small business retirement plans

Compare our small business retirement plans

Small plan 401(k), see what vanguard assets qualify.

Eligibility is first calculated using qualifying assets for an individual client. We then combine the qualifying assets of clients sharing a residential address to determine final eligibility*.

Assets that qualify

• Any assets under management of Vanguard Personal Advisor Services .
• Vanguard mutual funds and Vanguard ETFs held by a client in certain personal accounts qualify. Personal account types include: individual non-retirement, education savings accounts, IRAs, Joint, Trust, Custodian, Guardian, UTMA, UGMA, Estate, Sole Proprietorship, and Single-Participant SEP IRA plans.

Note: Vanguard assets in a Vanguard 529 Plan, Vanguard Variable Annuity, Multi-participant SEP IRA plans, SIMPLE, i401k, 403(b), family partnership, family corporation, or employer-sponsored retirement plans for which Vanguard provides recordkeeping services may be included in determining eligibility if you also have a personal account holding Vanguard mutual funds or Vanguard ETFs. Assets held in other account types are not eligible to be included in service eligibility determination.

We review qualifications periodically

The qualification criteria (for example, asset levels) are reviewed periodically and could change at any time. Vanguard reserves the right to discontinue enrollment in any of these services or reassign any investor, without prior notification, to the appropriate service level if the investor fails to continue to meet the applicable qualification criteria. Vanguard reserves the right to amend or cancel selected features and benefits at any time without prior notification.

In addition, ongoing access by any particular investor to individual services, discounts, and exemptions is subject to periodic review and may be restricted based upon criteria established solely by Vanguard. While these services are complimentary, some underlying services may charge fees and expenses. Vanguard does not guarantee any level of service.

*Business addresses and other non-residential addresses are not eligible to be aggregated for purposes of determining services.

*Self-employed individuals must calculate their maximum contribution using the rate table or worksheets in Chapter 5 of IRS Publication 560 Retirement Plans for Small Business , or see a tax advisor.

**For plans with $2 million or more in assets or plans using an advisor or investment fiduciary service.

All investing is subject to risk, including the possible loss of the money you invest.

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Individual 401(k)  at merrill, sep ira  at merrill, simple ira  at merrill, small business 401(k)  at merrill, what plan fits my business, individual 401( k ), small business 401( k ), contributions footnote  4, investment choices, filing requirements, contribution limits, ready to get started, set up a meeting.

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What are small business retirement plans?

E*TRADE from Morgan Stanley

Small business owners have many critical priorities, such as growing their business, making a profit, managing taxes, and attracting and rewarding valuable employees. A small business retirement plan may help them achieve these objectives. Most small business plans are easier to start up, less expensive to run, and simpler to manage than a typical employer sponsored qualified retirement.

What is a small business retirement plan? A small business plan is a tax-deferred plan that offers retirement savings for self-employed individuals and their spouses, or small business owners. Some define a small business owner as a business owner with less than 10 employees, but one of the plans we offer - a SIMPLE IRA - can be used as long as you have less than 100 employees. One of the advantages of a small business plan is that business owners can deduct contributions made to their own accounts, as well as contributions made on behalf of employees, as a business expense.

Who is eligible to set up a small business retirement plan? Anyone who has earned income from self-employment can establish a small business retirement plan. Examples include consultants, independent contractors, board members, store owners, sales representatives with 1099-MISC income, doctors, attorneys, real estate agents, people with home based businesses, and many more. Whether self-employed income is the primary income source, or an individual just has a small business on the side and continues to work for someone else, they are eligible to set up a small business retirement plan, using the income derived from being their own boss.

Three small business and self-employed retirement plans include: Individual 401(k) which offers a Roth 401(k) feature, SEP IRA, and a SIMPLE IRA.

Individual 401(k)

An Individual 401(k) plan is designed to maximize contributions for self-employed individuals and spouses, and it’s less complex and less costly to maintain than a conventional 401(k) plan. The first thing to understand about an Individual 401(k) is that contributions can come from two sources.

Owner's salary deferral

How this works is that the business owner defers, or foregoes, a percentage or dollar amount of their salary up to a maximum of $22,500 for 2023 ($23,000 for 2024). If over age 50, they can defer an additional $7,500 for 2023 and 2024, for a total of $30,000 for 2023 (and $30,500 for 2024) into the plan. Salary deferrals can be used to reduce income and thus tax liability now. Alternatively, they can designate all or a portion of salary deferrals as an Individual Roth 401(k) contribution if the plan permits. With a Roth contribution, the contribution cannot be deducted now, but the business owner can take tax-free qualified distributions later if certain requirements are met. A qualified distribution is generally a distribution that is made after a 5 year holding period and after age 59½.

Company contribution

The second part of the contribution is the company contribution, also called a profit sharing contribution. This piece can be as much as 25% of your income if the business is incorporated (or if the business owners receives a W-2), or 20% of income if they are a sole proprietor and file a Schedule C. The total of the two contribution pieces (salary deferral plus profit sharing) can total up to as much as $66,000 for 2023 ($69,000 for 2024). These limits are increased by 7,500 for 2023 and 2024 if age 50 or over. This plan allows a business owner to put away quite a large sum for retirement.

A traditional individual 401(k) and Roth Individual 401(k) can also offer a loan feature, giving the opportunity to take a loan in the event of a setback. Generally, 50% of the vested account balance, up to $50,000 can be borrowed if permitted under the plan. 

If there are any full or part-time employees other than a spouse, a small business owner is not able to establish this plan.

Another popular plan for small businesses is a SEP IRA . A SEP IRA is very similar to a Traditional IRA, except it has higher discretionary contribution limits. The contribution limits for SEP IRAs   are the lesser of (i) $66,000 in 2023/$69,000 in 2024 or (ii) 25% of employee compensation (or 20% of net earnings from self-employment), with compensation taken into account capped at $330,000 in 2023/$345,000 in 2024. The contributions made to a SEP IRA are generally not mandatory. Employers are generally able to set aside from 0 – 25% each year. Therefore, if they have a good year, they can generally put away the maximum amount. If on the other hand, they didn’t have as successful of a year as hoped, they can put away a small percentage or even skip a year of contributing altogether. Keep in mind that only employers can make SEP IRA contributions.  So whatever percentage of salary a business owner contributes to their own SEP IRA, they must also contribute the same percentage of eligible employee’s salary into the eligible employee's SEP IRA accounts.

Business owners can let all employees participate in the SEP IRA or they can specify that a certain age and length of employment has to be met before contributions are made to employee accounts. The age limit cannot exceed 21 years old, the employment requirement is limited to 3 of the immediately preceding 5 years and received at least 750 in compensation (2023 and 2024) from the employer for the year. Once the employees exceed these requirements, business owners are obligated to contribute the same percentage of salary to their SEP IRAs as they contribute to their own account. This plan must be adopted by the business tax return filing deadline, plus extensions.

For employers who want employees to help fund their own retirement plan, they may be interested in a SIMPLRE IRA . A SIMPLE IRA is sometimes described as a mini- 401(k) plan, but it is only available for businesses with no more than 100 eligible employees. Contributions are made both by the employer and the employee.

Employee salary reduction contributions

Employees defer a percentage of their salary into the SIMPLE IRA, up to $15,500 for 2023 (or $16,000 for 2024) or, if age 50 or older, $19,000 for 2023 (or $19,500 for 2024). The salary deferral contributions are typically deducted from the paychecks of each participant during normal payroll.

Employer contributions

Then the employer either matches contributions of employees that are participating in the plan, up to 3% of salary, or can choose to provide a 2% non-elective contribution to all eligible employees (the 2% non-elective contribution is subject to the compensation cap of $330,000 for 2023 or $345,000 for 2024), whether the employees participate in the salary deferral portion of the plan or not.

One advantage of providing a 3% matching contribution is that the employer only contributes to those employees who elect make a salary reduction contribution. An advantage of the 2% non-elective contribution is that these contributions are subject to a compensation cap -- however they’ll have to contribute for all eligible employees even if they don’t participate in the salary deferral portion of the plan.

Two important things to know about SIMPLE IRAs are:

1. A vesting schedule cannot be imposed on the employer contribution, meaning that even if an employee leaves the company soon after they become eligible for an employer contribution, the money is still theirs to keep.

2. If the employees need to tap into their account within the first 2 years of funding, any withdrawals carry a hefty 25% tax penalty if the employees are under age 59 ½.

In general, the plan must be adopted by October 1 in order to make current year contributions.

The infograph below shows some options to help you find the small business retirement plan that may make sense for you.

Many business owners are too busy with the day to day details of running their business to think about planning for retirement. However, these plans are a way to help grow businesses and help employers retain and attract valuable employees.  An employer sponsored retirement plan is often one of the crucial benefits individuals ask about when considering a new employment offer. Additionally, some plans have loan features, giving the opportunity to make a loan in the event of a setback. Also, tax credits exist for small business owners who establish new plans. Another big benefit is that contributions made to the employer’s account, or to employee accounts, are tax-advantaged. These contributions reduce the business’ taxable income and offer tax-deferred growth potential for the participants. Plus, contribution limits to these plans are much higher than the standard Traditional and Roth IRA contribution limits. A small business employer can control how much they contribute to their own account and employee’s accounts, and in some situations, employers may be able to skip funding one year if the business didn’t do as well as hoped.

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Incorporating social security into your retirement planning, looking to expand your financial knowledge.

Small Business Retirement Accounts

Work for yourself own a small business there are specialized accounts to help you save for retirement., our two cents.

If money is tight when you're first starting a business, start small with your saving and gradually increase the percentage you contribute. That way, you can ease your way up to your ideal amount.

Whether you work for yourself or have a small business with just a few employees, you can maximize your retirement savings and tax advantages with a small-business retirement plan. Setting up a retirement plan can help you and any employees. If you don't yet have a plan, you probably should think seriously about starting one. As a small business, there are many retirement plans to choose from. The one best-suited to your situation depends in large part on what your company can afford.

This article provides a brief overview of the major types of retirement plans for small businesses or self-employed workers. It's a good idea to talk to a tax advisor for help in choosing the plan that's right for you and your business.

Individual 401(k)—For self-employed individuals without employees

An Individual 401(k) is an easy-to-administer, low-cost retirement plan designed for self-employed individuals and owner-only businesses who want to make substantial contributions toward their retirement. You direct how the contributions are invested. By wearing two hats, you are eligible to make substantial contributions as both employer and employee. Individual 401(k)s offer some of the highest contribution limits.

SEP-IRA—For either self-employed individuals or small businesses with employees

SEP IRAs are easier to administer than an Individual 401(k). A SEP-IRA allows you to make sizable contributions for yourself and any eligible employees. You have the flexibility to vary contributions from year to year or even skip contributions altogether in any year. When you do contribute, you must contribute the same percentage of compensation to the SEP-IRAs of any employees.

SIMPLE IRA—For business owners with employees

A SIMPLE IRA provides an easy and economical way to establish a retirement program for you and up to 100 employees. Each eligible employee can decide whether or not to participate and how much to contribute. Employer contributions are mandatory by offering a match to employee contributions or making automatic contributions to employee accounts. Contribution limits to a SIMPLE IRA are the lowest compared to all other small business plans. Employers can choose to make a 2% retirement account contribution to all employees or an optional matching contribution of up to 3%.

Personal Defined Benefit Plan—For older business owners with few or no employees

A Personal Defined Benefit Plan may be best for professionals age 50 or over who can make annual contributions of $90,000 or more for at least five years and who have few, if any, employees. It's for people who are looking for a quick way to increase their retirement assets, most likely highly compensated business owners, partners, and key employees who are in their peak earning years. The business needs to be stable to allow substantial and regular contributions for several years with this type of plan. Contribution limits can be substantially higher than an Individual 401(k). Unlike the plans above, you don't have specific control of the underlying investments. At retirement, you and other plan participants may receive your benefit payout in the form of a lifetime payout in addition to rolling assets into an IRA or receiving a lump-sum distribution. These plans are the most complex and expensive to set up and maintain.

