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Publication 560 Cat. No. 46574N Contents

What's New ...... 1 Department of the Retirement Reminders ...... 2 Treasury Internal Introduction ...... 2 Revenue Plans Service Chapter 1. Definitions You Need for Small To Know ...... 4 Chapter 2. Simplified Employee Pensions (SEPs) ...... 5 Business Setting Up a SEP ...... 6 How Much Can I Contribute? ...... 6 Deducting Contributions ...... 7 (SEP, SIMPLE, and Salary Reduction Simplified Employee Pensions Qualified Plans) (SARSEPs) ...... 7 Distributions (Withdrawals) ...... 8 Additional Taxes ...... 8 Reporting and Disclosure For use in preparing Requirements ...... 8 Chapter 3. SIMPLE Plans ...... 8 2020 Returns SIMPLE IRA Plan ...... 9 SIMPLE 401(k) Plan ...... 11

Chapter 4. Qualified Plans ...... 11 Kinds of Plans ...... 12 Qualification Rules ...... 12 Setting Up a Qualified Plan ...... 14 Minimum Funding Requirement ... 14 Contributions ...... 14 Employer Deduction ...... 15 Elective Deferrals (401(k) Plans) ... 16 Qualified Roth Contribution Program ...... 18 Distributions ...... 18 Prohibited Transactions ...... 20 Reporting Requirements ...... 21

Chapter 5. Coronavirus - Related Distributions ...... 22 Qualified Individual ...... 22 Special Tax Treatment ...... 22 Repayment of Distributions and Tax Reporting Requirements ... 22

Chapter 6. Table and Worksheets for the Self-Employed ...... 24

Chapter 7. How To Get Tax Help .... 27

Index ...... 30

Future Developments For the latest information about developments related to Pub. 560, such as legislation enacted after it was published, go to IRS.gov/Pub560.

What's New Get forms and other information faster and easier at: Coronavirus-related distributions. Section • IRS.gov (English) • IRS.gov/Korean (한국어) 2202(a)(4)(A) of the CARES Act defines a coro- • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) navirus-related distribution as any distribution • IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (Tiếng Việt) from an eligible retirement plan made on or after January 1, 2020, and before December 31,

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2020, to a Qualified Individual (defined later). Small employer automatic enrollment The amount of aggregate distributions from all credit. The Further Consolidated Appropria- Introduction eligible retirement plans that can be treated as tions Act, 2020, P.L. 116-94, added section a coronavirus-related distribution is limited to no 45T. An eligible employer may claim a tax credit Section references are to the Internal Revenue more than $100,000. See Coronavirus-Related when it sponsors a qualified employer plan in- Code unless otherwise noted. Distributions, later. cluding an eligible automatic contribution ar- This publication discusses retirement plans rangement. The credit equals $500 per year you can set up and maintain for yourself and Qualified birth or adoption distribution. Be- your employees. In this publication, “you” refers ginning in tax years after December 31, 2019, over a 3-year period beginning with the first tax year beginning after December 31, 2019, and to the employer. See chapter 1 for the definition you can take a distribution from your IRA with- of the term “employer” and the definitions of out it being subject to the 10% additional tax for could first be claimed on the employer’s return for the year 2020. other terms used in this publication. This publi- early distributions if that distribution is for a cation covers the following types of retirement qualified birth or adoption. For more informa- Increase in credit limitation for small em- plans. tion, see Qualified birth or adoption distribution. ployer plan startup costs. The Further Con- • SEP (simplified employee pension) plans. under Introduction, later. solidated Appropriations Act, 2020, P.L. • SIMPLE (savings incentive match plan for Compensation limits for 2020 and 2021. For 116-94, also amended section 45E. For tax employees) plans. 2020, the maximum compensation used for fig- years beginning after December 31, 2019, eligi- • Qualified plans (also called H.R. 10 plans uring contributions and benefits is $285,000. ble employers can claim a tax credit for the first or Keogh plans when covering self-em- This limit increases to $290,000 for 2021. credit year and each of the 2 tax years immedi- ployed individuals), including 401(k) plans. ately following. The credit equals 50% of quali- SEP, SIMPLE, and qualified plans offer you Elective deferral limits for 2020 and 2021. fied startup costs, up to the greater of (a) $500; and your employees a tax-favored way to save The limit on elective deferrals, other than or (b) the lesser of (i) $250 for each employee for retirement. You can deduct contributions catch-up contributions, is $19,500 for 2020 and who is not a “highly compensated employee” el- you make to the plan for your employees. If you 2021. These limits apply for participants in igible to participate in the employer plan, or (ii) are a sole proprietor, you can deduct contribu- SARSEPs, 401(k) plans (excluding SIMPLE $5,000. See the instructions for Form 3800 and tions you make to the plan for yourself. You can plans), section 403(b) plans, and section 457(b) Form 8881 for more information on the startup also deduct trustees' fees if contributions to the plans. cost credit. plan don't cover them. Earnings on the contribu- Defined contribution limits for 2020 and Qualified automatic contribution arrange- tions are generally tax free until you or your em- 2021. The limit on contributions, other than ment (QACA) safe harbor plans. Effective ployees receive distributions from the plan. catch-up contributions, for a participant in a de- for plan years beginning after December 31, Under a 401(k) plan, employees can have fined contribution plan is $57,000 for 2020 and 2019, when an employee doesn’t make an affir- you contribute limited amounts of their be- increases to $58,000 for 2021. mative election specifying a deferral percent- fore-tax (after-tax, in the case of a qualified Defined benefit limits for 2020 and 2021. age, the maximum default deferral percentage Roth contribution program) pay to the plan. The limit on annual benefits for a participant in a increases from 10% to 15%. These amounts (and the earnings on them) are defined benefit plan is $230,000 for 2020 and generally tax free until your employees receive 2021. distributions from the plan or, in the case of a qualified distribution from a designated Roth ac- SIMPLE plan salary reduction contribution Reminders count, completely tax free. limit for 2020 and 2021. The limit on salary reduction contributions, other than catch-up Changes to the hardship distribution rules What this publication covers. This publica- contributions, is $13,500 for 2020 and 2021. for section 401(k) plans. The Bipartisan tion contains the information you need to under- Catch-up contribution limits for 2020 and Budget Act of 2018, P.L. 115-123, made stand the following topics. 2021. A plan can permit participants who are changes to the hardship distribution rules for • What type of plan to set up. plan years beginning after December 31, 2018. age 50 or over at the end of the calendar year to • How to set up a plan. Removes the 6-month prohibition on con- make catch-up contributions in addition to elec- • • How much you can contribute to a plan. tributions following a hardship distribution. tive deferrals and SIMPLE plan salary reduction • How much of your contribution is deducti- Permits hardship distributions to be made contributions. The catch-up contribution limita- • ble. from contributions, earnings on contribu- tion for defined contribution plans other than • How to treat certain distributions. tions, and employer contributions. SIMPLE plans is $6,500 for 2020 and 2021. • How to report information about the plan to Eliminates any requirement to take plan The catch-up contribution limitation for SIMPLE • the IRS and your employees. loans prior to taking a hardship distribution. plans is $3,000 for 2020 and 2021. • Basic features of SEP, SIMPLE, and quali- A participant's catch-up contributions for a Retirement savings contributions credit. fied plans. The key rules for SEP, SIMPLE, year can't exceed the lesser of the following Retirement plan participants (including self-em- and qualified plans are outlined in Table 1. amounts. ployed individuals) who make contributions to SEP plans. SEP plans provide a simplified The catch-up contribution limit. their plan may qualify for the retirement savings • method for you to make contributions to a retire- The excess of the participant's compensa- contribution credit. The maximum contribution • ment plan for yourself and your employees. In- tion over the elective deferrals that aren’t eligible for the credit is $2,000. To take the stead of setting up a profit-sharing or money catch-up contributions. credit, use Form 8880, Credit for Qualified Re- tirement Savings Contributions. For more infor- purchase plan with a trust, you can adopt a SEP See Catch-up contributions under Contribution mation on who is eligible for the credit, retire- agreement and make contributions directly to a Limits and Limit on Elective Deferrals in chap- ment plan contributions eligible for the credit, traditional individual retirement account or a tra- ters 3 and 4, respectively, for more information. and how to figure the credit, see Form 8880 and ditional individual retirement annuity (SEP-IRA) Repeal of maximum age for traditional IRA its instructions or go to IRS.gov/Retirement- set up for yourself and each eligible employee. contributions. For tax years beginning after Plans/Plan-Participant-Employee/Retirement- SIMPLE plans. Generally, if you had 100 or December 31, 2019, the rule that you aren’t Savings-Contributions-Savers-Credit. fewer employees who received at least $5,000 able to make contributions to your traditional Photographs of missing children. The IRS is in compensation last year, you can set up a 1 IRA for the year in which you reach age 70 /2 a proud partner with the National Center for SIMPLE IRA plan. Under a SIMPLE plan, em- and all later years has been repealed. Missing & Exploited Children® (NCMEC). Pho- ployees can choose to make salary reduction Required minimum distributions (RMDs). tographs of missing children selected by the contributions rather than receiving these For tax years beginning after December 31, Center may appear in this publication on pages amounts as part of their regular pay. In addition, 2019, the age for the required beginning date that would otherwise be blank. You can help you will contribute matching or nonelective con- for mandatory distributions is changed to age bring these children home by looking at the tributions. The two types of SIMPLE plans are 72 for taxpayers reaching age 701/2 after De- photographs and calling 1-800-THE-LOST the SIMPLE IRA plan and the SIMPLE 401(k) cember 31, 2019. (1-800-843-5678) if you recognize a child. plan.

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Qualified plans. The qualified plan rules born or the date on which the legal adoption of Amount may be repaid. If you receive a quali- are more complex than the SEP plan and SIM- your child was finalized. fied birth or adoption distribution you can make PLE plan rules. However, there are advantages A qualified birth or adoption distribution one or more contributions to an eligible retire- to qualified plans, such as increased flexibility in must not exceed $5,000 per adoption of birth. In ment plan if you are a beneficiary of that plan, designing plans and increased contribution and addition, an eligible adoptee is any individual the plan accepts rollover contributions, and the deduction limits in some cases. (other than the child the child of the taxpayer’s total of those contributions does not exceed the spouse) who has not reached age 18 or is amount of the qualified birth or adoption distri- Qualified birth or adoption distribution. physcically or mentally incapable of self-sup- bution. A qualified birth or adoption distribution is any port. distribution from an applicable eligible retire- ment plan if made during the 1-year period be- ginning on the date on which your child was

Table 1. Key Retirement Plan Rules for 2020

Type of Plan Last Date for Contribution Maximum Contribution Maximum Deduction When To Set Up Plan SEP Due date of employer's return Smaller of $57,000 or 25%1 25%1 of all participants' Any time up to the due date of (including extensions). of participant's compensation.2 employer's return (including compensation.2 extensions). SIMPLE Salary reduction contributions: 30 Employee contribution: Same as maximum Any time between January 1 IRA days after the end of the month for Salary reduction contribution contribution. and October 1 of the calendar and which the contributions are to be made.4 up to $13,500; $16,500 if year. SIMPLE age 50 or over. 401(k) Matching or nonelective For a new employer coming contributions: Due date of employer's Employer contribution: into existence after October 1, return (including extensions). Either dollar-for-dollar as soon as administratively matching contributions, up to feasible. 3% of employee's compensation,3 or fixed nonelective contributions of 2% of compensation.2 Qualified Elective deferral: Due date of Employee contribution: 25%1 of all participants' By the end of the tax year. Plan: employer's return (including Elective deferral up to compensation,2 plus Defined extensions).4 $19,500; $26,000 if age 50 amount of elective Contribution or over. deferrals made. Plan Employer contribution: Employer contribution: Money Purchase Pension Plan or Money Purchase Pension Profit-Sharing: Due date of employer's Plan: Smaller of $57,000 or return (including extensions). 100%1 of participant's compensation.2

Profit-Sharing: Smaller of $57,000 or 100%1 of participant's compensation.2 Qualified Contributions must generally be paid in Amount needed to provide Based on actuarial By the end of the tax year. Plan: quarterly installments, due 15 days an annual benefit no larger assumptions and Defined after the end of each quarter. See than the smaller of $230,000 computations. Benefit Plan Minimum Funding Requirement in or 100% of the participant's chapter 4. average compensation for his or her highest 3 consecutive calendar years. 1 Net earnings from self-employment must take the contribution into account. See Deduction Limit for Self-Employed Individuals in chapters 2 and 4. 2 Compensation is generally limited to $285,000 in 2020. 3 Under a SIMPLE 401(k) plan, compensation is generally limited to $285,000 in 2020. 4 Certain plans subject to Department of Labor (DOL) rules may have an earlier due date for salary reduction contributions and elective deferrals, such as 401(k) plans. See the “elective deferral” definition in Definitions You Need To Know, later. Solo/self-employed 401(k) plans are non-ERISA plans and don’t fall under DOL rules.

What this publication doesn’t cover. Al- rules are covered in Pub. 575, Pension and Internal Revenue Service though the purpose of this publication is to pro- Annuity Income. Tax Forms and Publications vide general information about retirement plans • The comprehensive rules that apply to 1111 Constitution Ave. NW, IR-6526 you can set up for your employees, it doesn't section 403(b) plans. These rules are cov- Washington, DC 20224 contain all the rules and exceptions that apply ered in Pub. 571, Tax-Sheltered Annuity to these plans. You may need professional help Plans (403(b) Plans) For Employees of Although we can’t respond individually to and guidance. Public Schools and Certain Tax-Exempt each comment received, we do appreciate your Also, this publication doesn't cover all the Organizations. feedback and will consider your comments as rules that may be of interest to employees. For we revise our tax forms, instructions, and publi- example, it doesn't cover the following topics. Comments and suggestions. We welcome cations. • The comprehensive IRA rules an em- your comments about this publication and your ployee needs to know. These rules are suggestions for future editions. Ordering forms and publications. Visit covered in Pub. 590-A, Contributions to In- You can send us comments through IRS.gov/FormsPubs to download forms and dividual Retirement Arrangements (IRAs), IRS.gov/FormComments. publications. Otherwise, you can go to IRS.gov/ and Pub. 590-B, Distributions from Individ- Or you can write to: OrderForms to order current and prior-year ual Retirement Arrangements (IRAs). forms and instructions. Your order should arrive • The comprehensive rules that apply to dis- within 10 business days. tributions from retirement plans. These

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Tax questions. If you have a tax question example, a minister employed by a congrega- Deduction. A deduction is the plan contribu- not answered by this publication, check tion for a salary is a common-law employee tion you can subtract from gross income on IRS.gov and How To Get Tax Help at the end of even though the salary is treated as self-em- your federal income tax return. Limits apply to this publication. ployment income for social security tax purpo- the amount deductible. ses. However, fees reported on Schedule C (Form 1040), Profit or Loss From Business, for Earned income. Earned income is net earn- performing marriages, baptisms, and other per- ings from self-employment, discussed later, sonal services are self-employment earnings for from a business in which your services materi- qualified plan purposes. ally helped to produce the income. You can also have earned income from 1. Compensation. Compensation for plan alloca- property your personal efforts helped create, tions is the pay a participant received from you such as royalties from your books or inventions. for personal services for a year. You can gener- Earned income includes net earnings from sell- ally define compensation as including all the fol- ing or otherwise disposing of the property, but it Definitions lowing payments. doesn't include capital gains. It includes income 1. Wages and salaries. from licensing the use of property other than goodwill. You Need To 2. Fees for professional services. Earned income includes amounts received 3. Other amounts received (cash or non- for services by self-employed members of rec- Know cash) for personal services actually ren- ognized religious sects opposed to social se- dered by an employee, including, but not curity benefits who are exempt from self-em- Certain terms used in this publication are de- limited to, the following items. ployment tax. fined below. The same term used in another If you have more than one business, but a. Commissions and tips. publication may have a slightly different mean- only one has a retirement plan, only the earned ing. b. Fringe benefits. income from that business is considered for that plan. c. Bonuses. Annual additions. Annual additions are the to- tal of all your contributions in a year, employee For a self-employed individual, compensa- Elective deferral. An elective deferral is the contributions (not including rollovers), and for- tion means the earned income, discussed later, contribution made by employees to a qualified feitures allocated to a participant's account. of that individual. retirement plan. • Non-owner employees: The employee sal- Compensation generally includes amounts ary reduction/elective deferral contribu- Annual benefits. Annual benefits are the ben- deferred at the employee's election in the fol- tions must be elected/made by end of the efits to be paid yearly in the form of a straight lowing employee benefit plans. tax year and deposited into the employee’s life annuity (with no extra benefits) under a plan Section 401(k) plans. • plan account within 7 business days (safe to which employees don't contribute and under Section 403(b) plans. • harbor) and no later than 15 days. which no rollover contributions are made. • SIMPLE IRA plans. • Owner/employees: The employee defer- SARSEPs. • rals must be elected by the end of the tax Business. A business is an activity in which a Section 457 deferred compensation plans. • year and then can be made by the tax re- profit motive is present and economic activity is • Section 125 cafeteria plans. involved. Service as a newspaper carrier under turn filing deadline, including extensions. age 18 or as a public official isn’t a business. However, an employer can choose to ex- clude elective deferrals under the above plans Employer. An employer is generally any per- Common-law employee. A common-law em- from the definition of compensation. The limit son for whom an individual performs or did per- ployee is any individual who, under common on elective deferrals is discussed in chapter 2 form any service, of whatever nature, as an em- law, would have the status of an employee. A under Salary Reduction Simplified Employee ployee. A sole proprietor is treated as his or her leased employee can also be a common-law Pension (SARSEP) and in chapter 4. own employer for retirement plan purposes. employee. However, a partner isn't an employer for retire- Other options. In figuring the compensa- A common-law employee is a person who ment plan purposes. Instead, the partnership is tion of a participant, you can treat any of the fol- treated as the employer of each partner. performs services for an employer who has the lowing amounts as the employee's compensa- right to control and direct the results of the work tion. and the way in which it is done. For example, Highly compensated employee. A highly • The employee's wages as defined for in- compensated employee is an individual who: the employer: come tax withholding purposes. • Provides the employee's tools, materials, • Owned more than 5% of the interest in • The employee's wages you report in box 1 your business at any time during the year and workplace; and of Form W-2, Wage and Tax Statement. • Can fire the employee. or the preceding year, regardless of how • The employee's social security wages (in- much compensation that person earned or Common-law employees aren't self-em- cluding elective deferrals). received; or ployed and can't set up retirement plans for in- Compensation generally can't include either • For the preceding year, received compen- come from their work, even if that income is of the following items. sation from you of more than $125,000 (if self-employment income for social security tax • Nontaxable reimbursements or other ex- the preceding year is 2019), more than purposes. For example, common-law employ- pense allowances. $130,000 (if the preceding year is 2020 ees who are ministers, members of religious or- • Deferred compensation (other than elec- and 2021), and, if you so choose, was in ders, full-time insurance salespeople, and U.S. tive deferrals). the top 20% of employees when ranked by citizens employed in the United States by for- compensation. eign governments can't set up retirement plans SIMPLE plans. A special definition of compen- for their earnings from those employments, sation applies for SIMPLE plans. See chapter 3. Leased employee. A leased employee who even though their earnings are treated as isn't your common-law employee must gener- self-employment income. Contribution. A contribution is an amount you ally be treated as your employee for retirement However, an individual may be a com- pay into a plan for all those participating in the plan purposes if he or she does all the follow- mon-law employee and a self-employed person plan, including self-employed individuals. Limits ing. as well. For example, an attorney can be a cor- apply to how much, under the contribution for- • Provides services to you under an agree- porate common-law employee during regular mula of the plan, can be contributed each year ment between you and a leasing organiza- working hours and also practice law in the eve- for a participant. tion. ning as a self-employed person. In another

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• Has performed services for you (or for you Qualified plan. A qualified plan is a retirement Useful Items and related persons) substantially full time plan that offers a tax-favored way to save for re- You may want to see: for at least 1 year. tirement. You can deduct contributions made to • Performs services under your primary di- the plan for your employees. Earnings on these Publications rection or control. contributions are generally tax free until distrib-

uted at retirement. Profit-sharing, money pur- 590-A 590-A Contributions to Individual Exception. A leased employee isn't treated chase, and defined benefit plans are qualified Retirement Arrangements (IRAs) as your employee if all the following conditions plans. A 401(k) plan is also a qualified plan. are met. 590-B 590-B Distributions from Individual Retirement Arrangements (IRAs) 1. Leased employees aren't more than 20% Participant. A participant is an eligible em-

of your non-highly compensated work- ployee who is covered by your retirement plan. 3998 3998 Choosing a Retirement Solution for force. See the discussions, later, of the different types Your Small Business of plans for the definition of an employee eligi-

2. The employee is covered under the leas- ble to participate in each type of plan. 4285 4285 SEP Checklist ing organization's qualified pension plan.

