Interactive Review
Course #10073
Retirement Plans for Small Business
(SEP, SIMPLE & Qualified Plans)
IRS Publication 560
1A. True – Incorrect Return
For SIMPLE plans, net earnings from self-employment is the amount on line 4 of Short
Schedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for yourself. Net earnings from self-employment do not include items excluded from gross income (or their related deductions) other than foreign earned income and foreign housing cost amounts. For the deduction limits, earned income is net earnings for personal services actually rendered to the business. You take into account the income tax deduction for one-half of self-employment tax and the deduction for contributions to the plan made on your behalf when figuring net earnings. Net earnings include a partner’s distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). It does not include income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. Distributions of other income or loss to limited partners are not net earnings from self-employment.
1B. False – Correct Return
Net earnings from self-employment for SIMPLE plans, is the amount of net earnings before subtracting any contributions made to the SIMPLE plan for yourself.
For SEP and qualified plans, net earnings from self-employment is your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions. Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for one-half of your self-employment tax.
2A. True – Correct Return
Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees’ union and you can be excluded from coverage under a SEP. Under a SEP, you make the contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. SEP-IRAs are set up for, at a minimum, each eligible employee (defined later). A SEP-IRA may have to be set up for a leased employee, but does not need to be set up for excludable employees.
2B. False – Incorrect Return
The following employees can be excluded from coverage under a SEP.
• Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees’ union and you.
• Nonresident alien employees who have received no U.S. source wages, salaries,
or other personal services compensation from you.
An eligible employee is an individual who meets all the following requirements.
• Has reached age 21.
• Has worked for you in at least 3 of the last 5 years.
• Has received at least $550 in 2010 compensation from you.
You can use less restrictive participation requirements than those listed, but not more restrictive ones.
3A. True – Incorrect Return
Generally, you can deduct the contributions you make each year to each employee’s SEP-IRA. If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. The most you can deduct for your contributions other than elective deferrals) for participants is the lesser of the following amounts.
1. Your contributions (including any excess contributions carryover).
2. 25% of the compensation (limited to $245,000 in 2010 per participant) paid to the participants from the business that has the plan, not to exceed $49,000 in 2010 per participant.
3B. False – Correct Return
You can deduct the contributions you make each year to your own SEP-IRA if you are self-employed. If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net
earnings from self-employment, which takes into account both the following deductions.
• The deduction for one-half of your self-employment tax.
• The deduction for contributions to your own SEP-IRA.
The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for your plan.
4A. True – Correct Return
You are not allowed to set up a SARSEP after 1996. However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan.
A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. This contribution is called an elective deferral” because employees choose elect) to set aside the money, and they defer the tax on the money until it is distributed to them.
4B. True – Incorrect Return
Participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. A SARSEP cannot be set up after 1996. However, all the following requirements must be met.
• At least 50% of your employees eligible to participate choose to make elective deferrals.
• You have 25 or fewer employees who were eligible to participate in the SEP at
any time during the preceding year.
• The elective deferrals of your highly compensated employees meet the SARSEP ADP test.
5A. True – Incorrect Return
You can set up a SIMPLE IRA plan if you meet both the following requirements.
• You meet the employee limit.
• You do not maintain another qualified plan unless the other plan is for collective bargaining employees.
You can set up a SIMPLE IRA plan only if you had 100 or fewer employees
who received $5,000 or more in compensation from you for the preceding year. Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. Employees include self-employed individuals who received earned income and leased employees in chapter.
Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit
each year you maintain the plan.
5B. True – Incorrect Return
A SIMPLE IRA plan can only be set up if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan. If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it. A different rule applies if you do not meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied.
• Coverage under the plan has not significantly changed during the grace period.
• The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer. The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective. If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees.
6A. True – Correct Return
A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the Qualification Rules. However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules in that discussion if the plan meets the conditions
listed below.
1. Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the
employee’s compensation, but not more than $16,500 for 2010. If permitted under the plan, an employee who is age 50 or over can also make a catch-
up contribution of up to $2,500 for 2010.
2. You must make either:
a. Matching contributions up to 3% of compensation for the year, or
b. Non-elective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year.
3. No other contributions can be made to the trust.
4. No contributions are made, and no benefits accrue, for services during the year
under any other qualified retirement plan of the employer on behalf of any employee
eligible to participate in the SIMPLE 401(k) plan.
5. The employee’s rights to any contributions are non-forfeitable.
6B. False – Incorrect Return
A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the Qualification Rules. You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit. No more than $245,000 in 2010 of the employee’s compensation can be taken into account in figuring salary reduction contributions, matching contributions, and non-elective contributions. The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans.