Small Business Retirement Plans

• Individual 401(k)
•  SIMPLE IRA
•  Personal Defined Benefit Plan
• Plan type Best for
• Individual 401(k) Owner-employee with no employees 
• SEP IRA Owner-employee or with just a few employees
•  SIMPLE IRA Any employer with 100 or fewer employees
•  Personal Defined Benefit Plan Older owner-only business or with just a few employees
• Plan type Contribution Limits
• Individual 401(k) High
• SEP IRA High
•  SIMPLE IRA  Low
•  Personal Defined Benefit Plan Very High
• Plan type Ease to set up and maintain plan
• Individual 401(k) Medium
• SEP IRA Medium
•  SIMPLE IRA High
•  Personal Defined Benefit Plan Very Low
• Plan type Contributions
• Individual 401(k) Owner can make contributions as employer and employee An employer can make additional contributions, including matching contributions as set by plan terms
• SEP IRA Employer contributions only Employer can decide whether to make contributions year-to-year
•  SIMPLE IRA Employee can decide how much to contribute Employer must make 3% matching contributions or contribute 2% of each employee’s compensation
•  Personal Defined Benefit Plan Employer generally required to make contributions as set by plan terms An actuary must determine annual contributions
• Plan type Key Features
• Individual 401(k)  Higher potential contribution limits than SEP-IRA and SIMPLE IRAs Employee salary reduction contributions are immediately 100% vested
• SEP IRA High contributions for you A way to contribute to qualified employees’ accounts Contributions for employees vest immediately
•  SIMPLE IRA A way to contribute to your own retirement easily and regularly and help employees contribute to theirs A low-cost plan funded mainly by employees Contributions for employees vest immediately
•  Personal Defined Benefit Plan Highest contribution limits compared to all other plans Predetermined benefit at retirement

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Publication 560 - additional material, publication 560 (2023), retirement plans for small business, (sep, simple, and qualified plans).

For use in preparing 2023 Returns

Publication 560 - Introductory Material

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

Compensation limits for 2023 and 2024. For 2023, the maximum compensation used for figuring contributions and benefits is $330,000. This limit increases to $345,000 for 2024.

Elective deferral limits for 2023 and 2024. The limit on elective deferrals, other than catch-up contributions, is $22,500 for 2023 and $23,000 for 2024. These limits apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), section 403(b) plans, and section 457(b) plans.

Defined contribution limits for 2023 and 2024. The limit on contributions, other than catch-up contributions, for a participant in a defined contribution plan is $66,000 for 2023 and increases to $69,000 for 2024.

Defined benefit limits for 2023 and 2024. The limit on annual benefits for a participant in a defined benefit plan is $265,000 for 2023 and increases to $275,000 for 2024.

SIMPLE plan salary reduction contribution limits for 2023 and 2024. The limit on salary reduction contributions, other than catch-up contributions, is $15,500 for 2023 and increases to $16,000 for 2024.

Catch-up contribution limits for 2023 and 2024. A plan can permit participants who are age 50 or over at the end of the calendar year to make catch-up contributions in addition to elective deferrals and SIMPLE plan salary reduction contributions. The catch-up contribution limit for defined contribution plans other than SIMPLE plans is $7,500 for 2023 and 2024. The catch-up contribution limit for SIMPLE plans is $3,500 for 2023 and 2024. A participant's catch-up contributions for a year can't exceed the lesser of the following amounts.

The catch-up contribution limit.

The excess of the participant's compensation over the elective deferrals that aren’t catch-up contributions.

See Catch-up contributions under Contribution Limits and Limit on Elective Deferrals in chapters 3 and 4, respectively, for more information.

Required minimum distributions (RMDs). Individuals who reach age 72 after December 31, 2022, may delay receiving their RMDs until April 1 of the year following the year in which they turn age 73. This change in the age for making these beginning RMDs applies to both IRA owners and participants in a qualified retirement plan.

Roth simplified employee pension (SEP) IRAs and Roth SIMPLE IRAs.

Plans established after end of taxable year. For 2023 and later years, a sole-proprietor with no employees can adopt a section 401(k) plan after the end of the taxable year, provided the plan is adopted by the tax filing deadline (without regard to extensions).

Increased small employer pension plan startup cost credit. The Secure 2.0 Act of Division T of the Consolidated Appropriations Act, 2023, P.L. 117-328 (SECURE 2.0 Act), provides that eligible employers with 1–50 employees are eligible for an increased small employer pension plan startup cost credit under section 45E of 100% of qualified startup costs, subject to limitation. The credit for eligible employers with 51–100 employees remains at 50% of qualified startup costs, subject to limitation. See the instructions to Form 3800 and Form 8881 for more information on the startup cost credit.

Employer contributions credit. The Secure 2.0 Act added an additional startup cost credit under section 45E available to certain eligible employers, in an amount equal to an applicable percentage of the employer’s contributions (not including an elective deferral, as defined in section 402(g)(3)) to an eligible employer plan, subject to limitation. See the instructions to Form 3800 and Form 8881 for more information on the employer contributions credit.

Small employer military spouse participation credit. The Secure 2.0 Act added a new military spouse participation credit under section 45AA available to eligible small employers who maintain defined contribution plans with specific features that benefit military spouses. See the instructions to Form 3800 and Form 8881 for more information on the military spouse participation credit.

Designated Roth nonelective contributions and designated Roth matching contributions. The Secure 2.0 Act of 2022 permits certain nonelective contributions and matching contributions that are made after December 29, 2022, to be designated as Roth contributions.

Small employer automatic enrollment credit. The Further Consolidated Appropriations Act, 2020, P.L. 116-94, added section 45T. An eligible employer may claim a tax credit if it includes an eligible automatic contribution arrangement under a qualified employer plan. The credit equals $500 per year over a 3-year period beginning with the first tax year in which it includes the automatic contribution arrangement, and may first be claimed on the employer’s return for the year 2020.

Increase in credit limitation for small employer plan startup costs. The Further Consolidated Appropriations Act, 2020, P.L. 116-94, amended section 45E. For tax years beginning after December 31, 2019, eligible employers can claim a tax credit for the first credit year and each of the 2 tax years immediately following. The credit equals 50% of qualified startup costs, up to the greater of (a) $500; or (b) the lesser of (i) $250 for each employee who is not a “highly compensated employee” eligible to participate in the employer plan, or (ii) $5,000.

The SECURE 2.0 Act further amended section 45E to increase the credit for tax years beginning after December 31, 2022. See What’s New .

See the instructions for Form 3800 and Form 8881 for more information on the small employer automatic enrollment credit and the small employer startup cost credit.

Restriction on conditions of participation. Effective for plan years beginning after December 31, 2020, a 401(k) plan can’t require, as a condition of participation, that an employee complete a period of service that extends beyond the close of the earlier of (a) 1 year of service, or (b) the first period of 3 consecutive 12‑month periods (excluding 12-month periods beginning before January 1, 2021) during each of which the employee has completed at least 500 hours of service. Effective for plan years beginning after December 31, 2024, 3 consecutive 12-month periods are reduced to 2 consecutive 12‑month periods.

Retirement savings contributions credit. Retirement plan participants (including self-employed individuals) who make contributions to their plan may qualify for the retirement savings contribution credit. The maximum contribution eligible for the credit is $2,000. To take the credit, use Form 8880, Credit for Qualified Retirement Savings Contributions. For more information on who is eligible for the credit, retirement plan contributions eligible for the credit, and how to figure the credit, see Form 8880 and its instructions or go to IRS.gov/Retirement-Plans/Plan-Participant-Employee/Retirement-Savings-Contributions-Savers-Credit .

Photographs of missing children. The IRS is a proud partner with the National Center for Missing & Exploited Children® (NCMEC) . Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication discusses retirement plans you can set up and maintain for yourself and your employees. In this publication, “you” refers to the employer. See chapter 1 for the definition of the term “employer” and the definitions of other terms used in this publication. This publication covers the following types of retirement plans.

SEP (simplified employee pension) plans.

SIMPLE (savings incentive match plan for employees) plans.

Qualified plans (also called H.R. 10 plans or Keogh plans when covering self-employed individuals), including 401(k) plans.

SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. You can deduct contributions you make to the plan for your employees. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. You can also deduct trustees' fees if contributions to the plan don't cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan.

Under a 401(k) plan, employees can have you contribute limited amounts of their before-tax (after-tax, in the case of a qualified Roth contribution program) pay to the plan. These amounts (and the earnings on them) are generally tax free until your employees receive distributions from the plan or, in the case of a qualified distribution from a designated Roth account, completely tax free.

This publication contains the information you need to understand the following topics.

What type of plan to set up.

How to set up a plan.

How much you can contribute to a plan.

How much of your contribution is deductible.

How to treat certain distributions.

How to report information about the plan to the IRS and your employees.

Basic features of SEP, SIMPLE, and qualified plans. The key rules for SEP, SIMPLE, and qualified plans are outlined in Table 1 .

SEP plans provide a simplified method for you to make contributions to a retirement plan for yourself and your employees. Instead of setting up a profit-sharing or money purchase plan with a trust, you can adopt a SEP agreement and make contributions directly to a traditional individual retirement account or a traditional individual retirement annuity (SEP-IRA) set up for yourself and each eligible employee.

Generally, if you had 100 or fewer employees who received at least $5,000 in compensation last year, you can set up a SIMPLE IRA plan. Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective contributions. The two types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE 401(k) plan.

The qualified plan rules are more complex than the SEP plan and SIMPLE plan rules. However, there are advantages to qualified plans, such as increased flexibility in designing plans and increased contribution and deduction limits in some cases.

Table 1. Key Retirement Plan Rules for 2023

Although the purpose of this publication is to provide general information about retirement plans you can set up for your employees, it doesn't contain all the rules and exceptions that apply to these plans. You may need professional help and guidance.

Also, this publication doesn't cover all the rules that may be of interest to employees. For example, it doesn't cover the following topics.

The comprehensive IRA rules an employee needs to know. These rules are covered in Pub. 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Pub. 590-B, Distributions from Individual Retirement Arrangements (IRAs).

The comprehensive rules that apply to distributions from retirement plans. These rules are covered in Pub. 575, Pension and Annuity Income.

The comprehensive rules that apply to section 403(b) plans. These rules are covered in Pub. 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations.

We welcome your comments about this publication and your suggestions for future editions.

You can send us comments through IRS.gov/FormComments . Or you can write to the Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments and suggestions as we revise our tax forms, instructions, and publications. Don’t send tax questions, tax returns, or payments to the above address.

If you have a tax question not answered by this publication or the How To Get Tax Help section at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/Help/ITA where you can find topics by using the search feature or viewing the categories listed.

Go to IRS.gov/Forms to download current and prior-year forms, instructions, and publications.

Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order prior-year forms and instructions. The IRS will process your order for forms and publications as soon as possible. Don’t resubmit requests you’ve already sent us. You can get forms and publications faster online.

If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication.

1. Definitions You Need To Know

Certain terms used in this publication are defined below. The same term used in another publication may have a slightly different meaning.

Annual additions are the total of all your contributions in a year, employee contributions (not including rollovers), and forfeitures allocated to a participant's account.

Annual benefits are the benefits to be paid yearly in the form of a straight life annuity (with no extra benefits) under a plan to which employees don't contribute and under which no rollover contributions are made.

A business is an activity in which a profit motive is present and economic activity is involved. Service as a newspaper carrier under age 18 or as a public official isn’t a business.

A common-law employee is any individual who, under common law, would have the status of an employee. A leased employee can also be a common-law employee.

A common-law employee is a person who performs services for an employer who has the right to control and direct the results of the work and the way in which it is done. For example, the employer:

Provides the employee's tools, materials, and workplace; and

Can fire the employee.

Common-law employees aren't self-employed and can't set up retirement plans for income from their work, even if that income is self-employment income for social security tax purposes. For example, common-law employees who are ministers, members of religious orders, full-time insurance salespeople, and U.S. citizens employed in the United States by foreign governments can't set up retirement plans for their earnings from those employments, even though their earnings are treated as self-employment income.

However, an individual may be a common-law employee and a self-employed person as well. For example, an attorney can be a corporate common-law employee during regular working hours and also practice law in the evening as a self-employed person. In another example, a minister employed by a congregation for a salary is a common-law employee even though the salary is treated as self-employment income for social security tax purposes. However, fees reported on Schedule C (Form 1040), Profit or Loss From Business, for performing marriages, baptisms, and other personal services are self-employment earnings for qualified plan purposes.

Compensation for plan allocations is the pay a participant received from you for personal services for a year. You can generally define compensation as including all the following payments.

Wages and salaries.