4286 4286 SARSEP Checklist 3. The leasing organization's plan is a money Partner. A partner is an individual who shares

purchase pension plan that has all the fol- ownership of an unincorporated trade or busi- 4333 4333 SEP Retirement Plans for Small lowing provisions. ness with one or more persons. For retirement Businesses plans, a partner is treated as an employee of a. Immediate participation. (This require- the partnership. 4336 4336 SARSEP for Small Businesses ment doesn't apply to any individual

4407 4407 SARSEP—Key Issues and whose compensation from the leasing Self-employed individual. An individual in Assistance organization in each plan year during business for himself or herself, and whose busi- the 4-year period ending with the plan ness isn't incorporated, is self-employed. Sole Forms (and Instructions) year is less than $1,000.) proprietors and partners are self-employed.

W-2 W-2 Wage and Tax Statement b. Full and immediate vesting. Self-employment can include part-time work. Not everyone who has net earnings from 1040 1040 U.S. Individual Income Tax Return c. A nonintegrated employer contribu- self-employment for social security tax purpo- tion rate of at least 10% of compensa- ses is self-employed for qualified plan purpo- 1040-SR 1040-SR U.S. Tax Return for Seniors tion for each participant. ses. See Common-law employee and Net earn- ings from self-employment, earlier. 5305-SEP 5305-SEP Simplified Employee However, if the leased employee is your com- Pension—Individual Retirement In addition, certain fishermen may be con- mon-law employee, that employee will be your Accounts Contribution Agreement employee for all purposes, regardless of any sidered self-employed for setting up a qualified pension plan of the leasing organization. plan. See Pub. 595, Capital Construction Fund 5305A-SEP 5305A-SEP Salary Reduction Simplified for Commercial Fishermen, for the special rules Employee Pension—Individual Net earnings from self-employment. For used to determine whether fishermen are Retirement Accounts Contribution SEP and qualified plans, net earnings from self-employed. Agreement self-employment are your gross income from

8880 8880 Credit for Qualified Retirement your trade or business (provided your personal Sole proprietor. A sole proprietor is an indi- Savings Contributions services are a material income-producing fac- vidual who owns an unincorporated business by himself or herself, including a single-member tor) minus allowable business deductions. Al- 8881 8881 Credit for Small Employer Pension lowable deductions include contributions to limited liability company that is treated as a dis- Plan Startup Costs SEP and qualified plans for common-law em- regarded entity for tax purposes. For retirement ployees and the deduction allowed for the de- plans, a sole proprietor is treated as both an A SEP is a written plan that allows you to make ductible part of your self-employment tax. employer and an employee. contributions toward your own retirement and Net earnings from self-employment don’t in- your employees' retirement without getting in- clude items excluded from gross income (or volved in a more complex qualified plan. their related deductions) other than foreign Under a SEP, you make contributions to a tradi- earned income and foreign housing cost tional individual retirement arrangement (called amounts. a SEP-IRA) set up by or for each eligible em- For the deduction limits, earned income is ployee. A SEP-IRA is owned and controlled by net earnings for personal services actually ren- 2. the employee, and you make contributions to dered to the business. You take into account the financial institution where the SEP-IRA is the income tax deduction for the deductible part maintained. of self-employment tax and the deduction for contributions to the plan made on your behalf Simplified SEP-IRAs are set up for, at a minimum, each el- when figuring net earnings. igible employee (defined below). A SEP-IRA Net earnings include a partner's distributive Employee may have to be set up for a leased employee share of partnership income or loss (other than (defined in chapter 1), but doesn't need to be separately stated items, such as capital gains set up for excludable employees (defined later). and losses). They don’t include income passed Pensions (SEPs) through to shareholders of S corporations. Eligible employee. An eligible employee is an Guaranteed payments to limited partners are individual who meets all the following require- net earnings from self-employment if they are Topics ments. This chapter discusses: paid for services to or for the partnership. Distri- • Has reached age 21. butions of other income or loss to limited part- • Has worked for you in at least 3 of the last ners aren't net earnings from self-employment. • Setting up a SEP 5 years. For SIMPLE plans, net earnings from • How much can I contribute • Has received at least $600 in compensa- self-employment are the amount on line 4 • Deducting contributions tion from you in 2020. This amount re- Schedule SE (Form 1040), Self-Employment • Salary reduction simplified employee pen- mains unchanged in 2021. sions (SARSEPs) Tax, before subtracting any contributions made You can use less restrictive participa- to the SIMPLE plan for yourself. • Distributions (withdrawals) • Additional taxes TIP tion requirements than those listed, but • Reporting and disclosure requirements not more restrictive ones.

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Excludable employees. The following em- 5. You don't pay the cost of the SEP contri- Contribution Limits ployees can be excluded from coverage under butions. a SEP. Contributions you make for 2020 to a com- • Employees covered by a union agreement Information you must give to employees. mon-law employee's SEP-IRA can't exceed the and whose retirement benefits were bar- You must give each eligible employee a copy of lesser of 25% of the employee's compensation gained for in good faith by the employees' Form 5305-SEP, its instructions, and the other or $57,000. Compensation generally doesn't in- union and you. information listed in the Form 5305-SEP instruc- clude your contributions to the SEP. The SEP • Nonresident alien employees who have re- tions. An IRS model SEP isn't considered adop- plan document will specify how the employer ceived no U.S. source wages, salaries, or ted until you give each employee this informa- contribution is determined and how it will be al- other personal services compensation tion. located to participants. from you. For more information about non- resident aliens, see Pub. 519, U.S. Tax Setting up the employee's SEP-IRA. A Example. Your employee, Mary Plant, Guide for Aliens. SEP-IRA must be set up by or for each eligible earned $21,000 for 2020. The maximum contri- employee. SEP-IRAs can be set up with banks, bution you can make to her SEP-IRA is $5,250 insurance companies, or other qualified finan- (25% (0.25) x $21,000). Setting Up a SEP cial institutions. You send SEP contributions to the financial institution where the SEP-IRA is Contributions for yourself. The annual limits There are three basic steps in setting up a SEP. maintained. on your contributions to a common-law employ- ee's SEP-IRA also apply to contributions you 1. You must execute a formal written agree- Deadline for setting up a SEP. You can set make to your own SEP-IRA. However, special ment to provide benefits to all eligible em- up a SEP for any year as late as the due date rules apply when figuring your maximum deduc- ployees. (including extensions) of your income tax return tible contribution. See Deduction Limit for for that year. 2. You must give each eligible employee cer- Self-Employed Individuals, later. tain information about the SEP. Annual compensation limit. You can't con- 3. A SEP-IRA must be set up by or for each How Much sider the part of an employee's compensation eligible employee. Can I Contribute? over $285,000 when figuring your contribution Many financial institutions will help you limit for that employee. However, $57,000 is the TIP set up a SEP. maximum contribution for an eligible employee. The SEP rules permit you to contribute a limited These limits increase to $290,000 and $58,000, amount of money each year to each employee's respectively, in 2021. SEP-IRA. If you are self-employed, you can Formal written agreement. You must exe- contribute to your own SEP-IRA. Contributions Example. Your employee, Susan Green, cute a formal written agreement to provide ben- must be in the form of money (cash, check, or earned $260,000 for 2020. Because of the max- efits to all eligible employees under a SEP. You money order). You can't contribute property. imum contribution limit for 2020, you can only can satisfy the written agreement requirement However, participants may be able to transfer contribute $57,000 to her SEP-IRA. by adopting an IRS model SEP using Form or roll over certain property from one retirement 5305-SEP. However, see When not to use plan to another. See Pubs. 590-A and 590-B for More than one plan. If you contribute to a de- Form 5305-SEP, later. more information about rollovers. fined contribution plan (defined in chapter 4), If you adopt an IRS model SEP using Form annual additions to an account are limited to the 5305-SEP, no prior IRS approval or determina- You don't have to make contributions every lesser of $57,000 or 100% of the participant's tion letter is required. Keep the original form. year. But if you make contributions, they must compensation. When you figure this limit, you Don't file it with the IRS. Also, using Form be based on a written allocation formula and must add your contributions to all defined con- 5305-SEP will usually relieve you from filing an- must not discriminate in favor of highly compen- tribution plans maintained by you. Because a nual retirement plan information returns with the sated employees (defined in chapter 1). When SEP is considered a defined contribution plan IRS and the Department of Labor. See the Form you contribute, you must contribute to the for this limit, your contributions to a SEP must 5305-SEP instructions for details. If you choose SEP-IRAs of all participants who actually per- be added to your contributions to other defined not to use Form 5305-SEP, you should seek formed personal services during the year for contribution plans you maintain. professional advice in adopting a SEP. which the contributions are made, including em- ployees who die or terminate employment be- When not to use Form 5305-SEP. You Tax treatment of excess contributions. Ex- fore the contributions are made. can't use Form 5305-SEP if any of the following cess contributions are your contributions to an apply. employee's SEP-IRA (or to your own SEP-IRA) Contributions are deductible within limits, as for 2020, that exceed the lesser of the following 1. You currently maintain any other qualified discussed later, and generally aren't taxable to amounts. retirement plan other than another SEP. the plan participants. • 25% of the employee's compensation (or, for you, 20% of your net earnings from 2. You have any eligible employees for A SEP-IRA can't be a Roth IRA. Employer whom IRAs haven’t been set up. self-employment). contributions to a SEP-IRA won’t affect the • $58,000. 3. You use the services of leased employ- amount an individual can contribute to a Roth or ees, who aren't your common-law employ- traditional IRA. Excess contributions are included in the em- ees (as described in chapter 1). ployee's income for the year and are treated as Unlike regular contributions to a traditional contributions by the employee to his or her 4. You are a member of any of the following IRA before 2020, contributions under a SEP SEP-IRA. For more information on employee unless all eligible employees of all the can be made to participants over age 701/2. If tax treatment of excess contributions, see Pub. members of these groups, trades, or busi- you are self-employed, you can also make con- 590-A. nesses participate under the SEP. tributions under the SEP for yourself even if you 1 Reporting on Form W-2. Don't include SEP a. An affiliated service group described are over 70 /2. Participants age 72 or over (if 1 contributions on your employee's Form W-2 un- in section 414(m). age 70 /2 was attained after December 31, 2019) must take required minimum distribu- less contributions were made under a salary re- b. A controlled group of corporations de- tions. duction arrangement (discussed later). scribed in section 414(b). c. Trades or businesses under common Time limit for making contributions. To de- control described in section 414(c). duct contributions for a year, you must make the contributions by the due date (including ex- tensions) of your tax return for the year.

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Excise tax. If you made nondeductible (ex- You aren't allowed to set up a SARSEP cess) contributions to a SEP, you may be sub- after 1996. However, participants (in- Deducting Contributions ject to a 10% excise tax. For information about cluding employees hired after 1996) in the excise tax, see Excise Tax for Nondeducti- a SARSEP set up before 1997 can continue to Generally, you can deduct the contributions you ble (Excess) Contributions under Employer De- have you contribute part of their pay to the plan. make each year to each employee's SEP-IRA. duction in chapter 4. If you are interested in setting up a retirement If you are self-employed, you can deduct the plan that includes a salary reduction arrange- contributions you make each year to your own ment, see chapter 3. SEP-IRA. When To Deduct Contributions Who can have a SARSEP? A SARSEP set up Deduction Limit for When you can deduct contributions made for a before 1997 is available to you and your eligible Contributions for year depends on the tax year for which the SEP employees only if all the following requirements Participants is maintained. are met. • If the SEP is maintained on a calen- • At least 50% of your employees eligible to participate choose to make elective defer- The most you can deduct for your contributions dar-year basis, you deduct the yearly con- tributions on your tax return for the year rals. to your or your employee's SEP-IRA is the • You have 25 or fewer employees who were lesser of the following amounts. within which the calendar year ends. • If you file your tax return and maintain the eligible to participate in the SEP at any 1. Your contributions (including any excess SEP using a fiscal year or short tax year, time during the preceding year. contributions carryover). you deduct contributions made for a year • The elective deferrals of your highly com- on your tax return for that year. pensated employees meet the SARSEP 2. 25% of the compensation (limited to average deferral percentage (ADP) test. $285,000 per participant) paid to the par- ticipants during 2020, from the business Example. You are a fiscal-year taxpayer SARSEP ADP test. Under the SARSEP that has the plan, not to exceed $57,000 whose tax year ends June 30. You maintain a ADP test, the amount deferred each year by per participant. SEP on a calendar-year basis. You deduct SEP each eligible highly compensated employee as contributions made for calendar year 2020 on a percentage of pay (the deferral percentage) In 2021, the amounts in (2) above increase to your tax return for your tax year ending June 30, can't be more than 125% of the ADP of all $290,000 and $58,000, respectively. 2021. non-highly compensated employees eligible to participate. A highly compensated employee is Deduction Limit for Where To Deduct defined in chapter 1. Self-Employed Individuals Contributions Deferral percentage. The deferral per- centage for an employee for a year is figured as If you contribute to your own SEP-IRA, you Deduct the contributions you make for your follows. must make a special computation to figure your common-law employees on your tax return. For example, sole proprietors deduct them on maximum deduction for these contributions. The elective employer contributions When figuring the deduction for contributions Schedule C (Form 1040) or Schedule F (Form (excluding certain catch-up contributions) made to your own SEP-IRA, compensation is 1040), Profit or Loss From Farming; partner- paid to the SEP for the employee for the year ships deduct them on Form 1065, U.S. Return your net earnings from self-employment (de- The employee's compensation fined in chapter 1), which takes into account of Partnership Income; and corporations deduct (limited to $285,000 in 2020) both the following deductions. them on Form 1120, U.S. Corporation Income The deduction for the deductible part of Tax Return, or Form 1120-S, U.S. Income Tax • The instructions for Form 5305A-SEP your self-employment tax. Return for an S Corporation. TIP have a worksheet you can use to deter- The deduction for contributions to your • Sole proprietors and partners deduct contri- mine whether the elective deferrals of own SEP-IRA. butions for themselves on line 15 of Schedule 1 your highly compensated employees meet the (Form 1040). (If you are a partner, contributions SARSEP ADP test. The deduction for contributions to your own for yourself are shown on the Schedule K-1 SEP-IRA and your net earnings depend on (Form 1065), Partner's Share of Income, De- each other. For this reason, you determine the Employee compensation. For figuring the ductions, Credits, etc., you receive from the deferral percentage, compensation is generally deduction for contributions to your own partnership.) SEP-IRA indirectly by reducing the contribution the amount you pay to the employee for the rate called for in your plan. To do this, use the Remember that sole proprietors and year. Compensation includes the elective defer- Rate Table for Self-Employed or the Rate Work- ! partners can't deduct as a business ex- ral and other amounts deferred in certain em- sheet for Self-Employed, whichever is appropri- CAUTION pense contributions made to a SEP for ployee benefit plans. See Compensation in ate for your plan's contribution rate, in chap- themselves, only those made for their com- chapter 1. Elective deferrals under the SARSEP ter 6. Then, figure your maximum deduction by mon-law employees. are included in figuring your employees' defer- using the Deduction Worksheet for Self-Em- ral percentage even though they aren't included ployed in chapter 6. in the income of your employees for income tax Salary Reduction purposes. Carryover of Compensation of self-employed individ- Excess SEP Contributions Simplified Employee uals. If you are self-employed, compensation is your net earnings from self-employment as Pensions (SARSEPs) defined in chapter 1. If you made SEP contributions that are more Compensation doesn't include tax-free than the deduction limit (nondeductible contri- A SARSEP is a SEP set up before 1997 that in- items (or deductions related to them) other than butions), you can carry over and deduct the dif- cludes a salary reduction arrangement. (See foreign earned income and housing cost ference in later years. However, the carryover, the Caution next.) Under a SARSEP, your em- amounts. when combined with the contribution for the ployees can choose to have you contribute part later year, is subject to the deduction limit for of their pay to their SEP-IRAs rather than re- Choice not to treat deferrals as compen- that year. If you also contributed to a defined ceive it in cash. This contribution is called an sation. You can choose not to treat elective benefit plan or defined contribution plan, see elective deferral because employees choose deferrals (and other amounts deferred in certain Carryover of Excess Contributions under Em- (elect) to set aside the money, and they defer employee benefit plans) for a year as compen- ployer Deduction in chapter 4 for the carryover the tax on the money until it is distributed to sation under your SARSEP. limit. them.

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Limit on Elective Deferrals For a participant who is eligible to make borrowing money from it, the employee has en- catch-up contributions, excess deferrals are the gaged in a prohibited transaction. In that case, The most a participant can choose to defer for elective deferrals that are more than $26,000. the SEP-IRA will no longer qualify as an IRA. calendar year 2020 is the lesser of the following The treatment of excess deferrals made under For a list of prohibited transactions, see Prohibi- amounts. a SARSEP is similar to the treatment of excess ted Transactions in chapter 4. deferrals made under a qualified plan. See 1. 25% of the participant's compensation Treatment of Excess Deferrals under Elective Effects on employee. If a SEP-IRA is dis- (limited to $285,000 of the participant's Deferrals (401(k) Plans) in chapter 4. qualified because of a prohibited transaction, compensation). the assets in the account will be treated as hav- ing been distributed to the employee on the first 2. $19,500. Excess SEP contributions. Excess SEP con- tributions are elective deferrals of highly com- day of the year in which the transaction occur- The $19,500 limit applies to the total elective pensated employees that are more than the red. The employee must include in income the deferrals the employee makes for the year to a amount permitted under the SARSEP ADP test. fair market value of the assets (on the first day SEP and any of the following. You must notify your highly compensated em- of the year) that is more than any cost basis in the account. Also, the employee may have to • Cash or deferred arrangement (section ployees within 21/2 months after the end of the 401(k) plan). plan year of their excess SEP contributions. If pay the additional tax for making early with- • Salary reduction arrangement under a you don't notify them within this time period, you drawals. tax-sheltered annuity plan (section 403(b) must pay a 10% tax on the excess. For an ex- plan). planation of the notification requirements, see • SIMPLE IRA plan. Revenue Procedure 91-44, 1991-2 C.B. 733. If Reporting and you adopted a SARSEP using Form In 2021, the $285,000 limit increases to 5305A-SEP, the notification requirements are Disclosure $290,000, and the $19,500 limit remains the explained in the instructions for that form. same. Requirements Reporting on Form W-2. Don’t include elec- If you set up a SEP using Form 5305-SEP, you Catch-up contributions. A SARSEP can per- tive deferrals in the “Wages, tips, other com- mit participants who are age 50 or over at the must give your eligible employees certain infor- pensation” box of Form W-2. You must, how- mation about the SEP when you set it up. See end of the calendar year to also make catch-up ever, include them in the “Social security contributions. The catch-up contribution limit is Setting Up a SEP, earlier. Also, you must give wages” and “Medicare wages and tips” boxes. your eligible employees a statement each year $6,500 for 2020 and 2021. Elective deferrals You must also include them in box 12. Mark the aren't treated as catch-up contributions for 2020 showing any contributions to their SEP-IRAs. “Retirement plan” checkbox in box 13. For more You must also give them notice of any excess until they exceed the elective deferral limit (the information, see the Form W-2 instructions. lesser of 25% of compensation or $19,500), the contributions. For details about other informa- SARSEP ADP test limit discussed earlier, or the tion you must give them, see the instructions for plan limit (if any). However, the catch-up contri- Form 5305-SEP or Form 5305A-SEP (for a sal- bution a participant can make for a year can't Distributions ary reduction SEP). exceed the lesser of the following amounts. (Withdrawals) • The catch-up contribution limit. Even if you didn't use Form 5305-SEP or • The excess of the participant's compensa- Form 5305A-SEP to set up your SEP, you must As an employer, you can't prohibit distributions give your employees information similar to that tion over the elective deferrals that aren't from a SEP-IRA. Also, you can't make your con- catch-up contributions. described above. For more information, see the tributions on the condition that any part of them instructions for either Form 5305-SEP or Form Catch-up contributions aren't subject to the must be kept in the account after you have 5305A-SEP. elective deferral limit (the lesser of 25% of com- made your contributions to the employee's ac- pensation or $19,500 in 2020 and 2021). counts. Distributions are subject to IRA rules. Gen- Overall limit on SEP contributions. If you erally, you or your employee must begin to re- also make nonelective contributions to a ceive distributions from a SEP-IRA by April 1 of SEP-IRA, the total of the nonelective and elec- the first year after the calendar year in which tive contributions to that SEP-IRA can't exceed you or your employee reaches age 72 (if age the lesser of 25% of the employee's compensa- 3. 701/2 was attained after December 31, 2019). tion or $57,000 for 2020 ($58,000 for 2021). For more information about IRA rules, including The same rule applies to contributions you the tax treatment of distributions, rollovers, re- make to your own SEP-IRA. See Contribution quired distributions, and income tax withhold- SIMPLE Plans Limits, earlier. ing, see Pubs. 590-A and 590-B. Figuring the elective deferral. For figuring Topics the 25% limit on elective deferrals, compensa- This chapter discusses: tion doesn't include SEP contributions, includ- Additional Taxes ing elective deferrals or other amounts deferred SIMPLE IRA plans The tax advantages of using SEP-IRAs for re- • in certain employee benefit plans. SIMPLE 401(k) plans tirement savings can be offset by additional • taxes that may be imposed for all the following Tax Treatment of Deferrals actions. Useful Items • Making excess contributions. You may want to see: Elective deferrals that aren't more than the lim- • Making early withdrawals. its discussed earlier under Limit on Elective De- • Not making required withdrawals. Publications ferrals are excluded from your employees' wa- ges subject to federal income tax in the year of For information about these taxes, see 590-A 590-A Contributions to Individual deferral. However, these deferrals are included Pubs. 590-A and 590-B. Also, a SEP-IRA may Retirement Arrangements (IRAs) in wages for social security, Medicare, and fed- be disqualified, or an excise tax may apply, if

eral unemployment (FUTA) tax. the account is involved in a prohibited transac- 590-B 590-B Distributions from Individual tion, discussed next. Retirement Arrangements (IRAs) Excess deferrals. For 2020, excess deferrals

are the elective deferrals for the year that are Prohibited transaction. If an employee im- 3998 3998 Choosing a Retirement Solution for more than the $19,500 limit discussed earlier. properly uses his or her SEP-IRA, such as by Your Small Business

