions. Taxact 1040x   Unless your employer chooses to make nonelective contributions, your employer must make contributions equal to the salary reduction contributions you choose (elect), but only up to certain limits. Taxact 1040x See How Much Can Be Contributed on Your Behalf below. Taxact 1040x These contributions are in addition to the salary reduction contributions and must be made to the SIMPLE IRAs of all eligible employees (defined earlier) who chose salary reductions. Taxact 1040x These contributions are referred to as matching contributions. Taxact 1040x   Matching contributions on behalf of a self-employed individual are not treated as salary reduction contributions. Taxact 1040x Nonelective contributions. Taxact 1040x   Instead of making matching contributions, your employer may be able to choose to make nonelective contributions on behalf of all eligible employees. Taxact 1040x These nonelective contributions must be made on behalf of each eligible employee who has at least $5,000 of compensation from your employer, whether or not the employee chose salary reductions. Taxact 1040x   One of the requirements your employer must satisfy is notifying the employees that the election was made. Taxact 1040x For other requirements that your employer must satisfy, see chapter 3 of Publication 560. Taxact 1040x How Much Can Be Contributed on Your Behalf? The limits on contributions to a SIMPLE IRA vary with the type of contribution that is made. Taxact 1040x Salary reduction contributions limit. Taxact 1040x   Salary reduction contributions (employee-chosen contributions or elective deferrals) that your employer can make on your behalf under a SIMPLE plan are limited to $12,000 for 2013. Taxact 1040x The limitation remains at $12,000 for 2014. Taxact 1040x If you are a participant in any other employer plans during 2013 and you have elective salary reductions or deferred compensation under those plans, the salary reduction contributions under the SIMPLE plan also are included in the annual limit of $17,500 for 2013 on exclusions of salary reductions and other elective deferrals. Taxact 1040x You, not your employer, are responsible for monitoring compliance with these limits. Taxact 1040x Additional elective deferrals can be contributed to your SIMPLE plan if: You reached age 50 by the end of 2013, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit. Taxact 1040x The most that can be contributed in additional elective deferrals to your SIMPLE plan is the lesser of the following two amounts. Taxact 1040x $2,500 for 2013, or Your compensation for the year reduced by your other elective deferrals for the year. Taxact 1040x The additional deferrals are not subject to any other contribution limit and are not taken into account in applying other contribution limits. Taxact 1040x The additional deferrals are not subject to the nondiscrimination rules as long as all eligible participants are allowed to make them. Taxact 1040x Matching employer contributions limit. Taxact 1040x   Generally, your employer must make matching contributions to your SIMPLE IRA in an amount equal to your salary reduction contributions. Taxact 1040x These matching contributions cannot be more than 3% of your compensation for the calendar year. Taxact 1040x See Matching contributions less than 3% below. Taxact 1040x Example 1. Taxact 1040x In 2013, Joshua was a participant in his employer's SIMPLE plan. Taxact 1040x His compensation, before SIMPLE plan contributions, was $41,600 ($800 per week). Taxact 1040x Instead of taking it all in cash, Joshua elected to have 12. Taxact 1040x 5% of his weekly pay ($100) contributed to his SIMPLE IRA. Taxact 1040x For the full year, Joshua's salary reduction contributions were $5,200, which is less than the $12,000 limit on these contributions. Taxact 1040x Under the plan, Joshua's employer was required to make matching contributions to Joshua's SIMPLE IRA. Taxact 1040x Because his employer's matching contributions must equal Joshua's salary reductions, but cannot be more than 3% of his compensation (before salary reductions) for the year, his employer's matching contribution was limited to $1,248 (3% of $41,600). Taxact 1040x Example 2. Taxact 1040x Assume the same facts as in Example 1 , except that Joshua's compensation for the year was $408,163 and he chose to have 2. Taxact 1040x 94% of his weekly pay contributed to his SIMPLE IRA. Taxact 1040x In this example, Joshua's salary reduction contributions for the year (2. Taxact 1040x 94% × $408,163) were equal to the 2013 limit for salary reduction contributions ($12,000). Taxact 1040x Because 3% of Joshua's compensation ($12,245) is more than the amount his employer was required to match ($12,000), his employer's matching contributions were limited to $12,000. Taxact 1040x In this example, total contributions made on Joshua's behalf for the year were $24,000 ($12,000 (Joshua's contributions) + $12,000 (matching contributions)), the maximum contributions permitted under a SIMPLE IRA for 2013. Taxact 