Fees for professional services.

Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to, the following items.

Commissions and tips.

Fringe benefits.

For a self-employed individual, compensation means the earned income, discussed later, of that individual.

Compensation generally includes amounts deferred at the employee's election in the following employee benefit plans.

Section 401(k) plans.

Section 403(b) plans.

SIMPLE IRA plans.

Section 457 deferred compensation plans.

Section 125 cafeteria plans.

However, an employer can choose to exclude elective deferrals under the above plans from the definition of compensation. The limit on elective deferrals is discussed in chapter 2 under Salary Reduction Simplified Employee Pension (SARSEP) and in chapter 4.

In figuring the compensation of a participant, you can treat any of the following amounts as the employee's compensation.

The employee's wages as defined for income tax withholding purposes.

The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement.

The employee's social security wages (including elective deferrals).

Compensation generally can't include either of the following items.

Nontaxable reimbursements or other expense allowances.

Deferred compensation (other than elective deferrals).

A special definition of compensation applies for SIMPLE plans. See chapter 3 .

A contribution is an amount you pay into a plan for all those participating in the plan, including self-employed individuals. Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant.

A deduction is the plan contribution you can subtract from gross income on your federal income tax return. Limits apply to the amount deductible.

Earned income is net earnings from self-employment, discussed later, from a business in which your services materially helped to produce the income.

You can also have earned income from property your personal efforts helped create, such as royalties from your books or inventions. Earned income includes net earnings from selling or otherwise disposing of the property, but it doesn't include capital gains. It includes income from licensing the use of property other than goodwill.

Earned income includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who are exempt from self-employment tax.

If you have more than one business, but only one has a retirement plan, only the earned income from that business is considered for that plan.

An elective deferral is the contribution made by employees to a qualified retirement plan.

Non-owner employees: The employee salary reduction/elective deferral contributions must be elected/made by the end of the tax year and deposited into the employee’s plan account within 7 business days (safe harbor) and no later than 15 days.

Owner/employees: The employee deferrals must be elected by the end of the tax year and can then be made by the tax return filing deadline, including extensions.

An employer is generally any person for whom an individual performs or did perform any service, of whatever nature, as an employee. A sole proprietor is treated as its own employer for retirement plan purposes. However, a partner isn't an employer for retirement plan purposes. Instead, the partnership is treated as the employer of each partner.

A highly compensated employee is an individual who:

Owned more than 5% of the interest in your business at any time during the year or the preceding year, regardless of how much compensation that person earned or received; or

For the preceding year, received compensation from you of more than $135,000 (if the preceding year is 2022 and increased to $150,000 for 2023), more than $155,000 (if the preceding year is 2024), and, if you so choose, was in the top 20% of employees when ranked by compensation.

A leased employee who isn't your common-law employee must generally be treated as your employee for retirement plan purposes if they do all the following.

Provides services to you under an agreement between you and a leasing organization.

Has performed services for you (or for you and related persons) substantially full time for at least 1 year.

Performs services under your primary direction or control.

A leased employee isn't treated as your employee if all the following conditions are met.

Leased employees aren't more than 20% of your non-highly compensated workforce.

The employee is covered under the leasing organization's qualified pension plan.

The leasing organization's plan is a money purchase pension plan that has all the following provisions.

Immediate participation. (This requirement doesn't apply to any individual whose compensation from the leasing organization in each plan year during the 4-year period ending with the plan year is less than $1,000.)

Full and immediate vesting.

A nonintegrated employer contribution rate of at least 10% of compensation for each participant.

For SEP and qualified plans, net earnings from self-employment are your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions. Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax.

Net earnings from self-employment don’t include items excluded from gross income (or their related deductions) other than foreign earned income and foreign housing cost amounts.

For the deduction limits, earned income is net earnings for personal services actually rendered to the business. You take into account the income tax deduction for the deductible part of self-employment tax and the deduction for contributions to the plan made on your behalf when figuring net earnings.

Net earnings include a partner's distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). They don’t include income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. Distributions of other income or loss to limited partners aren't net earnings from self-employment.

For SIMPLE plans, net earnings from self-employment are the amount on line 4 ofSchedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for yourself.

A qualified plan is a retirement plan that offers a tax-favored way to save for retirement. You can deduct contributions made to the plan for your employees. Earnings on these contributions are generally tax free until distributed at retirement. Profit-sharing, money purchase, and defined benefit plans are qualified plans. A 401(k) plan is also a qualified plan.

A participant is an eligible employee who is covered by your retirement plan. See the discussions, later, of the different types of plans for the definition of an employee eligible to participate in each type of plan.

A partner is an individual who shares ownership of an unincorporated trade or business with one or more persons. For retirement plans, a partner is treated as an employee of the partnership.

An individual in business for himself or herself, and whose business isn't incorporated, is self-employed. Sole proprietors and partners are self-employed. Self-employment can include part-time work.

Not everyone who has net earnings from self-employment for social security tax purposes is self-employed for qualified plan purposes. See Common-law employee and Net earnings from self-employment , earlier.

In addition, certain fishermen may be considered self-employed for setting up a qualified plan. See Pub. 595, Capital Construction Fund for Commercial Fishermen, for the special rules used to determine whether fishermen are self-employed.

A sole proprietor is an individual who owns an unincorporated business alone, including a single-member limited liability company that is treated as a disregarded entity for tax purposes. For retirement plans, a sole proprietor is treated as both an employer and an employee.

2. Simplified Employee Pensions (SEPs)

Setting up a sep.

How much can I contribute

Deducting contributions

Salary reduction simplified employee pensions (SARSEPs)

Distributions (withdrawals)

Additional taxes

Reporting and disclosure requirements

Useful Items

Publications

590-A Contributions to Individual Retirement Arrangements (IRAs)

590-B Distributions from Individual Retirement Arrangements (IRAs)

3998 Choosing a Retirement Solution for Your Small Business

4285 SEP Checklist

4286 SARSEP Checklist

4333 SEP Retirement Plans for Small Businesses

4336 SARSEP for Small Businesses

4407 SARSEP—Key Issues and Assistance

Forms (and Instructions)

W-2 Wage and Tax Statement

1040 U.S. Individual Income Tax Return

1040-SR U.S. Tax Return for Seniors

5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement

5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement

8880 Credit for Qualified Retirement Savings Contributions

8881 Credit for Small Employer Pension Plan Startup Costs

A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan.

Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained.

SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but doesn't need to be set up for excludable employees (defined later).

An eligible employee is an individual who meets all the following requirements.

Has reached age 21.

Has worked for you in at least 3 of the last 5 years.

Has received at least $750 in compensation from you in 2023. The amount remains the same for 2023.

The following employees can be excluded from coverage under a SEP.

Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.

Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you. For more information about nonresident aliens, see Pub. 519, U.S. Tax Guide for Aliens.

There are three basic steps in setting up a SEP.

You must execute a formal written agreement to provide benefits to all eligible employees.

You must give each eligible employee certain information about the SEP.

A SEP-IRA must be set up by or for each eligible employee.

You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. However, see When not to use Form 5305-SEP , later.

If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Keep the original form. Don't file it with the IRS. Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. See the Form 5305-SEP instructions for details. If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP.

You can't use Form 5305-SEP if any of the following apply.

You currently maintain any other qualified retirement plan other than another SEP.

You have any eligible employees for whom IRAs haven’t been set up.

You use the services of leased employees, who aren't your common-law employees (as described in chapter 1).

You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP.

An affiliated service group described in section 414(m).

A controlled group of corporations described in section 414(b).

Trades or businesses under common control described in section 414(c).

You don't pay the cost of the SEP contributions.

You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. An IRS model SEP isn't considered adopted until you give each employee this information.

A SEP-IRA must be set up by or for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. You send SEP contributions to the financial institution where the SEP-IRA is maintained.

You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year.

How Much Can I Contribute?

The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. If you are self-employed, you can contribute to your own SEP-IRA. Contributions must be in the form of money (cash, check, or money order). You can't contribute property. However, participants may be able to transfer or roll over certain property from one retirement plan to another. See Pubs. 590-A and 590-B for more information about rollovers.

You don't have to make contributions every year. But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made.

Contributions are deductible within limits, as discussed later, and generally aren't taxable to the plan participants.

A SEP-IRA can't be a Roth IRA. Employer contributions to a SEP-IRA won’t affect the amount an individual can contribute to a Roth or traditional IRA.

Unlike regular contributions to a traditional IRA before 2020, contributions under a SEP can be made to participants over age 70½. If you are self-employed, you can also make contributions under the SEP for yourself even if you are over age 70½. Participants age 72 or over (if age 70½ was reached after December 31, 2019) must take RMDs.

Individuals who reach age 72 after December 31, 2022, may delay receiving their RMDs until April 1 of the year following the year in which they reach age 73.

To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year.

Contribution Limits

Contributions you make for 2023 to a common-law employee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $66,000. Compensation generally doesn't include your contributions to the SEP. The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants.

Your employee has earned $21,000 for 2023. The maximum contribution you can make to your employee’s SEP-IRA is $5,250 (25% (0.25) x $21,000).

The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. However, special rules apply when figuring your maximum deductible contribution. See Deduction Limit for Self-Employed Individuals , later.

You can't consider the part of an employee's compensation over $330,000 when figuring your contribution limit for that employee. However, $66,000 is the maximum contribution for an eligible employee. These limits increase to $345,000 and $69,000, respectively, in 2024.

Your employee has earned $260,000 for 2023. Because of the maximum contribution limit for 2023, you can only contribute $66,000 to your employee’s SEP-IRA.

If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $66,000 or 100% of the participant's compensation. When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain.

Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2023 that exceed the lesser of the following amounts.

25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment).

Don't include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later).

Deducting Contributions

Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA.

The most you can deduct for your contributions to your or your employee's SEP-IRA is the lesser of the following amounts.

Your contributions (including any excess contributions carryover).

25% of the compensation (limited to $330,000 per participant) paid to the participants during 2023, from the business that has the plan, not to exceed $66,000 per participant.

If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions.

The deduction for the deductible part of your self-employment tax.

The deduction for contributions to your own SEP-IRA.

The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Then, figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

Carryover of Excess SEP Contributions

If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit.

If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4.

When you can deduct contributions made for a year depends on the tax year for which the SEP is maintained.

If the SEP is maintained on a calendar-year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends.

If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year.

You are a fiscal-year taxpayer whose tax year ends June 30. You maintain a SEP on a calendar-year basis. You deduct SEP contributions made for calendar year 2023 on your tax return for your tax year ending June 30, 2024.

Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U.S. Return of Partnership Income; and corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-S, U.S. Income Tax Return for an S Corporation.

Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., you receive from the partnership.)

Salary Reduction Simplified Employee Pensions (SARSEPs)

A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. (See the Caution next.) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. This contribution is called an elective deferral because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them.

A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met.

At least 50% of your employees eligible to participate choose to make elective deferrals.

You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year.

The elective deferrals of your highly compensated employees meet the SARSEP average deferral percentage (ADP) test.

Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) can't be more than 125% of the ADP of all non-highly compensated employees eligible to participate. A highly compensated employee is defined in chapter 1.

The deferral percentage for an employee for a year is figured as follows.

For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. See Compensation in chapter 1. Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they aren't included in the income of your employees for income tax purposes.

If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1.

Compensation doesn't include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts.

You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP.

Limit on Elective Deferrals

The most a participant can choose to defer for calendar year 2023 is the lesser of the following amounts.

25% of the participant's compensation (limited to $330,000 of the participant's compensation).

The $22,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following.

Cash or deferred arrangement (section 401(k) plan).

Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan).

SIMPLE IRA plan.

In 2024, the $330,000 limit increases to $345,000, and the $22,500 limit increases to $23,000.

A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit is $7,500 for 2023 and 2024. Elective deferrals aren't treated as catch-up contributions for 2023 until they exceed the elective deferral limit (the lesser of 25% of compensation, or $22,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). However, the catch-up contribution a participant can make for a year can't exceed the lesser of the following amounts.

The excess of the participant's compensation over the elective deferrals that aren't catch-up contributions.

Catch-up contributions aren't subject to the elective deferral limit (the lesser of 25% of compensation, or $22,500 in 2023 and $23,000 in 2024).