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4284 4284 SIMPLE IRA Plan Checklist individuals who received earned income and • Nonresident alien employees who have re- leased employees (defined in chapter 1). ceived no U.S. source wages, salaries, or

4334 4334 SIMPLE IRA Plans for Small other personal services compensation Businesses Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit from you. Forms (and Instructions) each year you maintain the plan. Compensation. Compensation for employees Grace period for employers who cease W-2 W-2 Wage and Tax Statement is the total wages, tips, and other compensation to meet the 100-employee limit. If you main- from the employer subject to federal income tax

5304-SIMPLE 5304-SIMPLE Savings Incentive Match tain the SIMPLE IRA plan for at least 1 year and withholding and the amounts paid for domestic Plan for Employees of Small you cease to meet the 100-employee limit in a service in a private home, local college club, or Employers (SIMPLE)—Not for Use later year, you will be treated as meeting it for local chapter of a college fraternity or sorority. With a Designated Financial the 2 calendar years immediately following the Compensation also includes the employee's Institution calendar year for which you last met it. salary reduction contributions made under this A different rule applies if you don't meet the 5305-SIMPLE 5305-SIMPLE Savings Incentive Match plan and, if applicable, elective deferrals under Plan for Employees of Small 100-employee limit because of an acquisition, a section 401(k) plan, a SARSEP, or a section Employers (SIMPLE)—for Use With a disposition, or similar transaction. Under this 403(b) annuity contract and compensation de- Designated Financial Institution rule, the SIMPLE IRA plan will be treated as ferred under a section 457 plan required to be meeting the 100-employee limit for the year of reported by the employer on Form W-2. If you

8880 8880 Credit for Qualified Retirement the transaction and the 2 following years if both are self-employed, compensation is your net Savings Contributions the following conditions are satisfied. earnings from self-employment (line 4 of Coverage under the plan hasn’t signifi- 8881 8881 Credit for Small Employer Pension • Schedule SE (Form 1040), before subtracting Plan Startup Costs cantly changed during the grace period. any contributions made to the SIMPLE IRA plan • The SIMPLE IRA plan would have contin- for yourself. A savings incentive match plan for employees ued to qualify after the transaction if you (SIMPLE plan) is a written arrangement that had remained a separate employer. provides you and your employees with a simpli- How To Set Up a fied way to make contributions to provide retire- The grace period for acquisitions, dis- SIMPLE IRA Plan ment income. Under a SIMPLE plan, employ- ! positions, and similar transactions also ees can choose to make salary reduction CAUTION applies if, because of these types of transactions, you don't meet the rules explained You can use Form 5304-SIMPLE or Form contributions to the plan rather than receiving 5305-SIMPLE to set up a SIMPLE IRA plan. these amounts as part of their regular pay. In under Other qualified plan or Who Can Partici- pate in a SIMPLE IRA Plan, later. Each form is a model SIMPLE plan document. addition, you will contribute matching or non- Which form you use depends on whether you elective contributions. select a financial institution or your employees Other qualified plan. The SIMPLE IRA plan SIMPLE plans can only be maintained on a cal- select the institution that will receive the contri- must generally be the only retirement plan to butions. endar-year basis. which you make contributions, or to which ben- A SIMPLE plan can be set up in either of the fol- efits accrue, for service in any year beginning Use Form 5304-SIMPLE if you allow each lowing ways. with the year the SIMPLE IRA plan becomes ef- plan participant to select the financial institution • Using SIMPLE IRAs (SIMPLE IRA plan). fective. for receiving his or her SIMPLE IRA plan contri- butions. Use Form 5305-SIMPLE if you require • As part of a 401(k) plan (SIMPLE 401(k) Exception. If you maintain a qualified plan that all contributions under the SIMPLE IRA plan). for collective bargaining employees, you are plan be deposited initially at a designated finan- permitted to maintain a SIMPLE IRA plan for Many financial institutions will help you cial institution. TIP set up a SIMPLE plan. other employees. The SIMPLE IRA plan is adopted when you Who Can Participate have completed all appropriate boxes and in a SIMPLE IRA Plan? blanks on the form and you (and the designated SIMPLE IRA Plan financial institution, if any) have signed it. Keep the original form. Don’t file it with the IRS. Eligible employee. Any employee who re- A SIMPLE IRA plan is a retirement plan that ceived at least $5,000 in compensation during Other uses of the forms. If you set up a SIM- uses SIMPLE IRAs for each eligible employee. any 2 years preceding the current calendar year PLE IRA plan using Form 5304-SIMPLE or Under a SIMPLE IRA plan, a SIMPLE IRA must and is reasonably expected to receive at least Form 5305-SIMPLE, you can use the form to be set up for each eligible employee. For the $5,000 during the current calendar year is eligi- satisfy other requirements, including the follow- definition of an eligible employee, see Who Can ble to participate. The term “employee” includes ing. Participate in a SIMPLE IRA Plan, later. a self-employed individual who received earned • Meeting employer notification require- income. ments for the SIMPLE IRA plan. Form Who Can Set Up You can use less restrictive eligibility re- 5304-SIMPLE and Form 5305-SIMPLE a SIMPLE IRA Plan? quirements (but not more restrictive ones) by contain a Model Notification to Eligible Em- eliminating or reducing the prior year compen- ployees that provides the necessary infor- You can set up a SIMPLE IRA plan if you meet sation requirements, the current year compen- mation to the employee. both the following requirements. sation requirements, or both. For example, you • Maintaining the SIMPLE IRA plan records • You meet the employee limit. can allow participation for employees who re- and proving you set up a SIMPLE IRA plan • You don't maintain another qualified plan ceived at least $3,000 in compensation during for employees. unless the other plan is for collective bar- any preceding calendar year. However, you gaining employees. can't impose any other conditions for participat- Deadline for setting up a SIMPLE IRA plan. ing in a SIMPLE IRA plan. You can set up a SIMPLE IRA plan effective on Employee limit. You can set up a SIMPLE IRA any date from January 1 through October 1 of a plan only if you had 100 or fewer employees Excludable employees. The following em- year, provided you didn't previously maintain a who received $5,000 or more in compensation ployees don't need to be covered under a SIM- SIMPLE IRA plan. This requirement doesn't ap- from you for the preceding year. Under this rule, PLE IRA plan. ply if you are a new employer that comes into you must take into account all employees em- • Employees who are covered by a union existence after October 1 of the year the SIM- ployed at any time during the calendar year re- agreement and whose retirement benefits PLE IRA plan is set up and you set up a SIM- gardless of whether they are eligible to partici- were bargained for in good faith by the em- PLE IRA plan as soon as administratively feasi- pate. Employees include self-employed ployees' union and you. ble after your business comes into existence. If

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you previously maintained a SIMPLE IRA plan, defined later. No other contributions can be Salary reduction contributions you can set up a SIMPLE IRA plan effective made to the SIMPLE IRA plan. These contribu- ($40,000 × 10% (0.10)) ...... $4,000 only on January 1 of a year. A SIMPLE IRA plan tions, which you can deduct, must be made Employer matching contribution can't have an effective date that is before the timely. See Time limits for contributing funds, 1,200 date you actually adopt the plan. later. ($40,000 × 3% (0.03)) ...... Total contributions ...... $5,200 Setting up a SIMPLE IRA. SIMPLE IRAs are Salary reduction contributions. The amount the individual retirement accounts or annuities the employee chooses to have you contribute to Lower percentage. If you choose a match- into which the contributions are deposited. A a SIMPLE IRA on his or her behalf can't be ing contribution less than 3%, the percentage SIMPLE IRA must be set up for each eligible more than $13,500 for 2020 and 2021. These must be at least 1%. You must notify the em- employee. Forms 5305-S, SIMPLE Individual contributions must be expressed as a percent- ployees of the lower match within a reasonable Retirement Trust Account, and 5305-SA, SIM- age of the employee's compensation unless period of time before the 60-day election period PLE Individual Retirement Custodial Account, you permit the employee to express them as a (discussed earlier) for the calendar year. You are model trust and custodial account docu- specific dollar amount. You can't place restric- can't choose a percentage less than 3% for ments the participant and the trustee (or custo- tions on the contribution amount (such as limit- more than 2 years during the 5-year period that dian) can use for this purpose. ing the contribution percentage), except to com- ends with (and includes) the year for which the A SIMPLE IRA can't be a Roth IRA. Contri- ply with the $13,500 limit for 2020 and 2021. choice is effective. butions to a SIMPLE IRA won't affect the If you or an employee participates in any amount an individual can contribute to a Roth or other qualified plan during the year and you or Nonelective contributions. Instead of match- traditional IRA. your employee have salary reduction contribu- ing contributions, you can choose to make non- tions (elective deferrals) under those plans, the elective contributions of 2% of compensation on Deadline for setting up a SIMPLE IRA. A salary reduction contributions under a SIMPLE behalf of each eligible employee who has at SIMPLE IRA must be set up for an employee IRA plan also count toward the overall annual least $5,000 (or some lower amount you select) before the first date by which a contribution is limit ($19,500 for 2020 and 2021) on exclusion of compensation from you for the year. If you required to be deposited into the employee's of salary reduction contributions and other elec- make this choice, you must make nonelective IRA. See Time limits for contributing funds, tive deferrals. contributions whether or not the employee later, under Contribution Limits. chooses to make salary reduction contributions. Catch-up contributions. A SIMPLE IRA Only $285,000 of the employee's compensation Notification Requirement plan can permit participants who are age 50 or can be taken into account to figure the contribu- over at the end of the calendar year to also tion limit in 2020 ($290,000 in 2021). make catch-up contributions. The catch-up con- If you choose this 2% contribution formula, If you adopt a SIMPLE IRA plan, you must notify tribution limit for SIMPLE IRA plans is $3,000 you must notify the employees within a reason- each employee of the following information be- for 2020 and 2021. Salary reduction contribu- able period of time before the 60-day election fore the beginning of the election period. tions aren't treated as catch-up contributions period (discussed earlier) for the calendar year. 1. The employee's opportunity to make or until they exceed $13,500 for 2020 and 2021. change a salary reduction choice under a However, the catch-up contribution a partici- Example 1. In 2020, your employee, Jane SIMPLE IRA plan. pant can make for a year can't exceed the Wood, earned $36,000 and chose to have you lesser of the following amounts. contribute 10% of her salary. Your net earnings 2. Your decision to make either matching • The catch-up contribution limit. from self-employment are $50,000, and you contributions or nonelective contributions • The excess of the participant's compensa- choose to contribute 10% of your earnings to (discussed later). tion over the salary reduction contributions your SIMPLE IRA. You make a 2% nonelective 3. A summary description provided by the fi- that aren't catch-up contributions. contribution. Both of you are under age 50. The nancial institution. total contribution you make for Jane is $4,320, Employer matching contributions. You are figured as follows. 4. Written notice that his or her balance can generally required to match each employee's be transferred without cost or penalty if salary reduction contribution(s) on a dol- they use a designated financial institution. lar-for-dollar basis up to 3% of the employee's Salary reduction contributions compensation, where only employees who ($36,000 × 10% (0.10)) ...... $3,600 Election period. The election period is gener- have elected to make contributions will receive 2% nonelective contributions ally the 60-day period immediately preceding an employer matching contribution. This re- ($36,000 × 2% (0.02)) ...... 720 January 1 of a calendar year (November 2 to quirement doesn't apply if you make nonelec- Total contributions ...... $4,320 December 31 of the preceding calendar year). tive contributions, as discussed later. However, the dates of this period are modified if you set up a SIMPLE IRA plan mid-year (for ex- Example. In 2020, your employee, John The total contribution you make for yourself ample, on July 1) or if the 60-day period falls Rose, earned $25,000 and chose to defer 5% is $6,000, figured as follows. before the first day an employee becomes eligi- of his salary. Your net earnings from self-em- ble to participate in the SIMPLE IRA plan. ployment are $40,000, and you choose to con- Salary reduction contributions A SIMPLE IRA plan can provide longer peri- tribute 10% of your earnings to your SIMPLE ($50,000 × 10% (0.10)) ...... $5,000 ods for permitting employees to enter into sal- IRA. You make 3% matching contributions. The 2% nonelective contributions ary reduction agreements or to modify prior total contribution you make for John is $2,000, ($50,000 × 2% (0.02)) ...... 1,000 agreements. For example, a SIMPLE IRA plan figured as follows. Total contributions ...... $6,000 can provide a 90-day election period instead of the 60-day period. Similarly, in addition to the Salary reduction contributions 60-day period, a SIMPLE IRA plan can provide Example 2. Using the same facts as in Ex- ($25,000 × 5% (0.05)) ...... $1,250 quarterly election periods during the 30 days ample 1 above, the maximum contribution you before each calendar quarter, other than the Employer matching contribution make for Jane or for yourself if you each earned 750 first quarter of each year. ($25,000 × 3% (0.03)) ...... $75,000 is $14,000, figured as follows. Total contributions ...... $2,000

Contribution Limits Salary reduction contributions The total contribution you make for yourself (maximum amount allowed) ...... $12,500 is $5,200, figured as follows. Contributions are made up of salary reduction 2% nonelective contributions contributions and employer contributions. You, ($75,000 × 2% (0.02)) ...... 1,500 as the employer, must make either matching Total contributions ...... $14,000 contributions or nonelective contributions,

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Time limits for contributing funds. You must must, however, include them in the “Social se- b. Nonelective contributions of 2% of make the salary reduction contributions to the curity wages” and “Medicare wages and tips” compensation on behalf of each eligi- SIMPLE IRA within 30 days after the end of the boxes. You must also include them in box 12. ble employee who has at least $5,000 month in which the amounts would otherwise Mark the “Retirement plan” checkbox in box 13. of compensation from you for the have been payable to the employee in cash. For more information, see the Form W-2 in- year. You must make matching contributions or non- structions. 3. No other contributions can be made to the elective contributions by the due date (including trust. extensions) for filing your federal income tax re- turn for the year. Certain plans subject to De- Distributions (Withdrawals) 4. No contributions are made, and no bene- partment of Labor rules may have an earlier due fits accrue, for services during the year un- date for salary reduction contributions. Distributions from a SIMPLE IRA are subject to der any other qualified retirement plan IRA rules and generally are includible in income sponsored by you on behalf of any em- for the year received. Tax-free rollovers can be ployee eligible to participate in the When To Deduct made from one SIMPLE IRA into another SIM- SIMPLE 401(k) plan. Contributions PLE IRA. However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free 5. The employee's rights to any contributions You can deduct SIMPLE IRA contributions in only after a 2-year participation in the SIMPLE are nonforfeitable. the tax year within which the calendar year for IRA plan. No more than $285,000 of the employee's which contributions were made ends. You can compensation can be taken into account in fig- deduct contributions for a particular tax year if Generally, you or your employee must begin uring matching contributions and nonelective they are made for that tax year and are made by to receive distributions from a SIMPLE IRA by contributions in 2020 ($290,000 in 2021). Com- the due date (including extensions) of your fed- April 1 of the first year after the calendar year in pensation is defined earlier in this chapter. eral income tax return for that year. which you or your employee reaches age 72 (if 1 age 70 /2 was attained after December 31, Employee notification. The notification re- The due date for making contributions for 2019). 2020 for most plans is Thursday, April 15, 2021. quirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. See Noti- Early withdrawals generally are subject to a fication Requirement, earlier in this chapter. Example 1. Your tax year is the fiscal year 10% additional tax. However, the additional tax ending June 30. Contributions under a SIMPLE is increased to 25% if funds are withdrawn Note on forms. Please note that Forms IRA plan for calendar year 2020 (including con- within 2 years of beginning participation. tributions made in 2020 before July 1, 2020) are 5304-SIMPLE and 5305-SIMPLE can’t be used to establish a SIMPLE 401(k) plan. To set up a deductible in the tax year ending June 30, More information. See Pubs. 590-A and 2021. SIMPLE 401(k) plan, see Adopting a Written 590-B for information about IRA rules, including Plan in chapter 4. those on the tax treatment of distributions, roll- Example 2. You are a sole proprietor overs, required distributions, and income tax whose tax year is the calendar year. Contribu- withholding. tions under a SIMPLE IRA plan for the calendar year 2020 (including contributions made in 2021 by April 15, 2021) are deductible in the More Information 2020 tax year. on SIMPLE IRA Plans 4. Where To Deduct If you need help to set up or maintain a SIMPLE Contributions IRA plan, go to the IRS website and search SIMPLE IRA Plan. Qualified Plans Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on SIMPLE 401(k) Plan Topics Schedule C (Form 1040) or Schedule F (Form This chapter discusses: 1040), partnerships deduct them on Form 1065, You can adopt a SIMPLE plan as part of a and corporations deduct them on Form 1120 or 401(k) plan if you meet the 100-employee limit, • Kinds of plans Form 1120-S. as discussed earlier under SIMPLE IRA Plan. A • Qualification rules SIMPLE 401(k) plan is a qualified retirement • Setting up a qualified plan Sole proprietors and partners deduct contri- plan and must generally satisfy the rules dis- • Minimum funding requirement butions for themselves on line 15 of Schedule 1 cussed under Qualification Rules in chapter 4, • Contributions (Form 1040). (If you are a partner, contributions including the required distribution rules. How- • Employer deduction for yourself are shown on the Schedule K-1 ever, a SIMPLE 401(k) plan isn't subject to the • Elective deferrals (401(k) plans) (Form 1065) you receive from the partnership.) nondiscrimination and top-heavy rules dis- • Qualified Roth contribution program cussed in chapter 4 if the plan meets the condi- • Distributions Tax Treatment tions listed below. • Prohibited transactions of Contributions 1. Under the plan, an employee can choose • Reporting requirements to have you make salary reduction contri- You can deduct your contributions and your butions for the year to a trust in an amount Useful Items employees can exclude these contributions expressed as a percentage of the employ- You may want to see: from their gross income. SIMPLE IRA plan con- ee's compensation, but not more than tributions aren't subject to federal income tax $13,500 for 2020 and 2021. If permitted Publications withholding. However, salary reduction contri- under the plan, an employee who is age butions are subject to social security, Medicare, 50 or over can also make a catch-up con- 575 575 Pension and Annuity Income

and federal unemployment (FUTA) taxes. tribution of up to $3,000 for 2020 and 590-A 590-A Contributions to Individual Matching and nonelective contributions aren't 2021. See Catch-up contributions, earlier, Retirement Arrangements (IRAs) subject to these taxes. under Contribution Limits.

590-B 590-B Distributions from Individual 2. You must make either: Retirement Arrangements (IRAs) Reporting on Form W-2. Don’t include SIM-

PLE IRA plan contributions in the “Wages, tips, a. Matching contributions up to 3% of 3066 3066 Have you had your check-up this other compensation” box of Form W-2. You compensation for the year, or year? for Retirement Plans

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3998 3998 Choosing a Retirement Solution for discussed here apply to corporations except Defined Benefit Plan Your Small Business where specifically limited to the self-employed.