1040x Matching contributions less than 3%. Taxact 1040x   Your employer can reduce the 3% limit on matching contributions for a calendar year, but only if: The limit is not reduced below 1%, The limit is not reduced for more than 2 years out of the 5-year period that ends with (and includes) the year for which the election is effective, and Employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which they can enter into salary reduction agreements. Taxact 1040x   For purposes of applying the rule in item (2) in determining whether the limit was reduced below 3% for the year, any year before the first year in which your employer (or a former employer) maintains a SIMPLE IRA plan will be treated as a year for which the limit was 3%. Taxact 1040x If your employer chooses to make nonelective contributions for a year, that year also will be treated as a year for which the limit was 3%. Taxact 1040x Nonelective employer contributions limit. Taxact 1040x   If your employer chooses to make nonelective contributions, instead of matching contributions, to each eligible employee's SIMPLE IRA, contributions must be 2% of your compensation for the entire year. Taxact 1040x For 2013, only $255,000 of your compensation can be taken into account to figure the contribution limit. Taxact 1040x   Your employer can substitute the 2% nonelective contribution for the matching contribution for a year if both of the following requirements are met. Taxact 1040x Eligible employees are notified that a 2% nonelective contribution will be made instead of a matching contribution. Taxact 1040x This notice is provided within a reasonable period during which employees can enter into salary reduction agreements. Taxact 1040x Example 3. Taxact 1040x Assume the same facts as in Example 2 , except that Joshua's employer chose to make nonelective contributions instead of matching contributions. Taxact 1040x Because his employer's nonelective contributions are limited to 2% of up to $255,000 of Joshua's compensation, his employer's contribution to Joshua's SIMPLE IRA was limited to $5,100. Taxact 1040x In this example, total contributions made on Joshua's behalf for the year were $17,100 (Joshua's salary reductions of $12,000 plus his employer's contribution of $5,100). Taxact 1040x Traditional IRA mistakenly moved to SIMPLE IRA. Taxact 1040x   If you mistakenly roll over or transfer an amount from a traditional IRA to a SIMPLE IRA, you can later recharacterize the amount as a contribution to another traditional IRA. Taxact 1040x For more information, see Recharacterizations in chapter 1. Taxact 1040x Recharacterizing employer contributions. Taxact 1040x   You cannot recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. Taxact 1040x SEPs are discussed in chapter 2 of Publication 560. Taxact 1040x SIMPLE plans are discussed in this chapter. Taxact 1040x Converting from a SIMPLE IRA. Taxact 1040x   Generally, you can convert an amount in your SIMPLE IRA to a Roth IRA under the same rules explained in chapter 1 under Converting From Any Traditional IRA Into a Roth IRA . Taxact 1040x    However, you cannot convert any amount distributed from the SIMPLE IRA during the 2-year period beginning on the date you first participated in any SIMPLE IRA plan maintained by your employer. Taxact 1040x When Can You Withdraw or Use Assets? Generally, the same distribution (withdrawal) rules that apply to traditional IRAs apply to SIMPLE IRAs. Taxact 1040x These rules are discussed in chapter 1. Taxact 1040x Your employer cannot restrict you from taking distributions from a SIMPLE IRA. Taxact 1040x Are Distributions Taxable? Generally, distributions from a SIMPLE IRA are fully taxable as ordinary income. Taxact 1040x If the distribution is an early distribution (discussed in chapter 1), it may be subject to the additional tax on early distributions. Taxact 1040x See Additional Tax on Early Distributions, later. Taxact 1040x Rollovers and Transfers Exception Generally, rollovers and trustee-to-trustee transfers are not taxable distributions. Taxact 1040x Two-year rule. Taxact 1040x   To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the 2-year period beginning on the date on which you first participated in your employer's SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. Taxact 1040x The 2-year period begins on the first day on which contributions made by your employer are deposited in your SIMPLE IRA. Taxact 1040x   After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan). Taxact 1040x Additional Tax on Early Distributions The additional tax on early distributions (discussed in chapter 1) applies to SIMPLE IRAs. Taxact 1040x If a distribution is an early distribution and occurs during the 2-year period following the date on which you first participated in your employer's SIMPLE plan, the additional tax on early distributions is increased from 10% to 25%. Taxact 1040x If a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed. Taxact 1040x Prev  Up  Next   Home   More Online Publications