If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA can't exceed the lesser of 25% of the employee's compensation, or $66,000 for 2023 ($69,000 for 2024). The same rule applies to contributions you make to your own SEP-IRA. See Contribution Limits , earlier.

For figuring the 25% limit on elective deferrals, compensation doesn't include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans.

Tax Treatment of Deferrals

Elective deferrals that aren't more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) taxes.

For 2023, excess deferrals are the elective deferrals for the year that are more than the $22,500 limit discussed earlier. For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $30,000. The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4.

Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. If you don't notify them within this time period, you must pay a 10% tax on the excess. For an explanation of the notification requirements, see Revenue Procedure 91-44, 1991-2 C.B. 733. If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form.

Don’t include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. You must also include them in box 12. Check the “Retirement plan” checkbox in box 13. For more information, see the Form W-2 instructions.

As an employer, you can't prohibit distributions from a SEP-IRA. Also, you can't make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts.

Distributions are subject to IRA rules. Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 72 (if age 70½ was reached after December 31, 2019). For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Pubs. 590-A and 590-B.

Additional Taxes

The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions.

Making excess contributions.

Making early withdrawals.

Not making required withdrawals.

For information about these taxes, see Pubs. 590-A and 590-B. Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next.

If an employee improperly uses their SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. In that case, the SEP-IRA will no longer qualify as an IRA. For a list of prohibited transactions, see Prohibited Transactions in chapter 4.

If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Also, the employee may have to pay the additional tax for making early withdrawals.

If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. See Setting Up a SEP , earlier. Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. You must also give them notice of any excess contributions. For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary SARSEP).

Even if you didn't use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP.

3. SIMPLE Plans

SIMPLE IRA plans

SIMPLE 401(k) plans

4284 SIMPLE IRA Plan Checklist

4334 SIMPLE IRA Plans for Small Businesses

5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution

5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution

8881 Credit for Small Employer Pension Plan Startup Costs and Auto Enrollment

A SIMPLE plan is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective contributions.

SIMPLE plans can only be maintained on a calendar-year basis.

A SIMPLE plan can be set up in either of the following ways.

Using SIMPLE IRAs (SIMPLE IRA plan).

As part of a 401(k) plan (SIMPLE 401(k) plan).

SIMPLE IRA Plan

A SIMPLE IRA plan is a retirement plan that uses a SIMPLE IRA for each eligible employee. Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later.

Who Can Set up a SIMPLE IRA Plan?

You can set up a SIMPLE IRA plan if you meet both the following requirements.

You meet the employee limit.

You don't maintain another qualified plan unless the other plan is for collective bargaining employees.

You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1).

Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan.

If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it.

A different rule applies if you don't meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied.

Coverage under the plan hasn’t significantly changed during the grace period.

The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer.

The SIMPLE IRA plan must generally be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective.

If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees.

Who Can Participate in a SIMPLE IRA Plan?

Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. The term “employee” includes a self-employed individual who received earned income.

You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. However, you can't impose any other conditions for participating in a SIMPLE IRA plan.

The following employees don't need to be covered under a SIMPLE IRA plan.

Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.

Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you.

Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. If you are self-employed, compensation is your net earnings from self-employment (line 4 of Schedule SE (Form 1040) before subtracting any contributions made to the SIMPLE IRA plan for yourself.

How To Set up a SIMPLE IRA Plan

You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. Each form is a model SIMPLE plan document. Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions.

Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving their SIMPLE IRA plan contributions. Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution.

The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Keep the original form. Don’t file it with the IRS.

If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following.

Meeting employer notification requirements for the SIMPLE IRA plan. Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee.

Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees.

You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you didn't previously maintain a SIMPLE IRA plan. This requirement doesn't apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. A SIMPLE IRA plan can't have an effective date that is before the date you actually adopt the plan.

SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. A SIMPLE IRA must be set up for each eligible employee. Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose.

A SIMPLE IRA can't be a Roth IRA. Contributions to a SIMPLE IRA won't affect the amount an individual can contribute to a Roth or traditional IRA.

A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. See Time limits for contributing funds , later, under Contribution Limits .

Notification Requirement

If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period.

The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan.

Your decision to make either matching contributions or nonelective contributions (discussed later).

A summary description provided by the financial institution.

Written notice that their balance can be transferred without cost or penalty if they use a designated financial institution.

The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). However, the dates of this period are modified if you set up a SIMPLE IRA plan mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.

A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year.

Contributions are made up of salary reduction contributions and employer contributions. You, as the employer, must make either matching contributions or nonelective contributions, defined later. No other contributions can be made to the SIMPLE IRA plan. These contributions, which you can deduct, must be made timely. See Time limits for contributing funds , later.

The amount the employee chooses to have you contribute to a SIMPLE IRA on their behalf can't be more than $15,500 for 2023 and increases to $16,000 for 2024. These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. You can't place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $15,500 limit for 2023 ($16,000 for 2024).

If you or an employee participates in any other qualified plan during the year and you or your employee has salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($22,500 for 2023; $23,000 for 2024) on exclusion of salary reduction contributions and other elective deferrals.

A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit for SIMPLE IRA plans is $3,500 for 2023 and 2024. Salary reduction contributions aren't treated as catch-up contributions until they exceed $15,500 for 2023 ($16,000 for 2024). However, the catch-up contribution a participant can make for a year can't exceed the lesser of the following amounts.

The excess of the participant's compensation over the salary reduction contributions that aren't catch-up contributions.

You are generally required to match each employee's salary reduction contribution(s) on a dollar-for-dollar basis up to 3% of the employee's compensation, where only employees who have elected to make contributions will receive an employer matching contribution. This requirement doesn't apply if you make nonelective contributions, as discussed later.

In 2023, your employee earned $25,000 and chose to defer 5% of their salary. The net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make 3% matching contributions. The total contribution made for the employee is $2,000, figured as follows.

The total contribution you make for yourself is $5,200, figured as follows.

If you choose a matching contribution less than 3%, the percentage must be at least 1%. You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. You can't choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective.

Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. Only $330,000 of the employee's compensation can be taken into account to figure the contribution limit in 2023 ($345,000 in 2024).

If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year.

In 2023, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make a 2% nonelective contribution. Both of you are under age 50. The total contribution you make for Jane is $4,320, figured as follows.

The total contribution you make for yourself is $6,000, figured as follows.

Using the same facts as in Example 1 above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $14,000, figured as follows.

You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would have otherwise have been payable to the employee in cash. You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions.

You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year.

The due date for making contributions for 2023 for most plans is Monday, April 15, 2024.

Your tax year is the fiscal year ending June 30. Contributions under a SIMPLE IRA plan for calendar year 2023 (including contributions made by the due date for the return for the tax year that ends on June 30, 2024) are deductible in the tax year ending June 30, 2024.

You are a sole proprietor whose tax year is the calendar year. Contributions under a SIMPLE IRA plan for calendar year 2023 (including contributions made by the due date for the return for the 2023 tax year) are deductible in the 2023 tax year.

Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), partnerships deduct them on Form 1065, and corporations deduct them on Form 1120 or 1120-S.

Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership.)

Tax Treatment of Contributions

You can deduct your contributions and your employees can exclude these contributions from their gross income. SIMPLE IRA plan contributions aren't subject to federal income tax withholding. However, salary reduction contributions are subject to social security, Medicare, and FUTA taxes. Matching and nonelective contributions aren't subject to these taxes.

Don’t include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. You must also include them in box 12. Check the “Retirement plan” checkbox in box 13. For more information, see the Form W-2 instructions.

Distributions from a SIMPLE IRA are subject to IRA rules and are generally includible in income for the year received. Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan.

Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 72 (if age 70½ was reached after December 31, 2019).

Early withdrawals are generally subject to a 10% additional tax. However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation.

See Pubs. 590-A and 590-B for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding.

If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan .

SIMPLE 401(k) Plan

You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit, as discussed earlier under SIMPLE IRA Plan. A SIMPLE 401(k) plan is a qualified retirement plan and must generally satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. However, a SIMPLE 401(k) plan isn't subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below.

Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $15,500 for 2023 ($16,000 for 2024). If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $3,500 for 2023 and 2024. See Catch-up contributions , earlier, under Contribution Limits.

You must make either:

Matching contributions up to 3% of compensation for the year, or

Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year.

No other contributions can be made to the trust.

No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan.

The employee's rights to any contributions are nonforfeitable.

No more than $330,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2023 ($345,000 in 2024). Compensation is defined earlier in this chapter.

The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. See Notification Requirement , earlier in this chapter.

Please note that Forms 5304-SIMPLE and 5305-SIMPLE can’t be used to establish a SIMPLE 401(k) plan. To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4.

4. Qualified Plans

Kinds of plans

Qualification rules

Setting up a qualified plan

Minimum funding requirement

Contributions

Employer deduction

Elective deferrals (401(k) plans)

Qualified Roth contribution program

Distributions

Prohibited transactions

Reporting requirements

575 Pension and Annuity Income

3066 Have you had your check-up this year? for Retirement Plans

4222 401(k) Plans for Small Businesses

4530 Designated Roth Accounts under a 401(k), 403(b) or governmental 457(b) plan

4531 401(k) Plan Checklist

4674 Automatic Enrollment 401(k) Plans for Small Businesses

4806 Profit Sharing Plans for Small Businesses

Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc.

1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Schedule C (Form 1040) Profit or Loss From Business

Schedule F (Form 1040) Profit or Loss From Farming

5300 Application for Determination for Employee Benefit Plan

5310 Application for Determination for Terminating Plan

5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

5330 Return of Excise Taxes Related to Employee Benefit Plans

5500 Annual Return/Report of Employee Benefit Plan

5500-EZ Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan

5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan

8717 User Fee for Employee Plan Determination Letter Request

8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits

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

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

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

Kinds of Plans

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

Defined Contribution Plan

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

Although it is called a profit-sharing plan, you don’t actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed, as discussed under Self-employed individual , later). A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan isn't fixed. An employer may even make no contribution to the plan for a given year.

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

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

Contributions to a money purchase pension plan are fixed and aren't based on your business profits. For example, a money purchase pension plan may require that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income).

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

Qualification Rules

To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. The following is a brief overview of important qualification rules that generally haven't yet been discussed. It isn't intended to be all-inclusive. See Setting Up a Qualified Plan , later.

Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the exclusive benefit of employees and their beneficiaries. As a general rule, the assets can't be diverted to the employer.

To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following.

50 employees.

The greater of:

40% of all employees, or

Two employees.

Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees.

Your plan must not provide for contributions or benefits that are more than certain limits. The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. These limits are discussed later in this chapter under Contributions.

Your plan must satisfy certain requirements regarding when benefits vest. A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. A benefit is nonforfeitable if it can't be lost upon the happening, or failure to happen, of any event. Special rules apply to forfeited benefit amounts. In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions.

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

In general, an employee must be allowed to participate in your plan if they meet both the following requirements.

Has at least 1 year of service (2 years if the plan isn't a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all their accrued benefit).

See Elective Deferrals )401(k) Plans , later, for additional information regarding conditions of participation in a 401(k) plan.

A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. These rules include those in all the following areas.

Nondiscrimination in coverage, contributions, and benefits.

Minimum age and service requirements.

Limits on contributions and benefits.

Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods.

The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan.

The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs.

The plan year in which the participant separates from service.

Your plan can provide for payment of retirement benefits before the normal retirement age. If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if the participant meets both the following requirements.

Satisfies the service requirement for the early retirement benefit.

Separates from service with a nonforfeitable right to an accrued benefit. The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met.

Special rules require minimum annual distributions from qualified plans, generally beginning after age 72 (if age 70½ was reached after December 31, 2019). See Required Distributions under Distributions , later.

Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms.

A qualified joint and survivor annuity for a vested participant who doesn't die before the annuity starting date.

A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse.

The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met.

The participant doesn't choose benefits in the form of a life annuity.

The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies.

The plan isn't a direct or indirect transferee of a plan that must provide automatic survivor benefits.

If automatic survivor benefits are required for a spouse under a plan, they must consent to a loan that uses as security the accrued benefits in the plan.

Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. The plan must also allow the participant to withdraw the waiver. The spouse's consent must be witnessed by a plan representative or notary public.

A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit isn't greater than $5,000 ($7,000 in 2024).

However, the distribution can't be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. If the present value is greater than $5,000 ($7,000 in 2024), the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit.

Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits.