4222 4222 401(k) Plans for Small Businesses The plan must be for the exclusive benefit of A defined benefit plan is any plan that isn't a de- employees or their beneficiaries. These quali- fined contribution plan. Contributions to a de- 4530 4530 Designated Roth Accounts under fined benefit plan are based on what is needed 401(k), 403(b), or governmental fied plans can include coverage for a self-em- to provide definitely determinable benefits to 457(b) plans ployed individual. plan participants. Actuarial assumptions and As an employer, you can usually deduct, sub- 4531 4531 401(k) Plan Checklist computations are required to figure these con- ject to limits, contributions you make to a quali- tributions. Generally, you will need continuing

4674 4674 Automatic Enrollment 401(k) Plans fied plan, including those made for your own re- professional help to have a defined benefit plan. for Small Businesses tirement. The contributions (and earnings and gains on them) are generally tax free until dis- 4806 4806 Profit Sharing Plans for Small Businesses tributed by the plan. Qualification Rules

Forms (and Instructions) To qualify for the tax benefits available to quali- Kinds of Plans fied plans, a plan must meet certain require- W-2 W-2 Wage and Tax Statement ments (qualification rules) of the tax law. Gener-

Schedule K-1 (Form 1065) Schedule K-1 (Form 1065) Partner's There are two basic kinds of qualified ally, unless you write your own plan, the Share of Income, Deductions, plans—defined contribution plans and defined financial institution that provided your plan will Credits, etc. benefit plans—and different rules apply to each. take the continuing responsibility for meeting You can have more than one qualified plan, but qualification rules that are later changed. The 1099-R 1099-R Distributions From Pensions, your contributions to all the plans must not total Annuities, Retirement or following is a brief overview of important qualifi- more than the overall limits discussed under Profit-Sharing Plans, IRAs, Insurance cation rules that generally haven't yet been dis- Contributions and Employer Deduction, later. Contracts, etc. cussed. It isn't intended to be all-inclusive. See Setting Up a Qualified Plan, later.

1040 1040 U.S. Individual Income Tax Return Defined Contribution Plan Generally, the following qualification

1040-SR 1040-SR U.S. Tax Return for Seniors TIP rules also apply to a SIMPLE 401(k) re- A defined contribution plan provides an individ- tirement plan. A SIMPLE 401(k) plan is, Schedule C (Form 1040) Schedule C (Form 1040) Profit or Loss ual account for each participant in the plan. It From Business however, not subject to the top-heavy plan rules provides benefits to a participant largely based and nondiscrimination rules if the plan satisfies

Schedule F (Form 1040) Schedule F (Form 1040) Profit or Loss on the amount contributed to that participant's the provisions discussed in chapter 3 under From Farming account. Benefits are also affected by any in- SIMPLE 401(k) Plan. come, expenses, gains, losses, and forfeitures 5300 5300 Application for Determination for of other accounts that may be allocated to an Employee Benefit Plan account. A defined contribution plan can be ei- Plan assets must not be diverted. Your plan must make it impossible for its assets to be

5310 5310 Application for Determination for ther a profit-sharing plan or a money purchase used for, or diverted to, purposes other than the Terminating Plan pension plan. exclusive benefit of employees and their benefi-

5329 5329 Additional Taxes on Qualified Plans Profit-sharing plan. Although it is called a ciaries. As a general rule, the assets can't be di- (Including IRAs) and Other “profit-sharing plan,” you don't actually have to verted to the employer. Tax-Favored Accounts make a business profit for the year in order to make a contribution (except for yourself if you Minimum coverage requirement must be 5330 5330 Return of Excise Taxes Related to met. To be a qualified plan, a defined benefit Employee Benefit Plans are self-employed, as discussed under Self-em- ployed individual, later). A profit-sharing plan plan must benefit at least the lesser of the fol-

5500 5500 Annual Return/Report of Employee can be set up to allow for discretionary em- lowing. Benefit Plan ployer contributions, meaning the amount con- 1. 50 employees. tributed each year to the plan isn't fixed. An em- 5500-EZ 5500-EZ Annual Return of A 2. The greater of: One-Participant (Owners/Partners ployer may even make no contribution to the and Their Spouses) Retirement Plan plan for a given year. a. 40% of all employees, or or A Foreign Plan The plan must provide a definite formula for allocating the contribution among the partici- b. Two employees.

5500-SF 5500-SF Short Form Annual Return/ pants and for distributing the accumulated If there is only one employee, the plan must Report of Small Employee Benefit funds to the employees after they reach a cer- benefit that employee. Plan tain age, after a fixed number of years, or upon

8717 8717 User Fee for Employee Plan certain other occurrences. Contributions or benefits must not discrimi- Determination Letter Request In general, you can be more flexible in mak- nate. Under the plan, contributions or benefits ing contributions to a profit-sharing plan than to to be provided must not discriminate in favor of

8880 8880 Credit for Qualified Retirement a money purchase pension plan (discussed highly compensated employees. Savings Contributions next) or a defined benefit plan (discussed later).

8881 8881 Credit for Small Employer Pension Contributions and benefits must not be Plan Startup Costs Money purchase pension plan. Contribu- more than certain limits. Your plan must not tions to a money purchase pension plan are provide for contributions or benefits that are 8955-SSA 8955-SSA Annual Registration Statement fixed and aren't based on your business profits. more than certain limits. The limits apply to the Identifying Separated Participants For example, a money purchase pension plan annual contributions and other additions to the With Deferred Vested Benefits may require that contributions be 10% of the account of a participant in a defined contribu- These qualified retirement plans set up by participants' compensation without regard to tion plan and to the annual benefit payable to a self-employed individuals are sometimes called whether you have profits (or the self-employed participant in a defined benefit plan. These lim- Keogh or H.R. 10 plans. A sole proprietor or a person has earned income). its are discussed later in this chapter under partnership can set up one of these plans. A Contributions. common-law employee or a partner can't set up one of these plans. The plans described here Minimum vesting standard must be met. can also be set up and maintained by Your plan must satisfy certain requirements re- employers that are corporations. All of the rules garding when benefits vest. A benefit is vested

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(you have a fixed right to it) when it becomes which may be actuarially reduced, is paya- otherwise. A section 402(f) notice must be sent nonforfeitable. A benefit is nonforfeitable if it ble when the early retirement age require- prior to an involuntary cash-out of an eligible can't be lost upon the happening, or failure to ment is met. rollover distribution. See Section 402(f) notice happen, of any event. Special rules apply to for- under Distributions, later, for more details. feited benefit amounts. In defined contribution Required minimum distributions. Special plans, forfeitures can be allocated to the ac- rules require minimum annual distributions from Consolidation, merger, or transfer of assets counts of remaining participants in a nondiscri- qualified plans, generally beginning after age 72 or liabilities. Your plan must provide that, in minatory way, or they can be used to reduce (if age 701/2 was attained after December 31, the case of any merger or consolidation with, or your contributions. 2019). See Required Distributions under Distri- transfer of assets or liabilities to, any other plan, Forfeitures under a defined benefit plan butions, later. each participant would (if the plan then termina- can't be used to increase the benefits any em- ted) receive a benefit equal to or more than the ployee would otherwise receive under the plan. Survivor benefits. Defined benefit and money benefit he or she would have been entitled to Forfeitures must be used instead to reduce em- purchase pension plans must provide automatic just before the merger, etc. (if the plan had then ployer contributions. survivor benefits in both the following forms. terminated). • A qualified joint and survivor annuity for a Participation. In general, an employee must vested participant who doesn't die before Benefits must not be assigned or alienated. be allowed to participate in your plan if he or the annuity starting date. Your plan must provide that a participant's or she meets both the following requirements. • A qualified pre-retirement survivor annuity beneficiary's benefits under the plan can't be • Has reached age 21. for a vested participant who dies before taken away by any legal or equitable proceed- • Has at least 1 year of service (2 years if the the annuity starting date and who has a ing except as provided below or pursuant to plan isn't a 401(k) plan and provides that surviving spouse. certain judgments or settlements against the after not more than 2 years of service the The automatic survivor benefit also applies participant for violations of plan rules. employee has a nonforfeitable right to all to any participant under a profit-sharing plan un- Exception for certain loans. A loan from his or her accrued benefit). less all the following conditions are met. the plan (not from a third party) to a participant A plan can't exclude an employee be- • The participant doesn't choose benefits in or beneficiary isn't treated as an assignment or ! cause he or she has reached a speci- the form of a life annuity. alienation if the loan is secured by the partici- CAUTION fied age. • The plan pays the full vested account bal- pant's accrued nonforfeitable benefit and is ex- ance to the participant's surviving spouse empt from the tax on prohibited transactions un- (or other beneficiary if the surviving spouse der section 4975(d)(1) or would be exempt if Leased employee. A leased employee, de- consents or if there is no surviving spouse) the participant were a disqualified person. A fined in chapter 1, who performs services for if the participant dies. disqualified person is defined later in this chap- you (recipient of the services) is treated as your • The plan isn't a direct or indirect transferee ter under Prohibited Transactions. employee for certain plan qualification rules. of a plan that must provide automatic survi- These rules include those in all the following vor benefits. Exception for a qualified domestic rela- areas. tions order (QDRO). Compliance with a • Nondiscrimination in coverage, contribu- Loan secured by benefits. If automatic QDRO doesn't result in a prohibited assignment tions, and benefits. survivor benefits are required for a spouse un- or alienation of benefits. • Minimum age and service requirements. der a plan, he or she must consent to a loan Payments to an alternate payee under a • Vesting. that uses as security the accrued benefits in the QDRO before the participant attains age 591/2 • Limits on contributions and benefits. plan. aren't subject to the 10% additional tax that • Top-heavy plan requirements. Waiver of survivor benefits. Each plan would otherwise apply under certain circum- Contributions or benefits provided by the leas- participant may be permitted to waive the joint stances. Benefits distributed to an alternate ing organization for services performed for you and survivor annuity or the pre-retirement survi- payee under a QDRO can be rolled over tax are treated as provided by you. vor annuity (or both), but only if the participant free to an individual retirement account or to an has the written consent of the spouse. The plan individual retirement annuity. Benefit payment must begin when required. must also allow the participant to withdraw the No benefit reduction for social security in- Your plan must provide that, unless the partici- waiver. The spouse's consent must be wit- creases. Your plan must not permit a benefit pant chooses otherwise, the payment of bene- nessed by a plan representative or notary pub- reduction for a post-separation increase in the fits to the participant must begin within 60 days lic. after the close of the latest of the following peri- social security benefit level or wage base for ods. Involuntary cash-out of benefits not any participant or beneficiary who is receiving • The plan year in which the participant rea- more than dollar limit. A plan may provide for benefits under your plan, or who is separated ches the earlier of age 65 or the normal re- the immediate distribution of the participant's from service and has nonforfeitable rights to tirement age specified in the plan. benefit under the plan if the present value of the benefits. This rule also applies to plans supple- • The plan year in which the 10th anniver- benefit isn't greater than $5,000. menting the benefits provided by other federal sary of the year in which the participant be- However, the distribution can't be made af- or state laws. gan participating in the plan occurs. ter the annuity starting date unless the partici- • The plan year in which the participant sep- pant and the spouse or surviving spouse of a Elective deferrals must be limited. If your arates from service. participant who died (if automatic survivor ben- plan provides for elective deferrals, it must limit efits are required for a spouse under the plan) those deferrals to the amount in effect for that Early retirement. Your plan can provide for consents in writing to the distribution. If the particular year. See Limit on Elective Deferrals, payment of retirement benefits before the nor- present value is greater than $5,000, the plan later in this chapter. mal retirement age. If your plan offers an early must have the written consent of the participant retirement benefit, a participant who separates and the spouse or surviving spouse (if auto- Top-heavy plan requirements. A top-heavy from service before satisfying the early retire- matic survivor benefits are required for a plan is one that mainly favors partners, sole pro- ment age requirement is entitled to that benefit spouse under the plan) for any immediate distri- prietors, and other key employees. if he or she meets both the following require- bution of the benefit. A plan is top-heavy for a plan year if, for the ments. Benefits attributable to rollover contributions preceding plan year, the total value of accrued • Satisfies the service requirement for the and earnings on them can be ignored in deter- benefits or account balances of key employees early retirement benefit. mining the present value of these benefits. is more than 60% of the total value of accrued • Separates from service with a nonforfeita- A plan must provide for the automatic roll- benefits or account balances of all employees. ble right to an accrued benefit. The benefit, over of any cash-out distribution of more than Additional requirements apply to a top-heavy $1,000 to an individual retirement account or plan primarily to provide minimum benefits or annuity, unless the participant chooses

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contributions for non-key employees covered sist of an adoption agreement plan or a single You don't need a trust or custodial account, by the plan. document plan. For more information about IRS although you can have one, to invest the plan's Most qualified plans, whether or not pre-approved plans, see Revenue Procedure funds in annuity contracts or face-amount certif- top-heavy, must contain provisions that meet 2017-41, 2017-29 I.R.B. 92, available at icates. If anyone other than a trustee holds the top-heavy requirements and will take effect IRS.gov/irb/2017-29_IRB#RP-2017-41. them, however, the contracts or certificates in plan years in which the plans are top-heavy. must state they aren't transferable. Plan providers. The following organiza- These qualification requirements for top-heavy tions can generally provide IRS pre-approved plans are explained in section 416 and its regu- Other plan requirements. For information on plans. lations. other important plan requirements, see Qualifi- • Banks (including some savings and loan cation Rules, earlier in this chapter. SIMPLE and safe harbor 401(k) plan ex- associations and federally insured credit ception. The top-heavy plan requirements unions). don't apply to SIMPLE 401(k) plans, discussed • Trade or professional organizations. Minimum Funding earlier in chapter 3, or to safe harbor 401(k) • Insurance companies. plans that consist solely of safe harbor contribu- • Mutual funds. Requirement tions, discussed later in this chapter. Qualified • Law firms. automatic contribution arrangements (QACAs) • Third-party administrators. In general, if your plan is a money purchase (discussed later) also aren't subject to pension plan or a defined benefit plan, you must top-heavy requirements. Individually designed plan. If you prefer, you actually pay enough into the plan to satisfy the can set up an individually designed plan to minimum funding standard for each year. Deter- meet specific needs. Although advance IRS ap- mining the amount needed to satisfy the mini- Setting Up a Qualified proval is not required, you can apply for appro- mum funding standard for a defined benefit plan val by paying a fee and requesting a determina- is complicated, and you should seek professio- Plan tion letter. You may need professional help for nal help in order to meet these contribution re- this. See Revenue Procedure 2020-4, 2020-1 quirements. For information on this funding re- There are two basic steps in setting up a quali- I.R.B. 148, available at IRS.gov/irb/ quirement, see section 430 and its regulations. fied plan. First, you adopt a written plan. Then, 2020-01_IRB, as annually updated, that may you invest the plan assets. help you decide whether to apply for approval. Quarterly installments of required contribu- You, the employer, are responsible for set- User fee. The fee mentioned earlier for re- tions. If your plan is a defined benefit plan sub- ting up and maintaining the plan. questing a determination letter doesn't apply to ject to the minimum funding requirements, you employers who have 100 or fewer employees must generally make quarterly installment pay- If you are self-employed, it isn't neces- who received at least $5,000 of compensation ments of the required contributions. If you don't TIP sary to have employees besides your- from the employer for the preceding year. At pay the full installments timely, you may have to self to sponsor and set up a qualified least one of them must be a non-highly com- pay interest on any underpayment for the period plan. If you have employees, see Participation pensated employee participating in the plan. of the underpayment. under Qualification Rules, earlier. The fee doesn't apply to requests made by the Due dates. The due dates for the install- later of the following dates. ments are 15 days after the end of each quar- Set-up deadline. To take a deduction for con- • The end of the fifth plan year the plan is in ter. For a calendar-year plan, the installments tributions for a tax year, your plan must be set effect. are due April 15, July 15, October 15, and Janu- up (adopted) by the last day of that year (De- • The end of any remedial amendment pe- ary 15 (of the following year). cember 31 for calendar-year employers). riod for the plan that begins within the first 5 plan years. Installment percentage. Each quarterly installment must be 25% of the required annual Adopting a Written Plan The request can't be made by the provider of an payment. IRS pre-approved plan that intends to market to You must adopt a written plan. The plan can be participating employers. Extended period for making contribu- an IRS pre-approved plan offered by a sponsor- For more information about whether the user tions. Additional contributions required to sat- ing organization. Or it can be an individually de- fee applies, see Revenue Procedure 2020-4, isfy the minimum funding requirement for a plan signed plan. 2020-1 I.R.B. 148, available at IRS.gov/irb/ year will be considered timely if made by 81/2 2020-01_IRB, as may be annually updated; No- months after the end of that year. Written plan requirement. To qualify, the tice 2017-1, 2017-2 I.R.B. 367, available at plan you set up must be in writing and must be IRS.gov/pub/irs-irbs/irb17-02.pdf; and Form communicated to your employees. The plan's 8717. Contributions provisions must be stated in the plan. It isn't suf- ficient for the plan to merely refer to a require- A qualified plan is generally funded by your con- ment of the Internal Revenue Code. Investing Plan Assets tributions. However, employees participating in IRS pre-approved plans. Most qualified plans In setting up a qualified plan, you arrange how the plan may be permitted to make contribu- follow a standard form of plan approved by the the plan's funds will be used to build its assets. tions, and you may be permitted to make contri- IRS. An IRS pre-approved plan is a plan, includ- • You can establish a trust or custodial ac- butions on your own behalf. See Employee ing a plan covering self-employed individuals, count to invest the funds. Contributions and Elective Deferrals, later. that is made available by a provider for adoption • You, the trust, or the custodial account can Contributions deadline. You can make de- by employers. Under the prior IRS pre-ap- buy an annuity contract from an insurance ductible contributions for a tax year up to the proved plan program, a plan could be a master company. Life insurance can be included due date of your return (plus extensions) for plan, a prototype plan, or a volume submitter only if it is incidental to the retirement ben- that year. plan. Under the restructured program, the three efits. plan types were combined into one type called Self-employed individual. You can make a pre-approved plan. IRS pre-approved plans You set up a trust by a legal instrument (writ- contributions on behalf of yourself only if you include both standardized plans and nonstan- ten document). You may need professional help have net earnings (compensation) from dardized plans. An IRS pre-approved plan may to do this. self-employment in the trade or business for use a single funding medium, for example, a which the plan was set up. Your net earnings trust or custodial account document, for the You can set up a custodial account with a must be from your personal services, not from joint use of all adopting employers or separate bank, savings and loan association, credit un- your investments. If you have a net loss from funding mediums established for each adopting ion, or other person who can act as the plan self-employment, you can't make contributions employer. An IRS pre-approved plan may con- trustee.