7A. True – Correct Return
There are two basic kinds of qualified plans, defined contribution plans and defined benefit plans, and different rules apply to each. You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits.
7B. False – Incorrect Return
Defined contribution plans and defined benefit plans are the two basic kinds of qualified plans.
A defined contribution plan provides an individual account for each participant in the plan. It provides benefits to a participant largely based on the amount contributed to that participant’s account. Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan.
A defined benefit plan is any plan that is not a defined contribution plan. Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions. Generally, you will need continuing professional help to have a defined benefit plan. Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. Forfeitures must be used instead to reduce employer contributions.
8A. True – Incorrect Return
If you are self-employed, it is not necessary to have employees other than yourself to sponsor and set up a qualified plan. There are two basic steps in setting up a qualified plan. First you adopt a written plan. Then you invest the plan assets. You, the employer, are responsible for setting up and maintaining the plan.
8B. False – Correct Return
It is not necessary to have employees other than yourself, if you are self-employed, to sponsor and set up a qualified plan. 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). 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 2006. You must adopt a written plan. The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. Or it can be an individually designed plan. 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. Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated. The amount is based on what should be contributed under the plan formula using actuarial assumptions and formulas.
9A. True – Correct Return
You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax-free until distributed by the plan. If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Compensation is your net earnings from self-employment, defined in chapter 1. This definition takes into account both the following items.
• The deduction for one-half of your self-employment tax.
• The deduction for contributions on your behalf to the plan.
The deduction for your own contributions and your net earnings depend on each other. For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. The deduction limit for multiple plans also applies to contributions you make as an employer on your own behalf.
9B. False – Incorrect Return
Contributions you make to a qualified plan, including those made for your own retirement, are usually deductible. The deduction limit for your contributions to a
qualified plan depends on the kind of plan you have. 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. If you are self-employed, you must reduce this
limit in figuring the deduction for contributions you make for your own account. When figuring the deduction limit, the following rules apply.
• Elective deferrals (discussed later) are not subject to the limit.
• Compensation includes elective deferrals
• The maximum compensation that can be taken into account for each employee is $245,000 in 2010.
The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Consequently, an actuary must figure your deduction limit. In figuring the deduction for contributions, you cannot take into account any contributions or benefits that are more than the limits. However, your deduction for contributions to a defined benefit plan can be as much as the plan’s unfounded current liability. If you contribute to both a defined contribution plan and a defined benefit plan and at least one employee is covered by both plans, your deduction for those contributions is limited to:
• 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. If you are self-employed, you must reduce this 25% limit in figuring the deduction for contributions you make for your own account; and
• Your contributions to the defined benefit plans, but not more than the amount needed to meet the year’s minimum funding standard for any of these plans. This limit does not apply if contributions to the defined contribution plan consist only of elective deferrals.
10A. True – Incorrect Return
Prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law. If you are a disqualified person who takes part in a prohibited transaction, you must pay a tax. Prohibited transactions generally include a transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person. Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction does not take place if you are a disqualified person and receive any benefit to which you are entitled as a plan participant or beneficiary. However, the benefit must be figured and paid under the same terms as for all other participants and beneficiaries.
10B. False – Correct Return
A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person, is generally a prohibited transaction. You are a disqualified person if you are any of the following.
1. A fiduciary of the plan.
2. A person providing services to the plan.
3. An employer, any of whose employees are covered by the plan.
4. An employee organization, any of whose members are covered by the plan.
5. Any direct or indirect owner of 50% or more of any of the following.
a. The combined voting power of all classes of stock entitled to vote, or the total
value of shares of all classes of stock of a corporation that is an employer or employee organization described in (3) or (4).
b. The capital interest or profits interest of a partnership that is an employer or employee organization described in (3) or (4).
c. The beneficial interest of a trust or unincorporated enterprise that is an employer or an employee organization described in (3) or (4).
6. A member of the family of any individual described in (1), (2), (3), or (5). (A member
of a family is the spouse, ancestor, lineal descendant, or any spouse of a lineal descendant.)
11A. True – Correct Return
Your plan can provide for payment of retirement benefits before the normal retirement age. 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.
• Satisfies the service requirement for the early retirement benefit.
• Separates from service with a non-forfeitable right to an accrued benefit.
The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met.
11B. False – Incorrect Return
Your plan can provide for payment of retirement benefits before the normal retirement age. To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. 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.
Copyright © 2010 By
CPE Accounting and Tax Institute
All Rights Reserved