A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. See Section 402(f) notice under Distributions , later, for more details.

Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit they would have been entitled to just before the merger, etc. (if the plan had then terminated).

Your plan must provide that a participant's or beneficiary's benefits under the plan can't be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgments or settlements against the participant for violations of plan rules.

A loan from the plan (not from a third party) to a participant or beneficiary isn't treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. A disqualified person is defined later in this chapter under Prohibited Transactions.

Compliance with a QDRO doesn't result in a prohibited assignment or alienation of benefits.

Payments to an alternate payee under a QDRO before the participant reaches age 59½ aren't subject to the 10% additional tax that would otherwise apply under certain circumstances. Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity.

Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. This rule also applies to plans supplementing the benefits provided by other federal or state laws.

If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. See Limit on Elective Deferrals , later in this chapter.

A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees.

A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan.

Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. These qualification requirements for top-heavy plans are explained in section 416 and its regulations.

The top-heavy plan requirements don't apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. QACAs (discussed later) also aren't subject to top-heavy requirements.

Setting up a Qualified Plan

There are two basic steps in setting up a qualified plan. First, you adopt a written plan. Then, you invest the plan assets.

You, the employer, are responsible for setting up and maintaining the plan.

To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year. If you are a sole proprietor with a new section 401(k) plan that you adopted after the end of the taxable year that ends after or with the first plan year, and you are the only participant, your elective deferrals must be paid to the plan before the time for filing your return for that taxable year (determined without regard to any extensions) in order for the elective deferrals to be treated as having been made by the end of the first plan year.

Adopting a Written Plan

You must adopt a written plan. The plan can be an IRS pre-approved plan offered by a sponsoring organization. Or it can be an individually designed plan.

To qualify, the plan you set up must be in writing and must be communicated to your employees. The plan's provisions must be stated in the plan. It isn't sufficient for the plan to merely refer to a requirement of the Internal Revenue Code.

Most qualified plans follow a standard form of plan approved by the IRS. An IRS pre-approved plan is a plan, including a plan covering self-employed individuals, that is made available by a provider for adoption by employers. Under the prior IRS pre-approved plan program, a plan could be a master plan, a prototype plan, or a volume submitter plan. Under the restructured program, the three plan types were combined into one type called a pre-approved plan. IRS pre-approved plans include both standardized plans and nonstandardized plans. An IRS pre-approved plan may use a single funding medium, for example, a trust or custodial account document, for the joint use of all adopting employers or separate funding mediums established for each adopting employer. An IRS pre-approved plan may consist of an adoption agreement plan or a single document plan. For more information about IRS pre-approved plans, see Revenue Procedure 2017-41, 2017-29 I.R.B. 92, available at IRS.gov/irb/2017-29_IRB#RP-2017-41 .

The following organizations can generally provide IRS pre-approved plans.

Banks (including some savings and loan associations and federally insured credit unions).

Trade or professional organizations.

Insurance companies.

Mutual funds.

Third-party administrators.

If you prefer, you can set up an individually designed plan to meet specific needs. Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. You may need professional help for this. See Revenue Procedure 2024-4, 2024-1 I.R.B. 160, available at IRS.gov/irb/2024-4_IRB , as annually updated, that may help you decide whether to apply for approval.

The fee mentioned earlier for requesting a determination letter doesn't apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. At least one of them must be a non-highly compensated employee participating in the plan. The fee doesn't apply to requests made by the later of the following dates.

The end of the fifth plan year the plan is in effect.

The end of any remedial amendment period for the plan that begins within the first 5 plan years.

For more information about whether the user fee applies, see Revenue Procedure 2020-4, 2020-1 I.R.B. 148, available at IRS.gov/irb/2020-01_IRB , as may be annually updated; Notice 2017-1, 2017-2 I.R.B. 367, available at IRS.gov/irb/2017-02_IRB ; and Form 8717.

Investing Plan Assets

In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets.

You can establish a trust or custodial account to invest the funds.

You, the trust, or the custodial account can buy an annuity contract from an insurance company. Life insurance can be included only if it is incidental to the retirement benefits.

You set up a trust by a legal instrument (written document). You may need professional help to do this.

You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee.

You don't need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. If anyone other than a trustee holds them, however, the contracts or certificates must state they aren't transferable.

For information on other important plan requirements, see Qualification Rules , earlier in this chapter.

Minimum Funding Requirement

In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. For information on this funding requirement, see section 430 and its regulations.

If your plan is a defined benefit plan subject to the minimum funding requirements, you must generally make quarterly installment payments of the required contributions. If you don't pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment.

The due dates for the installments are 15 days after the end of each quarter. For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year).

Each quarterly installment must be 25% of the required annual payment.

Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8½ months after the end of that year.

A qualified plan is generally funded by your contributions. However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. See Employee Contributions and Elective Deferrals , later.

You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year.

You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. Your net earnings must be from your personal services, not from your investments. If you have a net loss from self-employment, you can't make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation.

Employer Contributions

There are certain limits on the contributions and other annual additions you can make each year for plan participants. There are also limits on the amount you can deduct. See Deduction Limits , later.

Limits on Contributions and Benefits

Your plan must provide that contributions or benefits can't exceed certain limits. The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan.

For 2023, the annual benefit for a participant under a defined benefit plan can't exceed the lesser of the following amounts.

100% of the participant's average compensation for their highest 3 consecutive calendar years.

$265,000 for 2023 ($275,000 for 2024).

For 2023, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant can't exceed the lesser of the following amounts.

100% of the participant's compensation.

$66,000 for 2023 ($69,000 for 2024).

Catch-up contributions (discussed later under Limit on Elective Deferrals ) aren't subject to the above limit.

Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Even though these employee contributions aren't deductible, the earnings on them are tax free until distributed in later years. Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).

When Contributions Are Considered Made

You generally apply your plan contributions to the year in which you make them. But you can apply them to the previous year if all the following requirements are met.

You make them by the due date of your tax return for the previous year (plus extensions).

The plan was established by the end of the previous year.

The plan treats the contributions as though it had received them on the last day of the previous year.

You do either of the following.

You specify in writing to the plan administrator or trustee that the contributions apply to the previous year.

You deduct the contributions on your tax return for the previous year. A partnership shows contributions for partners on Form 1065.

Your promissory note made out to the plan isn't a payment that qualifies for the deduction. Also, issuing this note is a prohibited transaction subject to tax. See Prohibited Transactions , later.

Employer Deduction

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

Deduction Limits

The deduction limit for your contributions to a qualified plan depends on the kind of plan you have.

The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) can't be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. See Deduction Limit for Self-Employed Individuals , later.

When figuring the deduction limit, the following rules apply.

Elective deferrals (discussed later) aren't subject to the limit.

Compensation includes elective deferrals.

The maximum compensation that can be taken into account for each employee in 2023 is $330,000 ($345,000 in 2024).

The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Consequently, an actuary must figure your deduction limit.

If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Compensation is your net earnings from self-employment, defined in chapter 1. This definition takes into account both the following items.

The deduction for contributions on your behalf to the plan.

The deductions for your own contributions and your net earnings depend on each other. For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Then, figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership.)

If you contribute more to a plan than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. See Deduction Limit for Self-Employed Individuals , earlier. The amount you carry over and deduct may be subject to the excise tax discussed next.

Table 4-1. Carryover of Excess Contributions Illustrated Profit-Sharing Plan illustrates the carryover of excess contributions to a profit-sharing plan.

Excise Tax for Nondeductible (Excess) Contributions

If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs.

The 10% excise tax doesn't apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference isn't subject to this excise tax. See Minimum Funding Requirement , earlier.

You must report the tax on your nondeductible contributions on Form 5330. Form 5330 includes a computation of the tax. See the separate instructions for completing the form.

Elective Deferrals (401(k) Plans)

Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. A plan with this type of arrangement is popularly known as a 401(k) plan. (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business.) This contribution is called an elective deferral because participants choose (elect) to defer receipt of the money.

In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans.

A profit-sharing plan.

A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date.

A partnership can have a 401(k) plan.

Effective for plan years beginning after December 31, 2020, a 401(k) plan can’t require, as a condition of participation, that an employee complete a period of service that extends beyond the close of the earlier of (1) 1 year of service, or (2) the first period of 3 consecutive 12‑month periods (excluding 12-month periods beginning before January 1, 2021) during each of which the employee has completed at least 500 hours of service. Effective for plan years beginning after December 31, 2024, 3 consecutive 12-month periods are reduced to 2 consecutive 12‑month periods.

If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions .

You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. These are called nonelective contributions.

No more than $330,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2023. This limit is $345,000 for 2024.

If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. A SIMPLE 401(k) plan isn't subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3.

Certain rules apply to distributions from 401(k) plans. See Distributions From 401(k) Plans , later.

There is a limit on the amount an employee can defer each year under these plans. This limit applies without regard to community property laws. Your plan must provide that your employees can't defer more than the limit that applies for a particular year. The basic limit on elective deferrals is $22,500 for 2023 and increases to $23,000 for 2024. This limit applies to all salary reduction contributions and elective deferrals. If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income.

A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit is $7,500 for 2023 and 2024. Elective deferrals aren't treated as catch-up contributions for 2023 until they exceed the $22,500 limit ($23,000 limit for 2024), the ADP test limit of section 401(k)(3), or the plan limit (if any). However, the catch-up contributions a participant can make for a year can't exceed the lesser of the following amounts.

Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution.

Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. Elective deferrals are included in wages for social security, Medicare, and FUTA taxes.

Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals.

Don't include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. You must also include them in box 12. Check the “Retirement plan” checkbox in box 13. For more information, see the Form W-2 instructions.

Automatic Enrollment

Your 401(k) plan can have an automatic enrollment feature. Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on their behalf unless the employee affirmatively chooses not to have their pay reduced or chooses to have it reduced by a different percentage. These contributions are elective deferrals. An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). For more information, see Pub. 4674.

Under an EACA, a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). There is no required deferral percentage.

Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met.

The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA.

The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon.

If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. The additional 10% tax on early distributions won't apply to the distribution.

Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of their rights and obligations under the EACA. The notice must include an explanation of the employee's right to elect not to have elective contributions made on their behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. The notice must also explain how contributions will be invested in the absence of an investment election by the employee.

A QACA is a type of safe harbor plan. It contains an automatic enrollment feature, and mandatory employer contributions are required. If your plan includes a QACA, it won't be subject to the ADP test (discussed later) or the top-heavy requirements (discussed earlier). Additionally, your plan won't be subject to the ACP test if certain additional requirements are met. Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). If an employee doesn't make an affirmative election, the default deferral percentage must meet the following conditions.

It must be applied uniformly.

It must not exceed 10%. (After December 31, 2019, the maximum default deferral percentage increases to 15%.)

It must be at least 3% in the first plan year it applies to an employee and through the end of the following year.

It must increase to at least 4% in the following plan year.

It must increase to at least 5% in the following plan year.

It must increase to at least 6% in subsequent plan years.

Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms.

Matching contributions. You must make matching contributions on behalf of each non-highly compensated employee in the following amounts.

An amount equal to 100% of elective deferrals, up to 1% of compensation.

An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation.

Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees.

Nonelective contributions. You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation.

All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. These contributions are subject to special withdrawal restrictions, discussed later.

Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA within a reasonable period before each plan year. The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA.

If you make nonelective contributions under the QACA and you either don't make any matching contributions or you make matching contributions that are intended to satisfy the ACP test, then this QACA notice requirement doesn’t apply. However, this exception doesn’t apply to the EACA notice requirement, earlier.

Treatment of Excess Deferrals

If the total of an employee's deferrals is more than the limit for 2023, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. The employee must notify the plan by April 15, 2024 (or an earlier date specified in the plan), of the amount to be paid from each plan. The plan must then pay the employee that amount, plus earnings on the amount through the end of 2023, by April 15, 2024.

If the employee takes out the excess deferral by April 15, 2024, it isn't reported again by including it in the employee's gross income for 2024. However, any income earned in 2023 on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution isn't subject to the additional 10% tax on early distributions.

If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income.

Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans.

If the employee doesn't take out the excess deferral by April 15, 2024, the excess, though taxable in 2023, isn't included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified.

Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498.