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Table 4-1. Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted) Excess Excess Total contribution Deductible contribution deduction carryover Participants' Employer limit for current year carryover including available at Year compensation contribution (25% of compensation) used1 carryovers end of year ...... 2017 ...... $1,000 $100 $250 $ 0 $100 $ 0 2018 ...... 400 165 100 0 100 65 2019 ...... 500 100 125 25 125 40 2020 ...... 600 100 150 40 140 0 1 There were no carryovers from years before 2016. for yourself for the year, even if you can contrib- When Contributions When figuring the deduction limit, the follow- ute for common-law employees based on their Are Considered Made ing rules apply. compensation. • Elective deferrals (discussed later) aren't subject to the limit. Employer Contributions You generally apply your plan contributions to • Compensation includes elective deferrals. the year in which you make them. But you can • The maximum compensation that can be apply them to the previous year if all the follow- taken into account for each employee in There are certain limits on the contributions and ing requirements are met. 2020 is $285,000 ($290,000 in 2021). other annual additions you can make each year for plan participants. There are also limits on 1. You make them by the due date of your Defined benefit plans. The deduction for con- the amount you can deduct. See Deduction tax return for the previous year (plus ex- tributions to a defined benefit plan is based on Limits, later. tensions). actuarial assumptions and computations. Con- 2. The plan was established by the end of sequently, an actuary must figure your deduc- Limits on Contributions the previous year. tion limit. and Benefits 3. The plan treats the contributions as In figuring the deduction for contribu- though it had received them on the last Your plan must provide that contributions or ! tions, you can't take into account any day of the previous year. CAUTION benefits can't exceed certain limits. The limits contributions or benefits that are more differ depending on whether your plan is a de- 4. You do either of the following. than the limits discussed earlier under Limits on fined contribution plan or a defined benefit plan. Contributions and Benefits. a. You specify in writing to the plan ad- Defined benefit plan. For 2020, the annual ministrator or trustee that the contribu- benefit for a participant under a defined benefit tions apply to the previous year. Deduction Limit for plan can't exceed the lesser of the following b. You deduct the contributions on your Self-Employed Individuals amounts. tax return for the previous year. A If you make contributions for yourself, you need 1. 100% of the participant's average com- partnership shows contributions for partners on Form 1065. to make a special computation to figure your pensation for his or her highest 3 consecu- maximum deduction for these contributions. tive calendar years. Employer's promissory note. Your promis- Compensation is your net earnings from 2. $230,000 for 2020 and 2021. sory note made out to the plan isn't a payment self-employment, defined in chapter 1. This def- that qualifies for the deduction. Also, issuing inition takes into account both the following Defined contribution plan. For 2020, a de- this note is a prohibited transaction subject to items. fined contribution plan's annual contributions tax. See Prohibited Transactions, later. • The deduction for the deductible part of and other additions (excluding earnings) to the your self-employment tax. account of a participant can't exceed the lesser • The deduction for contributions on your be- of the following amounts. Employer Deduction half to the plan. 1. 100% of the participant's compensation. The deduction for your own contributions You can usually deduct, subject to limits, contri- and your net earnings depend on each other. 2. $57,000 for 2020 ($58,000 for 2021). butions you make to a qualified plan, including For this reason, you determine the deduction Catch-up contributions (discussed later un- those made for your own retirement. The contri- for your own contributions indirectly by reducing der Limit on Elective Deferrals) aren't subject to butions (and earnings and gains on them) are the contribution rate called for in your plan. To the above limit. generally tax free until distributed by the plan. do this, use either the Rate Table for Self-Em- ployed or the Rate Worksheet for Self-Em- Deduction Limits ployed in chapter 6. Then, figure your maximum Employee Contributions deduction by using the Deduction Worksheet for Self-Employed in chapter 6. Participants may be permitted to make nonde- The deduction limit for your contributions to a ductible contributions to a plan in addition to qualified plan depends on the kind of plan you your contributions. Even though these em- have. Where To Deduct ployee contributions aren't deductible, the earn- Contributions ings on them are tax free until distributed in later Defined contribution plans. The deduction years. Also, these contributions must satisfy the for contributions to a defined contribution plan Deduct the contributions you make for your actual contribution percentage (ACP) test of (profit-sharing plan or money purchase pension common-law employees on your tax return. For section 401(m)(2), a nondiscrimination test that plan) can't be more than 25% of the compensa- example, sole proprietors deduct them on applies to employee contributions and matching tion paid (or accrued) during the year to your el- Schedule C (Form 1040) or Schedule F (Form contributions. See Regulations sections igible employees participating in the plan. If you 1040), partnerships deduct them on Form 1065, 1.401(k)-2 and 1.401(m)-2 for further guidance are self-employed, you must reduce this limit in and corporations deduct them on Form 1120 or relating to the nondiscrimination rules under figuring the deduction for contributions you Form 1120-S. sections 401(k) and 401(m). make for your own account. See Deduction Sole proprietors and partners deduct contri- Limit for Self-Employed Individuals, later. butions for themselves on line 15 of Schedule 1

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(Form 1040). (If you are a partner, contributions In general, a qualified plan can include a tions for 2020 and 2021 until they exceed the for yourself are shown on the Schedule K-1 cash or deferred arrangement only if the quali- $19,500 limit, the ADP test limit of section (Form 1065) you get from the partnership.) fied plan is one of the following plans. 401(k)(3), or the plan limit (if any). However, the • A profit-sharing plan. catch-up contribution a participant can make for • A money purchase pension plan in exis- a year can't exceed the lesser of the following Carryover of tence on June 27, 1974, that included a amounts. Excess Contributions salary reduction arrangement on that date. • The catch-up contribution limit. • The excess of the participant's compensa- If you contribute more to a plan than you can Partnership. A partnership can have a 401(k) tion over the elective deferrals that aren't deduct for the year, you can carry over and de- plan. catch-up contributions. duct the difference in later years, combined with your contributions for those years. Your com- Restriction on conditions of participation. Treatment of contributions. Your contribu- bined deduction in a later year is limited to 25% The plan can't require, as a condition of partici- tions to your own 401(k) plan are generally de- of the participating employees' compensation pation, that an employee complete more than 1 ductible by you for the year they are contributed for that year. For purposes of this limit, a SEP is year of service. to the plan. Matching or nonelective contribu- treated as a profit-sharing (defined contribution) tions made to the plan are also deductible by plan. However, this percentage limit must be re- Matching contributions. If your plan permits, you in the year of contribution. Your employees' duced to figure your maximum deduction for you can make matching contributions for an elective deferrals other than designated Roth contributions you make for yourself. See De- employee who makes an elective deferral to contributions are tax free until distributed from duction Limit for Self-Employed Individuals, ear- your 401(k) plan. For example, the plan might the plan. Elective deferrals are included in wa- lier. The amount you carry over and deduct may provide that you will contribute 50 cents for ges for social security, Medicare, and federal be subject to the excise tax discussed next. each dollar your participating employees unemployment (FUTA) tax. choose to defer under your 401(k) plan. Match- Table 4-1. Carryover of Excess Contribu- ing contributions are generally subject to the Forfeiture. Employees have a nonforfeitable tions Illustrated Profit-Sharing Plan illustrates ACP test discussed earlier under Employee right at all times to their accrued benefit attribut- the carryover of excess contributions to a Contributions. able to elective deferrals. profit-sharing plan. Nonelective contributions. You can also Reporting on Form W-2. Don't include elec- make contributions (other than matching contri- tive deferrals in the “Wages, tips, other com- Excise Tax for butions) for your participating employees with- pensation” box of Form W-2. You must, how- Nondeductible (Excess) out giving them the choice to take cash instead. ever, include them in the “Social security Contributions These are called nonelective contributions. wages” and “Medicare wages and tips” boxes. You must also include them in box 12. Mark the Employee compensation limit. No more than “Retirement plan” checkbox in box 13. For more If you contribute more than your deduction limit $285,000 of the employee's compensation can information, see the Form W-2 instructions. to a retirement plan, you have made nondeduc- be taken into account when figuring contribu- tible contributions and you may be liable for an tions other than elective deferrals in 2020. This excise tax. In general, a 10% excise tax applies limit is $290,000 in 2021. Automatic Enrollment to nondeductible contributions made to quali- fied pension and profit-sharing plans and to SIMPLE 401(k) plan. If you had 100 or fewer Your 401(k) plan can have an automatic enroll- SEPs. employees who earned $5,000 or more in com- ment feature. Under this feature, you can auto- pensation during the preceding year, you may matically reduce an employee's pay by a fixed Special rule for self-employed individuals. be able to set up a SIMPLE 401(k) plan. A SIM- percentage and contribute that amount to the The 10% excise tax doesn't apply to any contri- PLE 401(k) plan isn't subject to the nondiscrimi- 401(k) plan on his or her behalf unless the em- bution made to meet the minimum funding re- nation and top-heavy plan requirements dis- ployee affirmatively chooses not to have his or quirements in a money purchase pension plan cussed earlier under Qualification Rules. For her pay reduced or chooses to have it reduced or a defined benefit plan. Even if that contribu- details about SIMPLE 401(k) plans, see SIM- by a different percentage. These contributions tion is more than your earned income from the PLE 401(k) Plan in chapter 3. are elective deferrals. An automatic enrollment trade or business for which the plan is set up, feature will encourage employees' saving for re- the difference isn't subject to this excise tax. Distributions. Certain rules apply to distribu- tirement and will help your plan pass nondiscri- See Minimum Funding Requirement, earlier. tions from 401(k) plans. See Distributions From mination testing (if applicable). For more infor- 401(k) Plans, later. mation, see Pub. 4674. Reporting the tax. You must report the tax on your nondeductible contributions on Form 5330. Eligible automatic contribution arrange- Form 5330 includes a computation of the tax. Limit on Elective Deferrals ment (EACA). Under an EACA, a participant is See the separate instructions for completing the treated as having elected to have the employer form. There is a limit on the amount an employee can make contributions in an amount equal to a uni- defer each year under these plans. This limit form percentage of compensation. This auto- applies without regard to community property matic election will remain in place until the par- Elective Deferrals laws. Your plan must provide that your employ- ticipant specifically elects not to have such ees can't defer more than the limit that applies deferral percentage made (or elects a different (401(k) Plans) for a particular year. The basic limit on elective percentage). There is no required deferral per- deferrals is $19,500 for 2020 and 2021. This centage. Your qualified plan can include a cash or defer- limit applies to all salary reduction contributions Withdrawals. Under an EACA, you may al- red arrangement under which participants can and elective deferrals. If, in conjunction with low participants to withdraw their automatic choose to have you contribute part of their be- other plans, the deferral limit is exceeded, the contributions to the plan if certain conditions are fore-tax compensation to the plan rather than difference is included in the employee's gross met. receive the compensation in cash. A plan with income. this type of arrangement is popularly known as • The participant must elect the withdrawal no later than 90 days after the date of the a 401(k) plan. (As a self-employed individual Catch-up contributions. A 401(k) plan can first elective contributions under the EACA. participating in the plan, you can contribute part permit participants who are age 50 or over at The participant must withdraw the entire of your before-tax net earnings from the busi- the end of the calendar year to also make • amount of EACA default contributions, in- ness.) This contribution is called an elective de- catch-up contributions. The catch-up contribu- cluding any earnings thereon. ferral because participants choose (elect) to de- tion limit is $6,500 for 2020 and 2021. Elective fer receipt of the money. deferrals aren't treated as catch-up contribu-

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If the plan allows withdrawals under the b. An amount equal to 50% of elective considered for purposes of nondiscrimination EACA, the amount of the withdrawal other than deferrals, from 1% up to 6% of com- testing requirements of the plan, unless the dis- the amount of any designated Roth contribu- pensation. tributed amount is for a non-highly compensa- tions must be included in the employee's gross ted employee who participates in only one em- income for the tax year in which the distribution Other formulas may be used as long as ployer's 401(k) plan or plans. is made. The additional 10% tax on early distri- they are at least as favorable to non-highly butions won't apply to the distribution. compensated employees. The rate of Excess not withdrawn by April 15. If the em- matching contributions for highly compen- ployee doesn't take out the excess deferral by Notice requirement. Under an EACA, em- sated employees, including yourself, must April 15, 2021, the excess, though taxable in ployees must be given written notice of the not exceed the rates for non-highly com- 2020, isn't included in the employee's cost ba- terms of the EACA within a reasonable period pensated employees. sis in figuring the taxable amount of any even- of time before each plan year. The notice must 2. Nonelective contributions. You must tual distributions under the plan. In effect, an be written in a manner calculated to be under- make nonelective contributions on behalf excess deferral left in the plan is taxed twice, stood by the average employee and be suffi- of every non-highly compensated em- once when contributed and again when distrib- ciently accurate and comprehensive in order to ployee eligible to participate in the plan, uted. Also, if the employee's excess deferral is apprise the employee of his or her rights and regardless of whether they elected to par- allowed to stay in the plan and the employee obligations under the EACA. The notice must ticipate, in an amount equal to at least 3% participates in no other employer's plan, the include an explanation of the employee's right of their compensation. plan can be disqualified. to elect not to have elective contributions made on his or her behalf, or to elect a different per- Vesting requirements. All accrued bene- Reporting corrective distributions on Form centage, and the employee must be given a fits attributed to matching or nonelective contri- 1099-R. Report corrective distributions of ex- reasonable period of time after receipt of the butions under the QACA must be 100% vested cess deferrals (including any earnings) on Form notice before the first elective contribution is for all employees who complete 2 years of serv- 1099-R. For specific information about reporting made. The notice must also explain how contri- ice. These contributions are subject to special corrective distributions, see the Instructions for butions will be invested in the absence of an in- withdrawal restrictions, discussed later. Forms 1099-R and 5498. vestment election by the employee. Notice requirements. Each employee eli- Tax on excess contributions of highly com- gible to participate in the QACA must receive Qualified automatic contribution arrange- pensated employees. The law provides tests written notice of their rights and obligations un- ment (QACA). A QACA is a type of safe har- to detect discrimination in a plan. If tests, such der the QACA within a reasonable period be- bor plan. It contains an automatic enrollment as the ADP test (see section 401(k)(3)) and the fore each plan year. The notice must be written feature, and mandatory employer contributions ACP test (see section 401(m)(2)), show that in a manner calculated to be understood by the are required. If your plan includes a QACA, it contributions for highly compensated employ- average employee, and it must be accurate and won't be subject to the ADP test (discussed ees are more than the test limits for these con- comprehensive. The notice must explain their later) nor the top-heavy requirements (dis- tributions, the employer may have to pay a 10% right to elect not to have elective contributions cussed earlier). Additionally, your plan won't be excise tax. Report the tax on Form 5330. The made on their behalf, or to have contributions subject to the ACP test if certain additional re- ADP test doesn't apply to a safe harbor 401(k) made at a different percentage than the default quirements are met. Under a QACA, each em- plan (discussed next) nor to a QACA. Also, the percentage. Additionally, the notice must ex- ployee who is eligible to participate in the plan ACP test doesn't apply to these plans if certain plain how contributions will be invested in the will be treated as having elected to make elec- additional requirements are met. absence of any investment election by the em- tive deferral contributions equal to a certain de- The tax for the year is 10% of the excess ployee. The employee must have a reasonable fault percentage of compensation. In order to contributions for the plan year ending in your period of time after receiving the notice to make not have default elective deferrals made, an tax year. Excess contributions are elective de- such contribution and investment elections prior employee must make an affirmative election ferrals, employee contributions, or employer to the first contributions under the QACA. specifying a deferral percentage (including matching or nonelective contributions that are zero, if desired). If an employee doesn't make more than the amount permitted under the ADP an affirmative election, the default deferral per- Treatment of Excess test or the ACP test. centage must meet the following conditions. Deferrals See Regulations sections 1.401(k)-2 and 1. It must be applied uniformly. 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) 2. It must not exceed 10%. (After December If the total of an employee's deferrals is more and 401(m). 31, 2019, the maximum default deferral than the limit for 2020, the employee can have percentage increases to 15%.) the difference (called an excess deferral) paid If the plan fails the ADP or ACP testing, out of any of the plans that permit these distri- and the failure isn't corrected by the 3. It must be at least 3% in the first plan year ! butions. He or she must notify the plan by April CAUTION end of the next plan year, the plan can it applies to an employee and through the 15, 2021 (or an earlier date specified in the be disqualified. end of the following year. plan), of the amount to be paid from each plan. 4. It must increase to at least 4% in the fol- The plan must then pay the employee that lowing plan year. amount, plus earnings on the amount through Safe Harbor 401(k) Plan the end of 2020, by April 15, 2021. 5. It must increase to at least 5% in the fol- If you meet the requirements for a safe harbor lowing plan year. Excess withdrawn by April 15. If the em- 401(k) plan, you don't have to satisfy the ADP 6. It must increase to at least 6% in subse- ployee takes out the excess deferral by April 15, test, nor the ACP test, if certain additional re- quent plan years. 2021, it isn't reported again by including it in the quirements are met. For your plan to be a safe employee's gross income for 2021. However, harbor plan, you must meet the following condi- Matching or nonelective contributions. any income earned in 2020 on the excess de- tions. Under the terms of the QACA, you must make ferral taken out is taxable in the tax year in 1. Matching or nonelective contributions. either matching or nonelective contributions ac- which it is taken out. The distribution isn't sub- You must make matching or nonelective cording to the following terms. ject to the additional 10% tax on early distribu- contributions according to one of the fol- tions. 1. Matching contributions. You must make lowing formulas. If the employee takes out part of the excess matching contributions on behalf of each deferral and the income on it, the distribution is a. Matching contributions. You must non-highly compensated employee in the treated as made proportionately from the ex- make matching contributions accord- following amounts. cess deferral and the income. ing to the following rules. a. An amount equal to 100% of elective Even if the employee takes out the excess deferrals, up to 1% of compensation. deferral by April 15, the amount will be

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i. You must contribute an amount and traditional, pre-tax elective deferrals) Required Distributions equal to 100% of each non-highly of $19,500 for 2020 and 2021, with an ad- compensated employee's elec- ditional $6,500 if age 50 or over; A qualified plan must provide that each partici- tive deferrals, up to 3% of com- • Determining the maximum employee and pant will either: pensation. employer annual contributions of the lesser Receive his or her entire interest (benefits) of 100% of compensation or $57,000 for • ii. You must contribute an amount in the plan by the required beginning date 2020 ($58,000 for 2021); equal to 50% of each non-highly (defined later), or • Nondiscrimination testing; compensated employee's elec- • Begin receiving regular periodic distribu- • Required distributions; and tive deferrals, from 3% up to 5% tions by the required beginning date in an- • Elective deferrals not taken into account of compensation. nual amounts figured to distribute the par- for purposes of deduction limits. ticipant's entire interest (benefits) over his iii. The rate of matching contribu- or her life expectancy or over the joint life tions for highly compensated em- expectancies of the participant and the ployees, including yourself, must Qualified Distributions designated beneficiary (or over a shorter not exceed the rates for A qualified distribution is a distribution that is period). non-highly compensated employ- made after the employee's nonexclusion period ees. and: These distribution rules apply individually to b. Nonelective contributions. You • On or after the employee attains age each qualified plan. You can't satisfy the re- must make nonelective contributions, 591/2, quirement for one plan by taking a distribution without regard to whether the em- • On account of the employee's being disa- from another. The plan must provide that these ployee made elective deferrals, on bled, or rules override any inconsistent distribution op- behalf of all non-highly compensated • On or after the employee's death. tions previously offered. employees eligible to participate in the plan, equal to at least 3% of the An employee's nonexclusion period for a Minimum distribution. If the account balance employee's compensation. plan is the 5-tax-year period beginning with the of a qualified plan participant is to be distributed earlier of the following tax years. (other than as an annuity), the plan administra- These mandatory matching and non- • The first tax year in which the employee tor must figure the minimum amount required to elective contributions must be immediately made a contribution to his or her Roth ac- be distributed each distribution calendar year. 100% vested and are subject to special count in the plan. This minimum is figured by dividing the account withdrawal restrictions. • If a rollover contribution was made to the balance by the applicable life expectancy. The employee's designated Roth account from 2. Notice requirement. You must give eligi- plan administrator can use the life expectancy a designated Roth account previously es- ble employees written notice of their rights tables in Pub. 590-B for this purpose. For more tablished for the employee under another and obligations with regard to contribu- information on figuring the minimum distribu- plan, then the first tax year the employee tions under the plan within a reasonable tion, see Tax on Excess Accumulation in Pub. made a designated Roth contribution to period before the plan year. 575. the previously established account. The other requirements for a 401(k) plan, in- Required beginning date. Generally, each Rollover. A rollover from another account can cluding withdrawal and vesting rules, must also participant must receive his or her entire bene- be made to a designated Roth account in the be met for your plan to qualify as a safe harbor fits in the plan or begin to receive periodic distri- same plan. For additional information on these 401(k) plan. butions of benefits from the plan by the required in-plan Roth rollovers, see Notice 2010-84, beginning date. 2010-51 I.R.B. 872, available at IRS.gov/irb/ A participant must begin to receive distribu- Qualified Roth 2010-51_IRB/ar11.html, and Notice 2013-74, tions from his or her qualified retirement plan by 2013-52 I.R.B. 819, available at IRS.gov/pub/ April 1 of the first year after the later of the fol- Contribution Program irs-irbs/irb13-52.pdf. A distribution from a desig- lowing years. nated Roth account can only be rolled over to 1. The calendar year in which he or she rea- Under this program, an eligible employee can another designated Roth account or a Roth ches age 72 (if age 701/2 was attained af- designate all or a portion of his or her elective IRA. Rollover amounts don't apply toward the ter December 31, 2019). deferrals as after-tax Roth contributions. Elec- annual deferral limit. tive deferrals designated as Roth contributions 2. The calendar year in which he or she re- must be maintained in a separate Roth account. Reporting Requirements tires from employment with the employer However, unlike other elective deferrals, desig- maintaining the plan. nated Roth contributions aren't excluded from You must report a contribution to a Roth ac- employees' gross income, but qualified distribu- count on Form W-2 and a distribution from a However, the plan may require the participant to tions from a Roth account are excluded from Roth account on Form 1099-R. See the Form begin receiving distributions by April 1 of the employees' gross income. W-2 and 1099-R instructions for detailed infor- year after the participant reaches age 72 (if age 1 mation. 70 /2 was attained after December 31, 2019) even if the participant has not retired. Elective Deferrals If the participant is a 5% owner of the em- ployer maintaining the plan, the participant must Under a qualified Roth contribution program, Distributions begin receiving distributions by April 1 of the the amount of elective deferrals that an em- first year after the calendar year in which the Amounts paid to plan participants from a quali- ployee may designate as a Roth contribution is participant reached age 72 (if age 701/2 was at- fied plan are called distributions. Distributions limited to the maximum amount of elective de- tained after December 31, 2019). For more in- may be nonperiodic, such as lump-sum distri- ferrals excludable from gross income for the formation, see Tax on Excess Accumulation in butions, or periodic, such as annuity payments. year (for 2020 and 2021, $19,500 if under age Pub. 575 about distributions prior to 2020. 50 and $25,500 if age 50 or over) less the total Also, certain loans may be treated as distribu- amount of the employee's elective deferrals not tions. See Loans Treated as Distributions in Distributions after the starting year. The designated as Roth contributions. Pub. 575. distribution required to be made by April 1 is treated as a distribution for the starting year. Designated Roth contributions are treated (The starting year is the year in which the partic- the same as pre-tax elective deferrals for most ipant meets (1) or (2) above, whichever ap- purposes, including: plies.) After the starting year, the participant The annual individual elective deferral limit • must receive the required distribution for each (total of all designated Roth contributions