The law provides tests to detect discrimination in a plan. If tests, such as the ADP test (see section 401(k)(3)) and the ACP test (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Report the tax on Form 5330. The ADP test doesn't apply to a safe harbor 401(k) plan (discussed next) or to a QACA. Also, the ACP test doesn't apply to these plans if certain additional requirements are met.

The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test.

See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).

If you meet the requirements for a safe harbor 401(k) plan, you don't have to satisfy the ADP test or the ACP test if certain additional requirements are met. For your plan to be a safe harbor plan, you must meet the following conditions.

Matching or nonelective contributions. You must make matching or nonelective contributions according to one of the following formulas.

Matching contributions. You must make matching contributions according to the following rules.

You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation.

You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation.

The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees.

Nonelective contributions. You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation.

These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions.

Notice requirement. You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan within a reasonable period before the plan year.

If you make nonelective contributions and you either don't make any matching contributions or you make matching contributions that are intended to satisfy the ACP test, then this notice requirement doesn’t apply. However, this exception doesn’t apply to the EACA notice requirement, earlier.

The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan.

Qualified Roth Contribution Program

Under this program, an eligible employee can designate all or a portion of their elective deferrals as after-tax Roth contributions. These contributions, which are made in lieu of elective deferrals, are designated Roth contributions. Unlike other elective deferrals, designated Roth contributions aren't excluded from an employee's gross income.

In addition, an eligible employee may be permitted to designate certain nonelective contributions or matching contributions as Roth contributions. These contributions are also includible in an employee's gross income.

Designated Roth contributions, designated Roth nonelective contributions, and designated Roth matching contributions must be maintained in a separate Roth account. However, qualified distributions from a Roth account are excluded from an employee's gross income.

Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2023, $22,500 if under age 50 and $30,000 if age 50 or over; amounts increase in 2024 to $23,000 and $30,500, respectively) less the total amount of the employee's elective deferrals not designated as Roth contributions.

Designated Roth contributions are treated the same as pre-tax elective deferrals for most purposes, including:

The annual individual elective deferral limit (total of all designated Roth contributions and traditional, pre-tax elective deferrals) of $22,500 for 2023 ($23,000 for 2024), with an additional $7,500 if age 50 or over;

Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $66,000 for 2023 ($69,000 for 2024);

Nondiscrimination testing;

Required distributions; and

Elective deferrals not taken into account for purposes of deduction limits.

Qualified Distributions

A qualified distribution is a distribution that is made after the employee's nonexclusion period and:

On or after the employee reaches age 59½,

On account of the employee's being disabled, or

On or after the employee's death.

An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years.

The first tax year in which a contribution was made to their Roth account in the plan.

If a rollover contribution was made to the employee's designated Roth account from a designated Roth account previously established for the employee under another plan, then the first tax year the employee made a designated Roth contribution to the previously established account.

A rollover from another account can be made to a designated Roth account in the same plan. For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I.R.B. 872, available at IRS.gov/irb/2010-51_IRB/ar11.html ; and Notice 2013-74, 2013-52 I.R.B. 819, available at IRS.gov/pub/irs-irbs/irb13-52_IRB . A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. Rollover amounts don't apply toward the annual deferral limit.

You must report a designated Roth contribution on Form W-2. See the Form W-2 instructions for detailed information.

You must report a designated Roth nonelective contribution or a designated Roth matching contribution on Form 1099-R for the year in which the contribution is allocated. You must also report a distribution from a Roth account on Form 1099-R. See the Form 1099-R instructions

Amounts paid to plan participants from a qualified plan are called distributions. Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Also, certain loans may be treated as distributions. See Loans Treated as Distributions in Pub. 575.

Required Distributions

A qualified plan must provide that each participant will either:

Receive their entire interest (benefits) in the plan by the required beginning date (defined later), or

Begin receiving regular periodic distributions by the required beginning date in annual amounts figured to distribute the participant's entire interest (benefits) over their life expectancy or over the joint life expectancies of the participant and the designated beneficiary (or over a shorter period).

These distribution rules apply individually to each qualified plan. You can't satisfy the requirement for one plan by taking a distribution from another. The plan must provide that these rules override any inconsistent distribution options previously offered.

If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. This minimum is figured by dividing the account balance by the applicable life expectancy. The plan administrator can use the life expectancy tables in Pub. 590-B for this purpose. For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Pub. 575.

Generally, each participant must receive their entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date.

A participant must begin to receive distributions from their qualified retirement plan by April 1 of the first year after the later of the following years.

The calendar year in which the participant reaches age 72 (if age 70½ was reached after December 31, 2019).

The calendar year in which he or she retires from employment with the employer maintaining the plan.

If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 72 (if age 70½ was reached after December 31, 2019). For more information, see Tax on Excess Accumulation in Pub. 575 about distributions prior to 2020.

Individuals who reach age 72 after December 31, 2022, may delay receiving their required minimum distribution until April 1 of the year following the year in which they reach age 73.

The distribution required to be made by April 1 is treated as a distribution for the starting year. (The starting year is the year in which the participant meets (1) or (2) above, whichever applies.) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31).

See Pub. 575 for the special rules covering distributions made after the death of a participant.

Distributions From 401(k) Plans

Generally, distributions can't be made until one of the following occurs.

The employee retires, dies, becomes disabled, or otherwise severs employment.

The plan ends and no other defined contribution plan is established or continued.

In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 59½ or suffers financial hardship. For the rules on hardship distributions, including the limits on them, see Regulations section 1.401(k)-1(d).

The employee becomes eligible for a qualified reservist distribution (defined next).

A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. All or part of a qualified reservist distribution can be repaid to an IRA. The additional 10% tax on early distributions doesn't apply to a qualified reservist distribution.

Tax Treatment of Distributions

Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. Because most recipients have no cost basis, a distribution is generally fully taxable. An exception is a distribution that is properly rolled over as discussed under Rollover next.

The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Pub. 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution.

A recipient of a distribution from a designated Roth account will have a cost basis because designated Roth contributions are made on an after-tax basis. Also, a distribution from a designated Roth account is entirely tax free if certain conditions are met. See Qualified distributions under Qualified Roth Contribution Program , earlier.

The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. However, it may be subject to withholding, as discussed under Withholding requirement , later. A rollover can also be made to a Roth IRA, in which case any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account.

This is a distribution of all or any part of an employee's balance in a qualified retirement plan that isn't any of the following.

An RMD. See Required Distributions , earlier.

Any of a series of substantially equal payments made at least once a year over any of the following periods.

The employee's life or life expectancy.

The joint lives or life expectancies of the employee and beneficiary.

A period of 10 years or longer.

A hardship distribution.

Loans treated as distributions.

Dividends on employer securities.

The cost of any life insurance coverage provided under a qualified retirement plan.

Similar items designated by the IRS in published guidance. See, for example, the Instructions for Forms 1099-R and 5498.

You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. If the rollover is to an IRA, the transfer can be made by any rollover method.

A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee).

For more information about rollovers, see Rollovers in Pubs. 575 and 590-A. For rules on rolling over distributions that contain nontaxable amounts, see Notice 2014-54, 2014-41 I.R.B. 670, available at IRS.gov/irb/2014-41_IRB/ar11.html . For guidance on rolling money into a qualified plan, see Revenue Ruling 2014-9, 2014-17 I.R.B. 975, available at IRS.gov/irb/2014-17_IRB/ar05.html .

If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax.

If, instead of having the distribution paid to them, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover ), no withholding is required.

If the distribution isn't an eligible rollover distribution, defined earlier, the 20% withholding requirement doesn't apply. Other withholding rules apply to distributions that aren't eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). However, the participant can choose not to have tax withheld from these distributions. If the participant doesn't make this choice, the following withholding rules apply.

For periodic distributions, withholding is based on their treatment as wages.

For nonperiodic distributions, 10% of the taxable part is withheld.

If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. For more information, see Withholding Tax and Estimated Tax in Pub. 575.

If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions.

That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer.

That tax will be withheld from the distribution if it isn't directly transferred to an eligible retirement plan.

That the distribution won't be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution.

Certain other rules that may be applicable.

Notice 2020-62, 2020-35 I.R.B. 476, available at, IRS.gov/irb/2023–15_IRB , contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions.

The notice must generally be provided no less than 30 days and no more than 180 days before the date of a distribution.

The written notice must be provided individually to each distributee of an eligible rollover distribution. Posting of the notice isn't sufficient. However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. See Regulations section 1.401(a)-21.

Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. The tax won't be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect.

Tax on Early Distributions

If a distribution is made to an employee under the plan before they reache age 59½, the employee may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that the employee must include in income.

The 10% tax won't apply if distributions before age 59½ are made in any of the following circumstances.

Made to a beneficiary (or to the estate of the employee) on or after the death of the employee.

Made due to the employee having a qualifying disability.

Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and their designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.)

Made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.

Made to an alternate payee under a QDRO.

Made to an employee for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the employee itemizes deductions).

Timely made to reduce excess contributions under a 401(k) plan.

Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).

Timely made to reduce excess elective deferrals.

Made because of an IRS levy on the plan.

Made as a qualified reservist distribution.

Made as a permissible withdrawal from an EACA.

Made as a qualified birth or adoption distribution.

Made as a qualified disaster distribution.

Made to an individual who has been certified by a physician as having a terminal illness.

Timely made to reduce excess IRA contributions pursuant to section 408(d)(4).

To report the tax on early distributions, file Form 5329. See the form instructions for additional information about this tax.

Tax on Excess Benefits

If you are or have been a 5% owner of the business maintaining the plan, amounts you receive at any age that are more than the benefits provided for you under the plan formula are subject to an additional tax. This tax also applies to amounts received by your successor. The tax is 10% of the excess benefit includible in income.

To determine whether or not you are a 5% owner, see section 416.

Include on Schedule 2 (Form 1040), line 8, any tax you owe for an excess benefit. Check box 8c and, on the line next to it, enter “Sec. 72(m)(5)” and enter the amount of the tax.

The amount subject to the additional tax isn't eligible for the optional methods of figuring income tax on a lump-sum distribution. The optional methods are discussed under Lump-Sum Distributions in Pub. 575.

A 20% or 50% excise tax is generally imposed on the cash and fair market value of other property an employer receives directly or indirectly from a qualified plan. If you owe this tax, report it on Schedule I of Form 5330. See the form instructions for more information.

An employer or the plan will have to pay an excise tax if both of the following occur.

A defined benefit plan or money purchase pension plan is amended to provide for a significant reduction in the rate of future benefit accrual.

The plan administrator fails to notify the affected individuals and the employee organizations representing them of the reduction in writing.

A plan amendment that eliminates or reduces any early retirement benefit or retirement-type subsidy reduces the rate of future benefit accrual.

The notice must be written in a manner calculated to be understood by the average plan participant and must provide enough information to allow each individual to understand the effect of the plan amendment. It must be provided within a reasonable time before the amendment takes effect.

The tax is $100 per participant or alternate payee for each day the notice is late. The total tax can't be more than $500,000 during the tax year. It is imposed on the employer or, in the case of a multiemployer plan, on the plan.

Prohibited Transactions

Prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law. (However, see Exemption later.) If you are a disqualified person who takes part in a prohibited transaction, you must pay a tax (discussed later).

Prohibited transactions generally include the following transactions.

A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person.

Any act of a fiduciary by which they deal with plan income or assets in the fiduciary own interest.

The receipt of consideration by a fiduciary for their own account from any party dealing with the plan in a transaction that involves plan income or assets.

Any of the following acts between the plan and a disqualified person.

Selling, exchanging, or leasing property.

Lending money or extending credit.

Furnishing goods, services, or facilities.

Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction doesn't take place if you are a disqualified person and receive any benefit to which you are entitled as a plan participant or beneficiary. However, the benefit must be figured and paid under the same terms as for all other participants and beneficiaries. For other transactions that are exempt, see section 4975 and the related regulations.

You are a disqualified person if you are any of the following.

A fiduciary of the plan.

A person providing services to the plan.

An employer, any of whose employees are covered by the plan.

An employee organization, any of whose members are covered by the plan.

Any direct or indirect owner of 50% or more of any of the following.

The combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of a corporation that is an employer or employee organization described in (3) or (4).

The capital interest or profits interest of a partnership that is an employer or employee organization described in (3) or (4).

The beneficial interest of a trust or unincorporated enterprise that is an employer or an employee organization described in (3) or (4).

A member of the family of any individual described in (1), (2), (3), or (5). (A member of a family is the spouse, ancestor, or lineal descendant, or any spouse of a lineal descendant.)

A corporation, partnership, trust, or estate of which (or in which) any direct or indirect owner described in (1) through (5) holds 50% or more of any of the following.

The combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation.

The capital interest or profits interest of a partnership.

The beneficial interest of a trust or estate.

An officer, a director (or an individual having powers or responsibilities similar to those of officers or directors), a 10%-or more shareholder, or a highly compensated employee (earning 10%-or-more of the yearly wages of an employer) of a person described in (3), (4), (5), or (7).

A 10%-or more (in capital or profits) partner or joint venturer of a person described in (3), (4), (5), or (7).

Any disqualified person, as described in (1) through (9) above, who is a disqualified person with respect to any plan to which a section 501(c)(22) trust is permitted to make payments under section 4223 of ERISA.

Tax on Prohibited Transactions

The initial tax on a prohibited transaction is 15% of the amount involved for each year (or part of a year) in the tax period. If the transaction isn't corrected within the tax period, an additional tax of 100% of the amount involved is imposed. For information on correcting the transaction, see Correcting a prohibited transaction , later.

Both taxes are payable by any disqualified person who participated in the transaction (other than a fiduciary acting only as such). If more than one person takes part in the transaction, each person can be jointly and severally liable for the entire tax.

The amount involved in a prohibited transaction is the greater of the following amounts.

The money and fair market value of any property given.

The money and fair market value of any property received.

If services are performed, the amount involved is any excess compensation given or received.

The tax period starts on the transaction date and ends on the earliest of the following days.

The day the IRS mails a notice of deficiency for the tax.

The day the IRS assesses the tax.

The day the correction of the transaction is completed.

Pay the 15% tax with Form 5330.

If you are a disqualified person who participated in a prohibited transaction, you can avoid the 100% tax by correcting the transaction as soon as possible. Correcting the transaction means undoing it as much as you can without putting the plan in a worse financial position than if you had acted under the highest fiduciary standards.

If the prohibited transaction isn't corrected during the tax period, you usually have an additional 90 days after the day the IRS mails a notice of deficiency for the 100% tax to correct the transaction. This correction period (the tax period plus the 90 days) can be extended if either of the following occurs.

The IRS grants reasonable time needed to correct the transaction.

You petition the Tax Court.

You may have to file an annual return/report by the last day of the seventh month after the plan year ends. See the following list of forms to choose the right form for your plan.

Form 5500-SF is a simplified annual reporting form. You can use Form 5500-SF if the plan meets all the following conditions.

The plan is a small plan (generally, fewer than 100 participants at the beginning of the plan year).

The plan meets the conditions for being exempt from the requirements that the plan's books and records be audited by an independent qualified public accountant.

The plan has 100% of its assets invested in certain secure investments with a readily determinable fair value.

The plan holds no employer securities.

The plan isn't a multiemployer plan.

If your plan is required to file an annual return/report but isn't eligible to file Form 5500-SF, the plan must file Form 5500 or 5500-EZ, as appropriate. For more details, see the Instructions for Form 5500-SF.

You may be able to use Form 5500-EZ if the plan is a one-participant plan, as defined below.

Your plan is a one-participant plan if either of the following is true.

The plan covers only you (or you and your spouse) and you (or you and your spouse) own the entire business (whether incorporated or unincorporated).

The plan covers only one or more partners (or partner(s) and spouse(s)) in a business partnership.

If your one-participant plan (or plans) had total assets of $250,000 or less at the end of the plan year, then you don't have to file Form 5500-EZ for that plan year. All plans should file a Form 5500-EZ for the final plan year to show that all plan assets have been distributed.

You are a sole proprietor and your plan meets all the conditions for filing Form 5500-EZ. The total plan assets are more than $250,000. You must file Form 5500-EZ or 5500-SF.

If you don't meet the requirements for filing Form 5500-EZ or 5500-SF and a return/report is required, you must file Form 5500.

All Forms 5500 and 5500-SF are required to be filed electronically with the Department of Labor through EFAST2. One-participant plans have the option of filing Form 5500-SF electronically rather than filing a Form 5500-EZ on paper with the IRS. For more information, see the instructions for Forms 5500 and 5500-SF, available at EFAST.dol.gov .

If you terminate your plan and are the plan sponsor or plan administrator, you can file Form 5310. Your application must be accompanied by the appropriate user fee and Form 8717.

Form 8955-SSA is used to report participants who are no longer covered by the plan but have a deferred vested benefit under the plan.

Form 8955-SSA is filed with the IRS and can be filed electronically through the FIRE (Filing Information Returns Electronically) system.

For more information about reporting requirements, see the forms and their instructions.

5. Table and Worksheets for the Self-Employed

As discussed in chapters 2 and 4, if you are self-employed, you must use the rate table or rate worksheet and deduction worksheet to figure your deduction for contributions you made for yourself to a SEP-IRA or qualified plan.

First, use either the rate table or rate worksheet to find your reduced contribution rate. Then, complete the deduction worksheet to figure your deduction for contributions.

If your plan's contribution rate is a whole percentage (for example, 12% rather than 12½%), you can use the Rate Table for Self-Employed on the next page to find your reduced contribution rate. Otherwise, use the Rate Worksheet for Self-Employed provided below.

First, find your plan contribution rate (the contribution rate stated in your plan) in Column A of the table. Then, read across to the rate under Column A. Enter the rate from Columnin step 4 of the Deduction Worksheet for Self-Employed on this page.

You are a sole proprietor with no employees. If your plan's contribution rate is 10% of a participant's compensation, your rate is 0.090909. Enter this rate on step 4 of the Deduction Worksheet for Self-Employed on this page.

Deduction Worksheet for Self-Employed

If your plan's contribution rate isn't a whole percentage (for example, 10½%), you can't use the Rate Table for Self-Employed. Use the following worksheet instead.

Rate Worksheet for Self-Employed

Now that you have your self-employed rate from either the rate table or rate worksheet, you can figure your maximum deduction for contributions for yourself by completing the Deduction Worksheet for Self-Employed.

If you reside in a community property state and you are married and filing a separate return, disregard community property laws for step 1 of the Deduction Worksheet for Self-Employed. Enter on step 1 the total net profit you actually earned.

Rate Table for Self-Employed

You are a sole proprietor with no employees. The terms of your plan provide that you contribute 8½% (0.085) of your compensation to your plan. Your net profit from Schedule C (Form 1040), line 31, is $200,000. You have no elective deferrals or catch-up contributions. Your self-employment tax deduction on line 15 of Schedule 1 (Form 1040) is $11,792. See the filled-in portions of both Schedule SE (Form 1040), and Form 1040, later.

You figure your self-employed rate and maximum deduction for employer contributions you made for yourself as follows.

See the filled-in Deduction Worksheet for Self-Employed later.

Portion of Form 1040 and Portion of Schedule SE

Portions of Schedule SE (Form 1040) and Schedule 1 (Form 1040)

Summary: These are portions of Schedule S.E. (Form 1040) and Form 1040 (2004) as pertains to the description in the text. The completed line items are:

Please click here for the text description of the image.

6. How To Get Tax Help

If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away.

After receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment compensation statements (by mail or in a digital format) or other government payment statements (Form 1099-G); and interest, dividend, and retirement statements from banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you qualify for free tax preparation, or hire a tax professional to prepare your return.

Your options for preparing and filing your return online or in your local community, if you qualify, include the following.

Free File. This program lets you prepare and file your federal individual income tax return for free using software or Free File Fillable Forms. However, state tax preparation may not be available through Free File. Go to IRS.gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options.

VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. Go to IRS.gov/VITA , download the free IRS2Go app, or call 800-906-9887 for information on free tax return preparation.

TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. Go to IRS.gov/TCE , download the free IRS2Go app, or call 888-227-7669 for information on free tax return preparation.

MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to MilitaryOneSource (MilitaryOneSource.Mil/Tax ).

Also, the IRS offers Free Fillable Forms, which can be completed online and then e-filed regardless of income.

Go to IRS.gov/Tools for the following.

The Earned Income Tax Credit Assistant ( IRS.gov/EITCAssistant ) determines if you’re eligible for the earned income credit (EIC).

The Online EIN Application ( IRS.gov/EIN ) helps you get an employer identification number (EIN) at no cost.

The Tax Withholding Estimator ( IRS.gov/W4App ) makes it easier for you to estimate the federal income tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

The First-Time Homebuyer Credit Account Look-up ( IRS.gov/HomeBuyer ) tool provides information on your repayments and account balance.

The Sales Tax Deduction Calculator ( IRS.gov/SalesTax ) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040).

IRS.gov/Help : A variety of tools to help you get answers to some of the most common tax questions.

IRS.gov/ITA : The Interactive Tax Assistant, a tool that will ask you questions and, based on your input, provide answers on a number of tax law topics.

IRS.gov/Forms : Find forms, instructions, and publications. You will find details on the most recent tax changes and interactive links to help you find answers to your questions.

You may also be able to access tax information in your e-filing software.

There are various types of tax return preparers, including enrolled agents, certified public accountants (CPAs), accountants, and many others who don’t have professional credentials. If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax preparer is:

Primarily responsible for the overall substantive accuracy of your return,

Required to sign the return, and

Required to include their preparer tax identification number (PTIN).

The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure online W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.

Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our highest priority. We use these tools to share public information with you. Don’t post your social security number (SSN) or other confidential information on social media sites. Always protect your identity when using any social networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.

Youtube.com/irsvideos .

Youtube.com/irsvideosmultilingua .

Youtube.com/irsvideosASL .

The IRS Video portal ( IRSVideos.gov ) contains video and audio presentations for individuals, small businesses, and tax professionals.

You can find information on IRS.gov/MyLanguage if English isn’t your native language.

The IRS is committed to serving taxpayers with limited-English proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), other IRS offices, and every VITA/TCE return site. The OPI Service is accessible in more than 350 languages.

Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp .

Form 9000, Alternative Media Preference, or Form 9000(SP) allows you to elect to receive certain types of written correspondence in the following formats.

Standard Print.

Large Print.

Audio (MP3).

Plain Text File (TXT).

Braille Ready File (BRF).

Go to IRS.gov/DisasterRelief to review the available disaster tax relief.

Go to IRS.gov/Forms to view, download, or print all of the forms, instructions, and publications you may need. Or you can go to IRS.gov/OrderForms to place an order.

Download and view most tax publications and instructions (including the Instructions for Form 1040) on mobile devices as eBooks at IRS.gov/eBooks .

IRS eBooks have been tested using Apple's iBooks for iPad. Our eBooks haven’t been tested on other dedicated eBook readers, and eBook functionality may not operate as intended.

Go to IRS.gov/Account to securely access information about your federal tax account.

View the amount you owe and a breakdown by tax year.

See payment plan details or apply for a new payment plan.

Make a payment or view 5 years of payment history and any pending or scheduled payments.

Access your tax records, including key data from your most recent tax return, and transcripts.

View digital copies of select notices from the IRS.

Approve or reject authorization requests from tax professionals.

View your address on file or manage your communication preferences.

With an online account, you can access a variety of information to help you during the filing season. You can get a transcript, review your most recently filed tax return, and get your adjusted gross income. Create or access your online account at IRS.gov/Account .

This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online account. For more information, go to IRS.gov/TaxProAccount .

The safest and easiest way to receive a tax refund is to e-file and choose direct deposit, which securely and electronically transfers your refund directly into your financial account. Direct deposit also avoids the possibility that your check could be lost, stolen, destroyed, or returned undeliverable to the IRS. Eight in 10 taxpayers use direct deposit to receive their refunds. If you don’t have a bank account, go to IRS.gov/DirectDeposit for more information on where to find a bank or credit union that can open an account online.

Tax-related identity theft happens when someone steals your personal information to commit tax fraud. Your taxes can be affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

The IRS doesn’t initiate contact with taxpayers by email, text messages (including shortened links), telephone calls, or social media channels to request or verify personal or financial information. This includes requests for personal identification numbers (PINs), passwords, or similar information for credit cards, banks, or other financial accounts.

Go to IRS.gov/IdentityTheft , the IRS Identity Theft Central webpage, for information on identity theft and data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, you can learn what steps you should take.