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year by December 31 of that year. If no distribu- tax on it by rolling it over into a traditional IRA or more, the payor must withhold 20% of the taxa- tion is made in the starting year, required distri- another eligible retirement plan. However, it ble portion of each distribution for federal in- butions for 2 years must be made in the next may be subject to withholding, as discussed un- come tax. year (one by April 1 and one by December 31). der Withholding requirement, later. A rollover can also be made to a Roth IRA, in which case Exceptions. If, instead of having the distri- Distributions after participant's death. any previously untaxed amounts are includible bution paid to him or her, the participant choo- See Pub. 575 for the special rules covering dis- in gross income unless the rollover is from a ses to have the plan pay it directly to an IRA or tributions made after the death of a participant. designated Roth account. another eligible retirement plan (a direct roll- over), no withholding is required. Eligible rollover distribution. This is a If the distribution isn't an eligible rollover dis- Distributions From 401(k) distribution of all or any part of an employee's tribution, defined earlier, the 20% withholding Plans balance in a qualified retirement plan that isn't requirement doesn't apply. Other withholding any of the following. rules apply to distributions that aren't eligible Generally, distributions can't be made until one rollover distributions, such as long-term periodic 1. A required minimum distribution. See Re- of the following occurs. distributions and required distributions (periodic quired Distributions, earlier. • The employee retires, dies, becomes disa- or nonperiodic). However, the participant can bled, or otherwise severs employment. 2. Any of a series of substantially equal pay- choose not to have tax withheld from these dis- • The plan ends and no other defined contri- ments made at least once a year over any tributions. If the participant doesn't make this bution plan is established or continued. of the following periods. choice, the following withholding rules apply. • In the case of a 401(k) plan that is part of a For periodic distributions, withholding is a. The employee's life or life expectancy. • profit-sharing plan, the employee reaches based on their treatment as wages. age 591/2 or suffers financial hardship. For b. The joint lives or life expectancies of • For nonperiodic distributions, 10% of the the rules on hardship distributions, includ- the employee and beneficiary. taxable part is withheld. ing the limits on them, see Regulations section 1.401(k)-1(d). c. A period of 10 years or longer. Estimated tax payments. If no income tax • The employee becomes eligible for a quali- 3. A hardship distribution. is withheld or not enough tax is withheld, the re- fied reservist distribution (defined next). cipient of a distribution may have to make esti- 4. The portion of a distribution that repre- mated tax payments. For more information, see Certain distributions listed above may sents the return of an employee's nonde- Withholding Tax and Estimated Tax in Pub. ! be subject to the tax on early distribu- ductible contributions to the plan. See Em- 575. CAUTION tions discussed later. ployee Contributions, earlier, and Rollover of nontaxable amounts next. Section 402(f) notice. If a distribution is an el- Qualified reservist distributions. A qualified 5. Loans treated as distributions. igible rollover distribution, as defined earlier, reservist distribution is a distribution from an you must provide a written notice to the recipi- IRA or an elective deferral account made after 6. Dividends on employer securities. ent that explains the following rules regarding September 11, 2001, to a military reservist or a 7. The cost of any life insurance coverage such distributions. member of the National Guard who has been provided under a qualified retirement plan. 1. That the distribution may be directly trans- called to active duty for at least 180 days or for ferred to an eligible retirement plan and in- an indefinite period. All or part of a qualified re- 8. Similar items designated by the IRS in formation about which distributions are eli- servist distribution can be repaid to an IRA. The published guidance. See, for example, the gible for this direct transfer. additional 10% tax on early distributions doesn't Instructions for Forms 1099-R and 5498. apply to a qualified reservist distribution. 2. That tax will be withheld from the distribu- Rollover of nontaxable amounts. You may tion if it isn't directly transferred to an eligi- be able to roll over the nontaxable part of a dis- ble retirement plan. Tax Treatment of tribution to another qualified retirement plan or a Distributions section 403(b) plan, or to an IRA. If the rollover 3. That the distribution won't be subject to tax is to a qualified retirement plan or a section if transferred to an eligible retirement plan Distributions from a qualified plan minus a pro- 403(b) plan that separately accounts for the tax- within 60 days after the date the recipient rated part of any cost basis are subject to in- able and nontaxable parts of the rollover, the receives the distribution. come tax in the year they are distributed. Since transfer must be made through a direct 4. Certain other rules that may be applicable. most recipients have no cost basis, a distribu- (trustee-to-trustee) rollover. If the rollover is to tion is generally fully taxable. An exception is a an IRA, the transfer can be made by any roll- Notice 2014-74, 2014-50 I.R.B. 937, availa- distribution that is properly rolled over as dis- over method. ble at IRS.gov/irb/2014-50_IRB/ar09.html, con- cussed under Rollover next. tains two updated safe harbor section 402(f) no- Note. A distribution from a designated Roth tices that plan administrators may provide The tax treatment of distributions depends account can be rolled over to another designa- recipients of eligible rollover distributions. on whether they are made periodically over ted Roth account or to a Roth IRA. If the rollover several years or life (periodic distributions) or is to a Roth IRA, it can be rolled over by any roll- Timing of notice. The notice must gener- are nonperiodic distributions. See Taxation of over method, but if the rollover is to another ally be provided no less than 30 days and no Periodic Payments and Taxation of Nonperiodic designated Roth account, it must be rolled over more than 180 days before the date of a distri- Payments in Pub. 575 for a detailed description directly (trustee-to-trustee). bution. of how distributions are taxed, including the 10-year tax option or capital gain treatment of a More information. For more information Method of notice. The written notice must lump-sum distribution. about rollovers, see Rollovers in Pubs. 575 and be provided individually to each distributee of 590-A. For rules on rolling over distributions that an eligible rollover distribution. Posting of the Note. A recipient of a distribution from a contain nontaxable amounts, see Notice notice isn't sufficient. However, the written re- designated Roth account will have a cost basis 2014-54, 2014-41 I.R.B. 670, available at quirement may be satisfied through the use of since designated Roth contributions are made IRS.gov/irb/2014-41_IRB/ar11.html. For guid- electronic media if certain additional conditions on an after-tax basis. Also, a distribution from a ance on rolling money into a qualified plan, see are met. See Regulations section 1.401(a)-21. designated Roth account is entirely tax free if Revenue Ruling 2014-9, 2014-17 I.R.B. 975, Tax on failure to give notice. Failure to certain conditions are met. See Qualified distri- available at IRS.gov/irb/2014-17_IRB/ar05.html. give a 402(f) notice will result in a tax of $100 butions under Qualified Roth Contribution Pro- for each failure, with a total not exceeding gram, earlier. Withholding requirement. If, during a year, a $50,000 per calendar year. The tax won't be im- qualified plan pays to a participant one or more posed if it is shown that such failure is due to Rollover. The recipient of an eligible rollover eligible rollover distributions (defined earlier) reasonable cause and not to willful neglect. distribution from a qualified plan can defer the that are reasonably expected to total $200 or

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Tax on Early Distributions Lump-sum distribution. The amount subject 4. Any of the following acts between the plan to the additional tax isn't eligible for the optional and a disqualified person. methods of figuring income tax on a lump-sum If a distribution is made to an employee under a. Selling, exchanging, or leasing prop- distribution. The optional methods are dis- the plan before he or she reaches age 591/2, the erty. employee may have to pay a 10% additional tax cussed under Lump-Sum Distributions in Pub. on the distribution. This tax applies to the 575. b. Lending money or extending credit. amount received that the employee must in- c. Furnishing goods, services, or facili- clude in income. Excise Tax on Reversion of ties. Plan Assets Exceptions. The 10% tax won't apply if distri- Exemption. Certain transactions are exempt butions before age 591/2 are made in any of the from being treated as prohibited transactions. following circumstances. A 20% or 50% excise tax is generally imposed on the cash and fair market value of other prop- For example, a prohibited transaction doesn't • Made to a beneficiary (or to the estate of take place if you are a disqualified person and the employee) on or after the death of the erty an employer receives directly or indirectly from a qualified plan. If you owe this tax, report receive any benefit to which you are entitled as employee. a plan participant or beneficiary. However, the • Made due to the employee having a quali- it on Schedule I of Form 5330. See the form in- structions for more information. benefit must be figured and paid under the fying disability. same terms as for all other participants and • Made as part of a series of substantially beneficiaries. For other transactions that are ex- equal periodic payments beginning after Notification of Significant empt, see section 4975 and the related regula- separation from service and made at least Benefit Accrual Reduction tions. annually for the life or life expectancy of the employee or the joint lives or life ex- An employer or the plan will have to pay an ex- Disqualified person. You are a disqualified pectancies of the employee and his or her cise tax if both of the following occur. person if you are any of the following. designated beneficiary. (The payments un- • A defined benefit plan or money purchase der this exception, except in the case of 1. A fiduciary of the plan. pension plan is amended to provide for a death or disability, must continue for at significant reduction in the rate of future 2. A person providing services to the plan. least 5 years or until the employee reaches benefit accrual. 3. An employer, any of whose employees are age 591/2, whichever is the longer period.) • The plan administrator fails to notify the af- Made to an employee after separation covered by the plan. • fected individuals and the employee or- from service if the separation occurred dur- ganizations representing them of the re- 4. An employee organization, any of whose ing or after the calendar year in which the duction in writing. members are covered by the plan. employee reached age 55. 5. Any direct or indirect owner of 50% or • Made to an alternate payee under a A plan amendment that eliminates or re- more of any of the following. QDRO. duces any early retirement benefit or retire- • Made to an employee for medical care up ment-type subsidy reduces the rate of future a. The combined voting power of all to the amount allowable as a medical ex- benefit accrual. classes of stock entitled to vote, or the pense deduction (determined without re- total value of shares of all classes of gard to whether the employee itemizes de- The notice must be written in a manner cal- stock of a corporation that is an em- ductions). culated to be understood by the average plan ployer or employee organization de- • Timely made to reduce excess contribu- participant and must provide enough informa- scribed in (3) or (4). tions under a 401(k) plan. tion to allow each individual to understand the • Timely made to reduce excess employee effect of the plan amendment. It must be provi- b. The capital interest or profits interest or matching employer contributions (ex- ded within a reasonable time before the amend- of a partnership that is an employer or cess aggregate contributions). ment takes effect. employee organization described in • Timely made to reduce excess elective de- (3) or (4). The tax is $100 per participant or alternate ferrals. c. The beneficial interest of a trust or un- payee for each day the notice is late. The total • Made because of an IRS levy on the plan. incorporated enterprise that is an em- tax can't be more than $500,000 during the tax • Made as a qualified reservist distribution. ployer or an employee organization year. It is imposed on the employer or, in the • Made as a permissible withdrawal from an described in (3) or (4). EACA. case of a multiemployer plan, on the plan. 6. A member of the family of any individual Reporting the tax. To report the tax on early described in (1), (2), (3), or (5). (A member distributions, file Form 5329. See the form in- Prohibited Transactions of a family is the spouse, ancestor, lineal structions for additional information about this descendant, or any spouse of a lineal de- tax. Prohibited transactions are transactions be- scendant.) tween the plan and a disqualified person that 7. A corporation, partnership, trust, or estate Tax on Excess Benefits are prohibited by law. (However, see Exemp- of which (or in which) any direct or indirect tion next.) If you are a disqualified person who owner described in (1) through (5) holds takes part in a prohibited transaction, you must 50% or more of any of the following. If you are or have been a 5% owner of the busi- pay a tax (discussed later). ness maintaining the plan, amounts you receive a. The combined voting power of all at any age that are more than the benefits provi- Prohibited transactions generally include the classes of stock entitled to vote or the ded for you under the plan formula are subject following transactions. total value of shares of all classes of to an additional tax. This tax also applies to stock of a corporation. amounts received by your successor. The tax is 1. A transfer of plan income or assets to, or 10% of the excess benefit includible in income. use of them by or for the benefit of, a dis- b. The capital interest or profits interest qualified person. of a partnership. To determine whether or not you are a 5% 2. Any act of a fiduciary by which he or she c. The beneficial interest of a trust or es- owner, see section 416. deals with plan income or assets in his or tate. her own interest. Reporting the tax. Include on Schedule 2 8. An officer, director (or an individual having (Form 1040), line 8, any tax you owe for an ex- 3. The receipt of consideration by a fiduciary powers or responsibilities similar to those cess benefit. Check box 8c and, on the line next for his or her own account from any party of officers or directors), a 10% or more to it, write “Sec. 72(m)(5)” and write in the dealing with the plan in a transaction that shareholder, or highly compensated amount of the tax. involves plan income or assets. employee (earning 10% or more of the

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yearly wages of an employer) of a person plan in a worse financial position than if you had • The plan covers only one or more partners described in (3), (4), (5), or (7). acted under the highest fiduciary standards. (or partner(s) and spouse(s)) in a business partnership. 9. A 10% or more (in capital or profits) part- Correction period. If the prohibited trans- ner or joint venturer of a person described action isn't corrected during the tax period, you A one-participant plan may not file an in (3), (4), (5), or (7). usually have an additional 90 days after the day ! annual return on Form 5500 for 2020. CAUTION Every one-participant plan required to 10. Any disqualified person, as described in the IRS mails a notice of deficiency for the file an annual return for 2020 must file either (1) through (9) above, who is a disqualified 100% tax to correct the transaction. This cor- Form 5500-EZ or Form 5500-SF. See the In- person with respect to any plan to which a rection period (the tax period plus the 90 days) structions for Form 5500-EZ. section 501(c)(22) trust is permitted to can be extended if either of the following oc- make payments under section 4223 of curs. Form 5500-EZ not required. If your ERISA. • The IRS grants reasonable time needed to correct the transaction. one-participant plan (or plans) had total assets • You petition the Tax Court. of $250,000 or less at the end of the plan year, Tax on Prohibited then you don't have to file Form 5500-EZ for If you correct the transaction within this period, that plan year. All plans should file a Form Transactions the IRS will abate, credit, or refund the 100% 5500-EZ for the final plan year to show that all tax. The initial tax on a prohibited transaction is 15% plan assets have been distributed. of the amount involved for each year (or part of a year) in the tax period. If the transaction isn't Reporting Requirements Example. You are a sole proprietor and corrected within the tax period, an additional tax your plan meets all the conditions for filing Form of 100% of the amount involved is imposed. For 5500-EZ. The total plan assets are more than You may have to file an annual return/report by information on correcting the transaction, see $250,000. You must file Form 5500-EZ or Form the last day of the seventh month after the plan Correcting a prohibited transaction, later. 5500-SF. year ends. See the following list of forms to Both taxes are payable by any disqualified choose the right form for your plan. All one-participant plans should file person who participated in the transaction Form 5500-EZ for their final plan year. (other than a fiduciary acting only as such). If Form 5500-SF. Form 5500-SF is a simplified The final plan year is the year in which more than one person takes part in the transac- annual reporting form. You can use Form distribution of all plan assets is completed. tion, each person can be jointly and severally li- 5500-SF if the plan meets all the following con- able for the entire tax. ditions. Form 5500. If you don't meet the require- • The plan is a small plan (generally, fewer ments for filing Form 5500-EZ or Form 5500-SF Amount involved. The amount involved in a than 100 participants at the beginning of and a return/report is required, you must file prohibited transaction is the greater of the fol- the plan year). Form 5500. The plan meets the conditions for being lowing amounts. • Electronic filing of Forms 5500 and exempt from the requirements that the • The money and fair market value of any 5500-SF. All Forms 5500 and 5500-SF are re- plan's books and records be audited by an property given. quired to be filed electronically with the Depart- independent qualified public accountant. • The money and fair market value of any ment of Labor through EFAST2. One-partici- The plan has 100% of its assets invested property received. • pant plans have the option of filing Form in certain secure investments with a readily If services are performed, the amount in- 5500-SF electronically rather than filing a Form determinable fair value. volved is any excess compensation given or re- 5500-EZ on paper with the IRS. For more infor- • The plan holds no employer securities. ceived. mation, see the instructions for Forms 5500 and The plan isn't a multiemployer plan. • 5500-SF, available at EFAST.dol.gov. Tax period. The tax period starts on the trans- If your plan is required to file an annual re- action date and ends on the earliest of the fol- turn/report but isn't eligible to file Form Form 5310. If you terminate your plan and are lowing days. 5500-SF, the plan must file Form 5500 or Form the plan sponsor or plan administrator, you can • The day the IRS mails a notice of defi- 5500-EZ, as appropriate. For more details, see file Form 5310. Your application must be ac- ciency for the tax. the Instructions for Form 5500-SF. companied by the appropriate user fee and • The day the IRS assesses the tax. Form 8717. • The day the correction of the transaction is Form 5500-EZ. You may be able to use Form completed. 5500-EZ if the plan is a one-participant plan, as Form 8955-SSA. Form 8955-SSA is used to defined below. report participants who are no longer covered Payment of the 15% tax. Pay the 15% tax by the plan but have a deferred vested benefit One-participant plan. Your plan is a with Form 5330. under the plan. one-participant plan if either of the following is Form 8955-SSA is filed with the IRS and can true. Correcting a prohibited transaction. If you be filed electronically through the FIRE (Filing The plan covers only you (or you and your are a disqualified person who participated in a • Information Returns Electronically) system. prohibited transaction, you can avoid the 100% spouse) and you (or you and your spouse) tax by correcting the transaction as soon as own the entire business (whether incorpo- More information. For more information about possible. Correcting the transaction means un- rated or unincorporated). reporting requirements, see the forms and their doing it as much as you can without putting the instructions.

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COVID-19 by a test approved by the Cen- plans, are permitted to provide for a special dis- ters for Disease Control and Prevention tribution of a coronavirus-related distribution be- (including a test authorized under the Fed- fore an otherwise permitted distribution event. 5. eral Food, Drug, and Cosmetic Act; or • Who experiences adverse financial conse- quences as a result of: Inclusion in Income – The individual being quarantined, being Coronavirus - furloughed or laid off, or having work There are two methods for a qualified individual hours reduced due to COVID-19; to include the taxable portion of a coronavi- Related – The individual being unable to work due rus-related distribution in income. A qualified in- to lack of childcare due to COVID-19; or dividual who receives a coronavirus-related dis- – Closing or reducing hours of a business tribution is permitted to include the taxable Distributions owned or operated by the individual portion of the distribution in income ratably over due to COVID-19. a 3-year period that begins in the year of the distribution. Alternatively, a qualified individual Topics In addition, a qualified individual is an indi- is permitted to elect out of the 3-year ratable in- This chapter discusses: vidual who experiences adverse financial con- come inclusion and include the entire amount of sequences as a result of: the taxable portion of the distribution in income • Qualified individual • The individual having a reduction in pay (or in the year of the distribution. This election can’t • Special tax treatment self-employment income) due to be made or changed after the timely filing of the • Repayment of distributions and tax COVID-19 or having a job offer rescinded individual’s federal income tax return (including reporting requirements or start date for a job delayed due to extensions) for the year of the distribution. All COVID-19; coronavirus-related distributions received in a Section 2202(a)(4)(A) of the CARES Act de- • The individual's spouse or a member of the taxable year must be treated consistently (ei- fines a coronavirus-related distribution as any individual's household (as defined below) ther all distributions must be included in income distribution from an eligible retirement plan being quarantined, being furloughed or laid over a 3-year period or all distributions must be made on or after January 1, 2020, and before off, or having work hours reduced due to included in income in the current year). December 31, 2020, to a qualified individual. COVID-19, being unable to work due to However, section 2202(a)(2) of the CARES Act lack of childcare due to COVID-19, having Example. Kenya receives a $30,000 distri- also limits the total amount of distributions from a reduction in pay (or self-employment in- bution from her IRA on October 1, 2020. Kenya all eligible retirement plans that can be treated come) due to COVID-19, or having a job is a qualified individual and elects to treat the as coronavirus-related to $100,000. offer rescinded or start date for a job de- distribution as a coronavirus-related distribu- layed due to COVID- 19; or tion. Kenya uses the 3-year ratable income in- Example 1. If a qualified individual receives • Closing or reducing hours of a business clusion for the $30,000 distribution. Kenya a distribution of $50,000 in August of 2020 and owned or operated by the individual's should include $10,000 on each of her federal a distribution of $75,000 in September of 2020 spouse or a member of the individual's income tax returns for 2020, 2021, and 2022. and both distributions satisfy the definition of a household due to COVID-19. coronavirus-related distribution, only $100,000 of the $125,000 received by the qualified indi- For this purpose, a member of the indi- Direct Rollover, 402(f) vidual can be treated as a coronavirus-related ! vidual’s household is someone who notice, and Withholding distribution. Therefore, the individual can treat CAUTION shares the individual’s principal resi- Requirements $100,000 of the distributions as coronavirus-re- dence. lated on the individual’s 2020 federal income tax return. Assuming no section 72(t)(2) excep- The administrator of an eligible retirement If a distribution is treated as a coronavirus-rela- tion applies, the remaining $25,000 of the distri- plan may rely on an individual’s certification that ted distribution by an employer retirement plan, bution is an early distribution that is subject to the individual satisfies the conditions to be a the rules for eligible rollover distributions under the 10% additional tax. This amount must be in- qualified individual in determining whether a section 401(a)(31), 402(f), and 3405 are not ap- cluded on the individual’s 2020 federal income distribution is a coronavirus-related distribution, plicable to the distribution. Thus, the plan is not tax return and will not be eligible for 3-year re- unless the administrator has actual knowledge required to offer the qualified individual a direct payment to an eligible retirement plan. to the contrary. rollover with respect to the distribution. In addi- tion, the plan administrator is not required to Example 2. A section 401(k) plan distrib- provide a section 402(f) notice. Finally, the plan utes $35,000 to a qualified individual on De- Special Tax Treatment administrator or payor of the coronavirus-rela- cember 1, 2020. The qualified individual also ted distribution is not required to withhold an amount equal to 20% of the distribution, as is receives a distribution from the individual’s IRA A qualified individual receiving a coronavi- usually required under section 3405(c)(1). How- on December 1, 2020, of $15,000. The individ- rus-related distribution is entitled to the follow- ever, a coronavirus-related distribution is sub- ual is permitted to treat both the $35,000 from ing favorable tax treatment by reporting the dis- ject to the voluntary withholding requirements of the plan and the $15,000 from the IRA as coro- tribution on the individual’s federal income tax section 3405(b) and section 35.3405-1T. navirus-related distributions on the individual’s return for 2020 and on Form 8915-E, Qualified 2020 federal income tax return. 2020 Disaster Retirement Plan Distributions and Repayments. If there’s no federal income tax return for 2020, the individual would just file Repayment of Qualified Individual form 8915-E. The 10% additional tax under sec- Distributions and Tax tion 72(t) (including the 25% additional tax un- A qualified individual is a person der section 72(t)(6) for certain distributions from Reporting Requirements • Who is diagnosed with the virus SIMPLE IRAs) doesn’t apply to any coronavi- SARS-CoV-2 or with coronavirus disease rus-related distribution. In general, an employer 2019 (collectively, COVID-19) by a test ap- retirement plan is permitted, not required, to Tax Reporting Requirements proved by the Centers for Disease Control treat a plan distribution that meets the definition and Prevention (including a test authorized of a coronavirus-related distribution to be trea- An eligible retirement plan must report the pay- under the Federal Food, Drug, and Cos- ted as such. A qualified individual is permitted ment of a coronavirus-related distribution to a metic Act); to designate a distribution as a coronavirus-re- qualified individual on Form 1099-R, Distribu- • Whose spouse or dependent (as defined lated distribution regardless of how it is treated tions from Pensions, Annuities, Retirement or in section 152) is diagnosed with by the plan. In addition, certain plans, including Profit-Sharing Plans, IRAs, Insurance Con- 401(k) plans and money purchase pension tracts, etc. This reporting is required even if the

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qualified individual repays the coronavirus-rela- is eligible for tax-free rollover treatment to an el- amount of a coronavirus-related distribution in- ted distribution to the same eligible retirement igible retirement plan within the 3-year period cludible in income for a tax year as a result of plan in the same year. If a payor is treating the beginning on the day after the date on which the repayment. Depending on when the repay- payment as a coronavirus-related distribution the distribution was received, and the repay- ment is made, a qualified individual may need and no other appropriate code applies, the ment will be treated as if it was paid in a to file an amended tax return and a revised payor is allowed to use the following: trustee-to-trustee transfer to an eligible retire- Form 8915-E to report the amount of the repay- • Distribution code 2 (early distribution, ex- ment plan. ment and to reduce the individual’s gross in- ception applies) in box 7 of Form 1099-R. come accordingly. For more information, see In general, a distribution from an employer Distribution code 1 (early distribution, no the Form 8915-E instructions. • retirement plan made on account of hardship is known exception) in box 7 of Form 1099-R. not an eligible rollover distribution. However, if the distribution satisfies the requirements of a Repayment of coronavirus-related distribution, it won’t be trea- coronavirus-related ted as a hardship distribution and, thus, any portion of the distribution is permitted to be re- distributions paid to an eligible retirement plan. A qualified individual is permitted to repay any Qualified individuals will use Form 8915-E to portion of a coronavirus-related distribution that report any repayments and to determine the

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Deduction Worksheet for Self-Employed

Step 1 6. Enter your net profit from Schedule C (Form 1040), line 31; Schedule F (Form 1040), line 34;* or Schedule K-1 (Form 1065),* box 14, code A.** For information on other income included in net profit from self-employment, see the Instructions for Schedule SE (Form 1040) ...... Table and * Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b. ** General partners should reduce this amount by the same additional expenses Worksheets subtracted from box 14, code A, to determine the amount on line 1 or line 2 of Schedule SE (Form 1040). Step 2 for the Enter your deduction for self-employment tax from Schedule 1 (Form 1040), line 14 ...

Step 3 Self-Employed Net earnings from self-employment. Subtract step 2 from step 1 ...... Step 4 As discussed in chapters 2 and 4, if you are Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for self-employed, you must use the rate table or Self-Employed ...... rate worksheet and deduction worksheet to fig- Step 5 ure your deduction for contributions you made Multiply step 3 by step 4 ...... for yourself to a SEP-IRA or qualified plan. Step 6 Multiply $285,000 by your plan contribution rate (not the reduced rate) ...... First, use either the rate table or rate worksheet Step 7 to find your reduced contribution rate. Then, Enter the smaller of step 5 or step 6 ...... complete the deduction worksheet to figure your deduction for contributions. Step 8 Contribution dollar limit ...... $57,000 The table and the worksheets in chap- • If you made any elective deferrals to your self-employed ! ter 6 apply only to self-employed indi- plan, go to step 9. CAUTION viduals who have only one defined • Otherwise, skip steps 9 through 20 and enter the smaller of contribution plan, such as a profit-sharing plan. step 7 or step 8 on step 21. A SEP plan is treated as a profit-sharing plan. Step 9 However, don't use this worksheet for SAR- Enter your allowable elective deferrals (including designated Roth contributions) made SEPs. to your self-employed plan for the 2020 plan year. Don't enter more than $19,500 ..... Step 10 Rate Table for Self-Employed. If your plan's Subtract step 9 from step 8 ...... contribution rate is a whole percentage (for ex- Step 11 ample, 12% rather than 121/2%), you can use Subtract step 9 from step 3 ...... the Rate Table for Self-Employed on the next Step 12 page to find your reduced contribution rate. Enter one-half of step 11 ...... Otherwise, use the Rate Worksheet for Step 13 Self-Employed provided below. Enter the smallest of step 7, step 10, or step 12 ...... First, find your plan contribution rate (the Step 14 contribution rate stated in your plan) in Column Subtract step 13 from step 3 ...... A of the table. Then, read across to the rate un- Step 15 der Column B. Enter the rate from Column B in Enter the smaller of step 9 or step 14 ...... step 4 of the Deduction Worksheet for Self-Em- • If you made catch-up contributions, go to step 16. ployed on this page. • Otherwise, skip steps 16 through 18 and go to step 19. Step 16 Example. You are a sole proprietor with no Subtract step 15 from step 14 ...... employees. If your plan's contribution rate is Step 17 10% of a participant's compensation, your rate Enter your catch-up contributions (including designated Roth contributions), if any. is 0.090909. Enter this rate in step 4 of the De- Don't enter more than $6,500 ...... duction Worksheet for Self-Employed on this Step 18 page. Enter the smaller of step 16 or step 17 ...... Rate Worksheet for Self-Employed. If your Step 19 plan's contribution rate isn't a whole percentage Add steps 13, 15, and 18 ...... (for example, 101/2%), you can't use the Rate Step 20 Table for Self-Employed. Use the following Enter the amount of designated Roth contributions included on steps 9 and 17 ...... worksheet instead. Step 21 Subtract step 20 from step 19. This is your maximum deductible contribution ...... Rate Worksheet for Self-Employed Next: Enter your actual contribution, not to exceed your maximum deductible contribution, 1) Plan contribution rate as a decimal (for on Schedule 1 (Form 1040), line 15. example, 101/2% = 0.105) ...... 2) Rate in line 1 plus 1 (for example, Figuring your deduction. Now that you have Community property laws. If you reside in

0.105 + 1 = 1.105) ...... your self-employed rate from either the rate ta- a community property state and you are married 3) Self-employed rate as a decimal ble or rate worksheet, you can figure your maxi- and filing a separate return, disregard commun- rounded to at least 3 decimal places mum deduction for contributions for yourself by ity property laws for step 1 of the Deduction (line 1 ÷ line 2) (for example, 0.105 ÷ completing the Deduction Worksheet for Worksheet for Self-Employed. Enter on step 1 1.105 = 0.095) ...... Self-Employed. the total net profit you actually earned.

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Rate Table for Self-Employed Deduction Worksheet for Self-Employed Column A Column B If the plan contri- Your Step 1 bution rate is: rate is: Enter your net profit from Schedule C (Form 1040), line 31; Schedule F (Form 1040), (shown as %) (shown as decimal) line 34;* or Schedule K-1 (Form 1065),* box 14, code A.** For information on other income included in net profit from self-employment, see the Instructions for 1 ...... 0.009901 Schedule SE (Form 1040) ...... $200,000 2 ...... 0.019608 * Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b. 3 ...... 0.029126 ** General partners should reduce this amount by the same additional expenses 4 ...... 0.038462 subtracted from box 14, code A, to determine the amount on line 1 or line 2 of 5 ...... 0.047619 Schedule SE (Form 1040). 6 ...... 0.056604 Step 2 7 ...... 0.065421 Enter your deduction for self-employment tax from Schedule 1 (Form 1040), line 14 ... 11,216 8 ...... 0.074074 9 ...... 0.082569 Step 3 10 ...... 0.090909 Net earnings from self-employment. Subtract step 2 from step 1 ...... 188,784 11 ...... 0.099099 Step 4 12 ...... 0.107143 Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for ...... 13 0.115044 Self-Employed ...... 0.078 14 ...... 0.122807 Step 5 ...... 15 0.130435 Multiply step 3 by step 4 ...... 14,725 16 ...... 0.137931 Step 6 17 ...... 0.145299 Multiply $285,000 by your plan contribution rate (not the reduced rate) ...... 22,230 18 ...... 0.152542 19 ...... 0.159664 Step 7 20 ...... 0.166667 Enter the smaller of step 5 or step 6 ...... 14,725 21 ...... 0.173554 Step 8 22 ...... 0.180328 Contribution dollar limit ...... $57,000 23 ...... 0.186992 • If you made any elective deferrals to your self-employed 24 ...... 0.193548 plan, go to step 9. 25* ...... 0.200000* • Otherwise, skip steps 9 through 20 and enter the smaller of * The deduction for annual employer contributions (other step 7 or step 8 on step 21. than elective deferrals) to a SEP plan, a profit-sharing Step 9 plan, or a money purchase pension plan can't be more Enter your allowable elective deferrals (including designated Roth contributions) made than 20% of your net earnings (figured without deducting to your self-employed plan for the 2020 plan year. Don't enter more than $19,500 .... N/A contributions for yourself) from the business that has the Step 10 plan. Subtract step 9 from step 8 ...... Step 11 Example. You are a sole proprietor with no Subtract step 9 from step 3 ...... employees. The terms of your plan provide that Step 12 1 you contribute 8 /2% (0.085) of your compensa- Enter one-half of step 11 ...... tion to your plan. Your net profit from Sched- Step 13 ule C (Form 1040), line 31, is $200,000. You Enter the smallest of step 7, step 10, or step 12 ...... have no elective deferrals or catch-up contribu- tions. Your self-employment tax deduction on Step 14 Subtract step 13 from step 3 ...... line 14 of Schedule 1 (Form 1040) is $11,216. See the filled-in portions of both Schedule SE Step 15 (Form 1040), Self-Employment Income, and Enter the smaller of step 9 or step 14 ...... Form 1040, later. • If you made catch-up contributions, go to step 16. You figure your self-employed rate and max- • Otherwise, skip steps 16 through 18 and go to step 19. imum deduction for employer contributions you Step 16 made for yourself as follows. Subtract step 15 from step 14 ...... See the filled-in Deduction Worksheet for Step 17 Self-Employed on this page. Enter your catch-up contributions (including designated Roth contributions), if any. Don't enter more than $6,500 ...... Rate Worksheet for Self-Employed Step 18 Enter the smaller of step 16 or step 17 ...... 1) Plan contribution rate as a decimal (for Step 19 example, 101/2% = 0.105) ...... 0.085 2) Rate in line 1 plus 1 (for example, Add steps 13, 15, and 18 ...... 0.105 + 1 = 1.105) ...... 1.085 Step 20 3) Self-employed rate as a decimal Enter the amount of designated Roth contributions included on steps 9 and 17 ...... rounded to at least 3 decimal places Step 21 (line 1 ÷ line 2) (for example, 0.105 ÷ Subtract step 20 from step 19. This is your maximum deductible contribution ..... $14,725 1.105 = 0.095) ...... 0.078 Next: Enter your actual contribution, not to exceed your maximum deductible contribution, on Schedule 1 (Form 1040), line 15.

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Portions of Schedule SE (Form 1040 or 1040-SR) and Schedule 1 (Form 1040 or 1040-SR)

Part I Self-Employment Tax Skip lines 1a and 1b if you use the farm optional method in Part II. See instructions. 1 a Net farm pro t or (loss) from Schedule F, line 34, and farm partnerships, Schedule K-1 (Form 1065), box 14, code A ...... 1a b If you received social security retirement or disability bene ts, enter the amount of Conservation Reserve Program payments included on Schedule F, line 4b, or listed on Schedule K-1 (Form 1065), box 20, code AH 1b ( ) Skip line 2 if you use the nonfarm optional method in Part II. See instructions. 2 Net pro t or (loss) from Schedule C, line 31; and Schedule K-1 (Form 1065), box 14, code A (other than farming). See instructions for other income to report or if you are a minister or member of a religious order 2 200,000 3 Combine lines 1a, 1b, and 2 ...... 3 200,000 4 a If line 3 is more than zero, multiply line 3 by 92.35% (0.9235). Otherwise, enter amount from line 3 . 4a 184,700 Note: If line 4a is less than $400 due to Conservation Reserve Program payments on line 1b, see instructions. b If you elect one or both of the optional methods, enter the total of lines 15 and 17 here . . . . . 4b c Combine lines 4a and 4b. If less than $400, stop; you don’t owe self-employment tax. Exception: If less than $400 and you had church employee income, enter -0- and continue ...... ▶ 4c 184,700 5 a Enter your church employee income from Form W-2. See instructions for de nition of church employee income ...... 5a b Multiply line 5a by 92.35% (0.9235). If less than $100, enter -0- ...... 5b 6 Add lines 4c and 5b ...... 6 184,700 7 Maximum amount of combined wages and self-employment earnings subject to social security tax or the 6.2% portion of the 7.65% railroad retirement (tier 1) tax for 2020 ...... 7 137,700 8a Total social security wages and tips (total of boxes 3 and 7 on Form(s) W-2) and railroad retirement (tier 1) compensation. If $137,700 or more, skip lines 8b through 10, and go to line 11 ...... 8a b Unreported tips subject to social security tax from Form 4137, line 10 . . . 8b c Wages subject to social security tax from Form 8919, line 10 ...... 8c d Add lines 8a, 8b, and 8c ...... 8d 9 Subtract line 8d from line 7. If zero or less, enter -0- here and on line 10 and go to line 11 . . . ▶ 9 137,700 10 Multiply the smaller of line 6 or line 9 by 12.4% (0.124) ...... 10 17,075 11 Multiply line 6 by 2.9% (0.029) ...... 11 5,356 12 Self-employment tax. Add lines 10 and 11. Enter here and on Schedule 2 (Form 1040), line 4 . . 12 22,431 13 Deduction for one-half of self-employment tax. Multiply line 12 by 50% (0.50). Enter here and on Schedule 1 (Form 1040), line 14 ...... 13 11,216 For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 11358Z Schedule SE (Form 1040) 2020

Part II Adjustments to Income 10 Educator expenses ...... 10 11 Certain business expenses of reservists, performing artists, and fee-basis government of cials. Attach Form 2106 ...... 11 12 Health savings account deduction. Attach Form 8889 ...... 12 13 Moving expenses for members of the Armed Forces. Attach Form 3903 . . . . . 13 14 Deductible part of self-employment tax. Attach Schedule SE ...... 14 11,216 15 Self-employed SEP, SIMPLE, and quali ed plans ...... 15 14,748 16 Self-employed health insurance deduction ...... 16 17 Penalty on early withdrawal of savings ...... 17 18a Alimony paid ...... 18a b Recipient’s SSN ...... ▶ c Date of original divorce or separation agreement (see instructions) ▶ 19 IRA deduction ...... 19 20 Student loan interest deduction ...... 20 21 Tuition and fees deduction. Attach Form 8917 ...... 21 22 Add lines 10 through 21. These are your adjustments to income. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 10a ...... 22 For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 71479F Schedule 1 (Form 1040) 2020

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Using online tools to help prepare your re- prepare tax returns for others should have a turn. Go to IRS.gov/Tools for the following. thorough understanding of tax matters. For • The Earned Income Tax Credit Assistant more information on how to choose a tax pre- 7. (IRS.gov/EITCAssistant) determines if parer, go to Tips for Choosing a Tax Preparer you’re eligible for the earned income credit on IRS.gov. (EIC). • The Online EIN Application (IRS.gov/EIN) Coronavirus. Go to IRS.gov/Coronavirus for How To Get Tax helps you get an employer identification links to information on the impact of the corona- number (EIN). virus, as well as tax relief available for individu- Help • The Tax Withholding Estimator (IRS.gov/ als and families, small and large businesses, W4app) makes it easier for everyone to and tax-exempt organizations. If you have questions about a tax issue, need pay the correct amount of tax during the help preparing your tax return, or want to down- year. The tool is a convenient, online way Tax reform. Tax reform legislation affects indi- load free publications, forms, or instructions, go to check and tailor your withholding. It’s viduals, businesses, and tax-exempt and gov- to IRS.gov and find resources that can help you more user-friendly for taxpayers, including ernment entities. Go to IRS.gov/TaxReform for right away. retirees and self-employed individuals. The information and updates on how this legislation features include the following. affects your taxes. Preparing and filing your tax return. After – Easy to understand language. receiving all your wage and earnings state- – The ability to switch between screens, Employers can register to use Business ments (Form W-2, W-2G, 1099-R, 1099-MISC, correct previous entries, and skip Services Online. The Social Security Adminis- 1099-NEC, etc.); unemployment compensation screens that don’t apply. tration (SSA) offers online service at SSA.gov/ statements (by mail or in a digital format) or – Tips and links to help you determine if employer for fast, free, and secure online W-2 other government payment statements (Form you qualify for tax credits and deduc- filing options to CPAs, accountants, enrolled 1099-G); and interest, dividend, and retirement tions. agents, and individuals who process Form W-2, statements from banks and investment firms – A progress tracker. Wage and Tax Statement, and Form W-2c, (Forms 1099), you have several options to – A self-employment tax feature. Corrected Wage and Tax Statement. choose from to prepare and file your tax return. – Automatic calculation of taxable social IRS social media. Go to IRS.gov/SocialMedia You can prepare the tax return yourself, see if security benefits. to see the various social media tools the IRS you qualify for free tax preparation, or hire a tax • The First Time Homebuyer Credit Account uses to share the latest information on tax professional to prepare your return. Look-up (IRS.gov/HomeBuyer) tool pro- changes, scam alerts, initiatives, products, and vides information on your repayments and services. At the IRS, privacy and security are Free options for tax preparation. Go to account balance. IRS.gov to see your options for preparing and paramount. We use these tools to share public • The Sales Tax Deduction Calculator information with you. Don’t post your SSN or filing your return online or in your local commun- (IRS.gov/SalesTax) figures the amount you ity, if you qualify, which include the following. other confidential information on social media can claim if you itemize deductions on sites. Always protect your identity when using Free File. This program lets you prepare • Schedule A (Form 1040). any social networking site. and file your federal individual income tax return for free using brand-name tax-prep- Getting answers to your tax ques- The following IRS YouTube channels pro- aration-and-filing software or Free File filla- tions. On IRS.gov, you can get vide short, informative videos on various tax-re- ble forms. However, state tax preparation up-to-date information on current lated topics in English, Spanish, and ASL. may not be available through Free File. Go events and changes in tax law. • Youtube.com/irsvideos. • Youtube.com/irsvideosmultilingua. to IRS.gov/FreeFile to see if you qualify for IRS.gov/Help: A variety of tools to help you • • Youtube.com/irsvideosASL. free online federal tax preparation, e-filing, get answers to some of the most common and direct deposit or payment options. tax questions. Watching IRS videos. The IRS Video portal • VITA. The Volunteer Income Tax Assis- • IRS.gov/ITA: The Interactive Tax Assistant, (IRSVideos.gov) contains video and audio pre- tance (VITA) program offers free tax help a tool that will ask you questions on a num- sentations for individuals, small businesses, to people with low-to-moderate incomes, ber of tax law topics and provide answers. and tax professionals. persons with disabilities, and limited-Eng- • IRS.gov/Forms: Find forms, instructions, lish-speaking taxpayers who need help and publications. You will find details on Online tax information in other languages. preparing their own tax returns. Go to 2020 tax changes and hundreds of interac- You can find information on IRS.gov/ IRS.gov/VITA, download the free IRS2Go tive links to help you find answers to your MyLanguage if English isn’t your native lan- app, or call 800-906-9887 for information questions. guage. on free tax return preparation. • You may also be able to access tax law in- TCE. The Tax Counseling for the Elderly • formation in your electronic filing software. Free interpreter service. Multilingual assis- (TCE) program offers free tax help for all tance, provided by the IRS, is available at Tax- taxpayers, particularly those who are 60 payer Assistance Centers (TACs) and other years of age and older. TCE volunteers Need someone to prepare your tax return? IRS offices. Over-the-phone interpreter service specialize in answering questions about There are various types of tax return preparers, is accessible in more than 350 languages. pensions and retirement-related issues including tax preparers, enrolled agents, certi- fied public accountants (CPAs), attorneys, and unique to seniors. Go to IRS.gov/TCE, Getting tax forms and publications. Go to many others who don’t have professional cre- download the free IRS2Go app, or call IRS.gov/Forms to view, download, or print all of dentials. If you choose to have someone pre- 888-227-7669 for information on free tax the forms, instructions, and publications you pare your tax return, choose that preparer return preparation. may need. You can also download and view wisely. A paid tax preparer is: • MilTax. Members of the U.S. Armed popular tax publications and instructions (in- Primarily responsible for the overall sub- Forces and qualified veterans may use Mil- • cluding the Instructions for Forms 1040 and stantive accuracy of your return, Tax, a free tax service offered by the De- 1040-SR) on mobile devices as an eBook at Required to sign the return, and partment of Defense through Military One- • IRS.gov/eBooks. Or you can go to IRS.gov/ Required to include their preparer tax iden- Source. • OrderForms to place an order. Also, the IRS offers Free Fillable tification number (PTIN). Forms, which can be completed online and then filed electronically regardless of in- Although the tax preparer always signs the re- come. turn, you're ultimately responsible for providing all the information required for the preparer to accurately prepare your return. Anyone paid to

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Access your online account (individual tax- Making a tax payment. The IRS uses the lat- Contacting your local IRS office. Keep in payers only). Go to IRS.gov/Account to se- est encryption technology to ensure your elec- mind, many questions can be answered on curely access information about your federal tax tronic payments are safe and secure. You can IRS.gov without visiting an IRS Taxpayer Assis- account. make electronic payments online, by phone, tance Center (TAC). Go to IRS.gov/LetUsHelp • View the amount you owe, pay online, or and from a mobile device using the IRS2Go for the topics people ask about most. If you still set up an online payment agreement. app. Paying electronically is quick, easy, and need help, IRS TACs provide tax help when a • Access your tax records online. faster than mailing in a check or money order. tax issue can’t be handled online or by phone. • Review your payment history. Go to IRS.gov/Payments for information on how All TACs now provide service by appointment, • Go to IRS.gov/SecureAccess to review the to make a payment using any of the following so you’ll know in advance that you can get the required identity authentication process. options. service you need without long wait times. Be- • IRS Direct Pay: Pay your individual tax bill fore you visit, go to IRS.gov/TACLocator to find Using direct deposit. The fastest way to re- or estimated tax payment directly from the nearest TAC and to check hours, available ceive a tax refund is to file electronically and your checking or savings account at no services, and appointment options. Or, on the choose direct deposit, which securely and elec- cost to you. IRS2Go app, under the Stay Connected tab, tronically transfers your refund directly into your • Debit or Credit Card: Choose an approved choose the Contact Us option and click on “Lo- financial account. Direct deposit also avoids the payment processor to pay online, by cal Offices.” possibility that your check could be lost, stolen, phone, or by mobile device. or returned undeliverable to the IRS. Eight in 10 • Electronic Funds Withdrawal: Offered only taxpayers use direct deposit to receive their re- when filing your federal taxes using tax re- The Taxpayer Advocate funds. The IRS issues more than 90% of re- turn preparation software or through a tax funds in less than 21 days. professional. Service (TAS) Is Here To • Electronic Federal Tax Payment System: Getting a transcript of your return. The Best option for businesses. Enrollment is Help You quickest way to get a copy of your tax transcript required. is to go to IRS.gov/Transcripts. Click on either • Check or Money Order: Mail your payment What is TAS? TAS is an independent organi- “Get Transcript Online” or “Get Transcript by to the address listed on the notice or in- zation within the IRS that helps taxpayers and Mail” to order a free copy of your transcript. If structions. protects taxpayer rights. Their job is to ensure you prefer, you can order your transcript by call- • Cash: You may be able to pay your taxes that every taxpayer is treated fairly and that you ing 800-908-9946. with cash at a participating retail store. know and understand your rights under the • Same-Day Wire: You may be able to do Taxpayer Bill of Rights. Reporting and resolving your tax-related same-day wire from your financial institu- identity theft issues. tion. Contact your financial institution for How can you learn about your taxpayer • Tax-related identity theft happens when availability, cost, and cut-off times. rights? The Taxpayer Bill of Rights describes someone steals your personal information 10 basic rights that all taxpayers have when to commit tax fraud. Your taxes can be af- What if I can’t pay now? Go to IRS.gov/ dealing with the IRS. Go to fected if your SSN is used to file a fraudu- Payments for more information about your op- TaxpayerAdvocate.IRS.gov to help you under- lent return or to claim a refund or credit. tions. stand what these rights mean to you and how • Apply for an online payment agreement they apply. These are your rights. Know them. • The IRS doesn’t initiate contact with tax- Use them. payers by email, text messages, telephone (IRS.gov/OPA) to meet your tax obligation calls, or social media channels to request in monthly installments if you can’t pay your taxes in full today. Once you complete What can TAS do for you? TAS can help you personal or financial information. This in- resolve problems that you can’t resolve with the cludes requests for personal identification the online process, you will receive imme- diate notification of whether your agree- IRS. And their service is free. If you qualify for numbers (PINs), passwords, or similar in- their assistance, you will be assigned to one ad- formation for credit cards, banks, or other ment has been approved. • Use the Offer in Compromise Pre-Qualifier vocate who will work with you throughout the financial accounts. process and will do everything possible to re- • Go to IRS.gov/IdentityTheft, the IRS Iden- to see if you can settle your tax debt for less than the full amount you owe. For solve your issue. TAS can help you if: tity Theft Central webpage, for information • Your problem is causing financial difficulty on identity theft and data security protec- more information on the Offer in Compro- mise program, go to IRS.gov/OIC. for you, your family, or your business; tion for taxpayers, tax professionals, and • You face (or your business is facing) an businesses. If your SSN has been lost or Filing an amended return. You can now file immediate threat of adverse action; or stolen or you suspect you’re a victim of • You’ve tried repeatedly to contact the IRS tax-related identity theft, you can learn Form 1040-X electronically with tax filing soft- ware to amend 2019 Forms 1040 and 1040-SR. but no one has responded, or the IRS what steps you should take. hasn’t responded by the date promised. • Get an Identity Protection PIN (IP PIN). IP To do so, you must have e-filed your original 2019 return. Amended returns for all prior years PINs are six-digit numbers assigned to eli- How can you reach TAS? TAS has offices in gible taxpayers to help prevent the misuse must be mailed. See Tips for taxpayers who need to file an amended tax return and go to every state, the District of Columbia, and Puerto of their SSNs on fraudulent federal income Rico. Your local advocate’s number is in your tax returns. When you have an IP PIN, it IRS.gov/Form1040X for information and up- dates. local directory and at prevents someone else from filing a tax re- TaxpayerAdvocate.IRS.gov. You can also call turn with your SSN. To learn more, go to them at 877-777-4778. IRS.gov/IPPIN. Checking the status of your amended re- turn. Go to IRS.gov/WMAR to track the status How else does TAS help taxpayers? TAS Checking on the status of your refund. of Form 1040-X amended returns. Please note that it can take up to 3 weeks from the date you works to resolve large-scale problems that af- • Go to IRS.gov/Refunds. fect many taxpayers. If you know of one of • The IRS can’t issue refunds before filed your amended return for it to show up in our system, and processing it can take up to 16 these broad issues, please report it to them at mid-February 2021 for returns that claimed IRS.gov/SAMS. the EIC or the additional child tax credit weeks. (ACTC). This applies to the entire refund, TAS also has a website, Tax Reform not just the portion associated with these Understanding an IRS notice or letter you’ve received. Go to IRS.gov/Notices to Changes, which shows you how the new tax credits. law may change your future tax filings and help • Download the official IRS2Go app to your find additional information about responding to an IRS notice or letter. you plan for these changes. The information is mobile device to check your refund status. categorized by tax topic in the order of the IRS • Call the automated refund hotline at Form 1040 or 1040-SR. Go to TaxChanges.us 800-829-1954. for more information.

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TAS for Tax Professionals. TAS can provide Low Income Taxpayer collection disputes. In addition, clinics can pro- a variety of information for tax professionals, in- vide information about taxpayer rights and re- cluding tax law updates and guidance, TAS Clinics (LITCs) sponsibilities in different languages for individu- programs, and ways to let TAS know about sys- als who speak English as a second language. temic problems you’ve seen in your practice. LITCs are independent from the IRS. LITCs Services are offered for free or a small fee. To represent individuals whose income is below a find a clinic near you, visit IRS.gov/LITC or see certain level and need to resolve tax problems IRS Pub. 4134, Low Income Taxpayer Clinic with the IRS, such as audits, appeals, and tax List.

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To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Highly compensated 4 Qualified plans 11 SEP-IRAs: 401(k) Plan: Leased 4 Qualified Plans: Contributions 6 Elective Deferrals 16 Employer: Assignment of benefits 13 Deductible contributions 7 Safe harbor 17 Defined 4 Benefits starting date 13 Carryover of excess Excess Deferrals 17 Contributions 14, 15 contributions 7 Excise tax 20 Deduction limits 15, 16 Deduction limits 7 A Nondeductible (excess) Deductions 15 Limits for self-employed 7 Annual additions 4 contributions 16 Deduction Worksheet for When to deduct 7 Annual benefits 4 Reduced benefit accrual 20 Self-Employed 24 Where to deduct 7 Assistance (See Tax help) SEP excess contributions 7 Deferrals 16 Distributions (withdrawals) 8 Automatic Enrollment 16 Excludable employees 9 Defined benefit plan 12 Eligible employee 5 Defined contribution plan 12 Excludable employees 6 Distributions 18 SEP plans: B F Minimum 18 Deduction Worksheet for Business, definition 4 Form: Required beginning Self-Employed 24 1040 15, 20 date 18 Rate Table for 1099-R 17 Rollover 19 Self-Employed 24 C 5304–SIMPLE 9 Tax on excess benefits 20 Rate Worksheet for Common-law employee 4 5305–S 10 Tax on premature 20 Self-Employed 24 Tax treatment 19 Reporting and Disclosure 8 Compensation 4 5305–SA 10 Contribution: 5305–SEP 6 Elective Deferrals 16 SIMPLE IRA plan: Defined 4 5305–SIMPLE 9 Limits 16 Compensation 9 Limits: 5310 21 Employee nondeductible Contributions 10 Qualified plans 15 5329 20 contributions 15 Deductions 10 SEP-IRAs 6 5330 16, 17, 20, 21 Excess Deferrals 17 Distributions(withdrawals) 11 SIMPLE IRA plan 10 5500 21 Investing plan assets 14 Employee election period 10 Coronavirus-Related 5500-EZ 21 Kinds of plans 12 Employer matching Distributions 22 Form W-2 11 Leased employees 13 contributions 10 Qualified Individual 22 Schedule K (Form 1065) 15 Minimum requirements: Excludable employees 9 Repayment of Distributions 22 Coverage 12 Notification requirements 10 Special Tax Treatment 22 Funding 14 When to deduct H Vesting 12 contributions 11 Highly compensated Prohibited transactions 20 SIMPLE plans 9, 11 D employee 4 Qualification rules 12 SIMPLE 401(k) 11 Rate Table for SIMPLE IRA plan 9 Deduction: Self-Employed 24 Simplified employee pension Defined 4 Rate Worksheet for (SEP) 7 Deduction Worksheet for K Self-Employed 24 Salary reduction arrangement: Self-Employed 24 Keogh plans (See Qualified Reporting requirements 21 Compensation of Defined benefit plan: plans) Setting up 14 self-employed Deduction limits 15 Survivor benefits 13 individuals 7 Limits on contributions 15 Qualified Roth Contribution Employee compensation 7 Defined contribution plan: L Program 18 Who can have a Automatic Enrollment 16 Leased employee 4 SARSEP 7 Deduction limits 15 SEP-IRA contributions 6 Eligible automatic contribution Setting up a SEP 6 arrangement 16 N R Sixty-day employee election Forfeitures 16 Net earnings from Rate Table for period 10 Limits on contributions 15 self-employment 5 Self-Employed 24 Sole proprietor, definition 5 Money purchase pension Notification requirements 10 Rate Worksheet for plan 12 Self-Employed 24 Profit-sharing plan 12 Required distributions 18 Qualified automatic contribution P Rollovers 19 T arrangement 17 Participant, definition 5 Tax help 27 Definitions you need to know 4 Participation 13 Disqualified person 20 Partner, definition 5 S Distributions (withdrawals) 11 Publications (See Tax help) Safe harbor 401(k) plan 17 U Salary reduction User fee 14 arrangement 7, 8 E Q Salary Reduction Simplified EACA 16 QACA 17 Employee W Earned income 4 Qualified automatic Pension(SARSEP) 7 Worksheets: Eligible automatic contribution contribution SARSEP: Deduction Worksheet for arrangement 16 arrangement 17 ADP test 7 Self-Employed 24 Employees: Qualified Plan, definition 5 Section 402(f) notice 19 Rate Worksheet for Eligible 5 Self-employed individual 5 Self-Employed 24 Excludable 6

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Tax Publications for Business Taxpayers See How To Get Tax Help, earlier, for a variety of ways to get publications, including by computer, Keep for Your Records phone, and mail.

General Guides 527 Residential Rental Property 901 U.S. Tax Treaties 1 Your Rights as a Taxpayer 534 Depreciating Property Placed in 908 Bankruptcy Tax Guide 17 Your Federal Income Tax Service Before 1987 925 Passive Activity and At-Risk Rules 334 Tax Guide for Small Business 535 Business Expenses 946 How To Depreciate Property (For Individuals Who Use 536 Net Operating Losses (NOLs) for 947 Practice Before the IRS and Power of Schedule C) Individuals, Estates, and Trusts Attorney 509 Tax Calendars 537 Installment Sales 1544 Reporting Cash Payments of Over 538 Accounting Periods and Methods $10,000 Employer’s Guides 541 Partnerships 1546 Taxpayer Advocate Service—Your 15 (Circular E), Employer’s Tax Guide 542 Corporations Voice at the IRS 15-A Employer’s Supplemental Tax Guide 544 Sales and Other Dispositions of 15-B Employer’s Tax Guide to Fringe Spanish Language Publications Assets Bene ts 1SP Derechos del Contribuyente 551 Basis of Assets 51 (Circular A), Agricultural Employer’s 556 Examination of Returns, Appeal 179 (Circular PR), Guía Contributiva Tax Guide Rights, and Claims for Refund Federal para Patronos 80 (Circular SS), Federal Tax Guide for 560 Retirement Plans for Small Business Puertorriquenos˜ Employers in the U.S. Virgin (SEP, SIMPLE, and Quali ed 17 (SP) El Impuesto Federal sobre los Islands, Guam, American Samoa, Plans) Ingresos and the Commonwealth of the 561 Determining the Value of Donated 594 (SP) El Proceso de Cobro del IRS Northern Mariana Islands Property English-Spanish Glossary of Tax 926 Household Employer’s Tax Guide 850 583 Starting a Business and Keeping (EN/SP) Words and Phrases Specialized Publications Records 1544 (SP) Informe de Pagos en Efectivo en 225 Farmer’s Tax Guide 587 Business Use of Your Home Exceso de $10,000 463 Travel, Gift, and Car Expenses (Including Use by Daycare 505 Tax Withholding and Estimated Tax Providers) 510 Excise Taxes 594 The IRS Collection Process 515 Withholding of Tax on Nonresident 595 Capital Construction Fund for Aliens and Foreign Entities Commercial Fishermen 517 Social Security and Other Information 597 Information on the United for Members of the Clergy and States—Canada Income Tax Treaty Religious Workers 598 Tax on Unrelated Business Income of Exempt Organizations

Commonly Used Tax Forms See How To Get Tax Help, earlier, for a variety of ways to get forms, including by computer, phone, and mail. Keep for Your Records

Form Number and Form Title 1120 U.S. Corporation Income Tax Return W-2 Wage and Tax Statement 1120-S U.S. Income Tax Return for an S Corporation W-4 Employee’s Withholding Allowance Certi cate Sch. D Capital Gains and Losses and Built-in Gains 940 Employer’s Annual Federal Unemployment (FUTA) Tax Sch. K-1 Shareholder’s Share of Income, Deductions, Credits, Return etc. 941 Employer’s QUARTERLY Federal Tax Return 2106 Employee Business Expenses 944 Employer’s ANNUAL Federal Tax Return 2106-EZ Unreimbursed Employee Business Expenses 1040 U.S. Individual Income Tax Return 2210 Underpayment of Estimated Tax by Individuals, Estates, 1040-SR U.S. Tax Return for Seniors and Trusts Sch. A Itemized Deductions 2441 Child and Dependent Care Expenses Sch. B Interest and Ordinary Dividends 2848 Power of Attorney and Declaration of Representative Sch. C Pro t or Loss From Business 3800 General Business Credit Sch. D Capital Gains and Losses 3903 Moving Expenses Sch. E Supplemental Income and Loss 4562 Depreciation and Amortization Sch. F Pro t or Loss From Farming 4797 Sales of Business Property Sch. H Household Employment Taxes 4868 Application for Automatic Extension of Time To File U.S. Sch. J Income Averaging for Farmers and Fishermen Individual Income Tax Return Sch. R Credit for the Elderly or the Disabled 5329 Additional Taxes on Quali ed Plans (Including IRAs) and Sch. SE Self-Employment Tax Other Tax-Favored Accounts Sch. 1 Additional Income and Adjustments to Income 6252 Installment Sale Income Sch. 2 Additional Taxes 7004 Application for Automatic Extension of Time To File Sch. 3 Additional Credits and Payments Certain Business Income Tax, Information, and Other 1040-ES Estimated Tax for Individuals Returns 1040-X Amended U.S. Individual Income Tax Return 8283 Noncash Charitable Contributions 1065 U.S. Return of Partnership Income 8300 Report of Cash Payments Over $10,000 Received in a Sch. D Capital Gains and Losses Trade or Business Sch. K-1 Partner’s Share of Income, Deductions, Credits, etc. 8582 Passive Activity Loss Limitations 8606 Nondeductible IRAs 8822 Change of Address 8829 Expenses for Business Use of Your Home

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