Get an Identity Protection PIN (IP PIN). IP PINs are six-digit numbers assigned to eligible taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your SSN. To learn more, go to IRS.gov/IPPIN .

Go to IRS.gov/Refunds .

Download the official IRS2Go app to your mobile device to check your refund status.

Call the automated refund hotline at 800-829-1954.

Payments of U.S. tax must be remitted to the IRS in U.S. dollars. Digital assets are not accepted. Go to IRS.gov/Payments for information on how to make a payment using any of the following options.

IRS Direct Pay : Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

Debit Card, Credit Card, or Digital Wallet : Choose an approved payment processor to pay online or by phone.

Electronic Funds Withdrawal : Schedule a payment when filing your federal taxes using tax return preparation software or through a tax professional.

Electronic Federal Tax Payment System : Best option for businesses. Enrollment is required.

Check or Money Order : Mail your payment to the address listed on the notice or instructions.

Cash : You may be able to pay your taxes with cash at a participating retail store.

Same-Day Wire : You may be able to do same-day wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

The IRS uses the latest encryption technology to ensure that the electronic payments you make online, by phone, or from a mobile device using the IRS2Go app are safe and secure. Paying electronically is quick, easy, and faster than mailing in a check or money order.

Go to IRS.gov/Payments for more information about your options.

Apply for an online payment agreement ( IRS.gov/OPA ) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

Use the Offer in Compromise Pre-Qualifier to see if you can settle your tax debt for less than the full amount you owe. For more information on the Offer in Compromise program, go to IRS.gov/OIC .

Go to IRS.gov/Form1040X for information and updates.

Go to IRS.gov/WMAR to track the status of Form 1040-X amended returns.

Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

You can now upload responses to all notices and letters using the Document Upload Tool. For notices that require additional action, taxpayers will be redirected appropriately on IRS.gov to take further action. To learn more about the tool, go to IRS.gov/Upload .

You can use Schedule LEP (Form 1040), Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language. You may not immediately receive written communications in the requested language. The IRS’s commitment to LEP taxpayers is part of a multi-year timeline that began providing translations in 2023. You will continue to receive communications, including notices and letters, in English until they are translated to your preferred language.

Keep in mind, many questions can be answered on IRS.gov without visiting an IRS TAC. Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment, so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) Is Here To Help You

TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights .

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

Your problem is causing financial difficulty for you, your family, or your business;

You face (or your business is facing) an immediate threat of adverse action; or

You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

TAS has offices in every state, the District of Columbia, and Puerto Rico . To find your advocate’s number:

Go to TaxpayerAdvocate.IRS.gov/Contact-Us ;

Download Pub. 1546, The Taxpayer Advocate Service Is Your Voice at the IRS, available at IRS.gov/pub/irs-pdf/p1546.pdf ;

Call the IRS toll free at 800-TAX-FORM (800-829-3676) to order a copy of Pub. 1546;

Check your local directory; or

Call TAS toll free at 877-777-4778.

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, report it to TAS at IRS.gov/SAMS . Be sure to not include any personal taxpayer information.

LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, appeals, and tax collection disputes. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee for eligible taxpayers. To find an LITC near you, go to TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134, Low Income Taxpayer Clinic List , at IRS.gov/pub/irs-pdf/p4134.pdf .

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• Open an Account

A SEP IRA is one of the easiest small business retirement plans to set up and maintain. You can make sizable contributions for yourself and any eligible employees. There's little administration, and tax filing isn't required. And you can vary contributions from year to year, skip years, or even make contributions one year and then never again.

If you are self employed with no employees you can open an account here .

If you are a business owner/employer you can open your new plan by downloading the forms below .

What are the fees and commissions?

• $0 account open or maintenance fees. Other account fees, fund expenses, and brokerage commissions may apply 1 .
• Account minimum: $0
• Commissions: $0 per online listed equity trades; 2  $0 per Schwab ETF online trade in your Schwab account 3  

There are no fees to open or maintain your account. Other fees may apply; please see Account Pricing.

What do I get with this SEP IRA?

Every Schwab account comes with one-on-one investment help and guidance. With this account, you'll also get:

• Tax-deductible contributions that vest immediately
• Tax-deferred earnings
• Flexible annual contributions
• High contributions for you
• A way to contribute to eligible employees' accounts
• Retirement planning tools and resources, like our Contribution and Eligibility Calculator to model contributions to both business owners and employees, if applicable.
• 24/7 service and support

How do I contribute?

Once you have established your Schwab SEP IRA plan, you may begin making contributions.

• If you do not have employees, you can contribute to your account online by transferring funds from your Schwab brokerage account into your SEP IRA (login required).
• If you do have employees, you must contribute by mail using our Contribution Transmittal Form . Contributions for employees cannot be made online.

See below for more information .

To learn more about SEP, view here.

Account Pricing

There is no fee to open or maintain an account at Schwab. Our SEP IRA offers:

• Minimum opening deposit: $0
• Trade commissions: $0 per online listed equity trades; 2  $0 per Schwab ETF online trade in your Schwab account 3

Find out more about our  fees and minimums .

Related Questions

Have questions about our SEP IRA? Here are responses to some of the most common questions we hear. If you have a specific question that's not answered here, please call us at  800-435-4000 .

To get detailed instructions see Establish Your Plan, or call us at  800-435-4000  if you have questions.

Employers with no eligible employees: you may use the on-line system to open your plan, upload your employer documents, and set-up your personal SEP account.

Employers with eligible employees:  You must complete the employer paperwork and mail in all the forms.  You must also provide your employees with SEP IRA applications, and return completed paper applications to us, to open all the employee accounts.

A Simplified Employee Pension Plan (SEP IRA) is specifically designed for self-employed individuals and small business owners who want to save for retirement without getting involved in complex plan administration. If you are self-employed, have a side gig, or have few employees, and if you want flexibility in the amount you contribute annually—particularly if you want to make high contributions—a SEP IRA might be right for you.

Almost any type of business is eligible to establish a SEP IRA, from self-employed individuals to multi-person corporations (including sole proprietors, partnerships, S and C corporations, and limited liability companies [LLCs]), tax-exempt organizations, and government agencies.

Employer contributions are tax-deductible. Earnings grow tax-deferred and are not taxed until they are withdrawn.

A SEP IRA is funded with employer contributions only. It does not need to be funded annually, but if you have employees and contribute for yourself, you must contribute for all eligible employees, including those who have terminated employment during the year. Full vesting is immediate.

Employee eligibility - special information for business owners with employees:

• Has reached age 21.
• Has worked a minimum of three of the previous five years.
• And earned at least $750 in the year you are making the contribution for (either 2023 or 2024).
• An employer can also exclude union employees subject to a collective bargaining agreement, as well as non-resident aliens.
• An employer can use less restrictive participation requirements than those listed above but not more restrictive ones. And the employer must also meet all the eligibility requirements listed in their SEP Adoption Agreement.

Use our Contribution and Eligibility Calculator to model which employees may be eligible , as well as contributions to both business owner(s) and employees, if applicable.

Employers may contribute up to 25% of each eligible employee's income, but no more than $69,000 per person for 2024 (or $66,000 if the contribution is for 2023).  The business owner has complete flexibility in contributions, as long as each employee (including the owner) receiving a contribution meets the plan eligibility requirements in the Adoption Agreement. Employers can change the percentage contributed every year, skip years entirely and even contribute one year and then never again. Use our Contribution and Eligibility Calculator to model contributions to both business owners and employees, if applicable.

A SEP IRA can be opened and contributions made until the employer's actual tax-filing deadline, including any extensions.

Plans must be established by the tax-filing deadline of the business (generally April 15, plus extensions) in order to contribute for that tax year. This is also the deadline for annual contributions.

SEP IRAs are easy to set up and maintain, and no tax filing is required. Schwab reports all contributions and end-of-year fair market value on Form 5498 by May 31 each year.

You can start making penalty-free withdrawals from your account after age 59½. If you do not start Required Minimum Distribution (RMD) withdrawals by age 73, you may be subject to pay a penalty. The new SECURE 2.0 reduces the 50% penalty for missing an RMD effective for RMDs in 2023, it does not impact missed RMDs in 2022. Under SECURE 2.0 if you don't take your RMD by the IRS deadline, a 25% excise tax on insufficient or late RMD withdrawals applies. If the RMD is corrected timely, the penalty can be reduced down to 10%. Follow the  IRS guidelines  and consult your tax advisor. There are certain exceptions for which you can withdraw funds before age 59½ without taking a 10% penalty, including a rollover to another IRA, some higher education expenses, qualified first-time home purchase expenses, death, disability, and certain medical expenses, however, income taxes may still be due.

SEP IRA plans (Simplified Employee Pension) are designed to allow small-business owners or the self-employed to make sizable contributions to a retirement plan without filing a tax form. SEP IRAs require little administration. Employers may contribute up to 25% of each eligible employee's income, but no more than $69,000 per person for 2024 (or $66,000 if the contribution is for 2023). The business owner has complete flexibility in contributions, as long as each employee (including the owner) receiving a contribution meets the plan eligibility requirements in the Adoption Agreement. Employers can change the percentage contributed every year, skip years entirely and even contribute one year and then never again. Use our Contribution and Eligibility Calculator to model contributions to both business owners and employees, if applicable.

Rollover or transfer rules for a SEP IRA are the same as traditional IRA plans. That means you can roll over funds to a traditional IRA or any qualified retirement plan, such as a 401(k). Distributions or withdrawals from a SEP IRA are penalty-free after age 59½ and other traditional IRA exceptions to the penalty also apply.  Of course, ordinary income taxes may still be due. If you do not start Required Minimum Distributions (RMDs) by age 73, you pay a penalty of 25% to 10%.

There are certain exceptions for which you can withdraw funds before age 59½ without taking a 10% penalty, including a rollover to another IRA, some higher-education expenses, qualified first-time home purchase expenses, death, disability, and certain medical expenses.

Business Owner Establish Your Plan

Follow these instructions for establishing and contributing to a SEP IRA plan.

• Review the basic plan document , which describes and governs your account, and keep it for your records.
• Mandatory For All Employers: Print and complete the adoption agreement . Retain a copy and return the signed original to Schwab.
• Print and complete your account application . Retain a copy and return the signed original to Schwab.
• Print and complete your employer's agreement . Retain a copy and return the signed original to Schwab.
• Read answers to frequently asked questions about the Schwab SEP IRA.
• Optional: Review the benefits, features, and contribution eligibility of the plan.
• If you are a single owner sole proprietor, you can setup a SEP plan and open a SEP IRA online . You will be required to upload a signed Employer's Agreement and Adoption Agreement during account open. Not a single owner sole proprietor? You can still open the plan by paper application.

Need help? Call us at  800-435-4000 .

What comes next?

After you've done your initial paperwork, here are the next steps.

Download, print, and distribute the following documents to each eligible employee.

Once you have established your Schwab SEP IRA plan, opened your own SEP IRA, and opened SEP IRAs for eligible employees (as applicable), you may begin making contributions.

• Online: If you do not have employees, you can contribute to your account online by transferring funds from your Schwab brokerage account into your SEP IRA (login required). Contributions for employees cannot be made online.
• Each participant's account number (including your own)
• The exact amount to be deposited per account

Be sure your check total matches the total amount of participant contributions. Mail your check and the Contribution Transmittal Form to the nearest Schwab operations center listed below:

Charles Schwab & Co., Inc. P.O. Box 628291 Orlando, FL 32862-8291

Charles Schwab & Co., Inc. P.O. Box 982600 El Paso, TX 79998-2600

Take the next step.

Ready to establish a SEP IRA plan? Get detailed instructions above in Establish Your Plan.

Or call  800-435-4000 .

See all  Schwab accounts .

Ready to get started?

If you are a single owner sole proprietor, you can setup a SEP plan and open a SEP IRA online. You will be required to upload a signed  Employer's Agreement  and  Adoption Agreement  during account open. Not a single owner sole proprietor? Review the Establish Your Plan section above and follow the directions to open the account by paper application.

Understand how to choose which retirement plan fits your business, and money management tips for side gigs and freelance work.

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Choosing a Retirement Solution for Your Small Business

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Starting a retirement savings plan can be easier than most business owners think. What's more, there are many retirement programs that provide tax advantages to both employers and employees.

Experts estimate that Americans will need 70 to 90 percent of their preretirement income to maintain their current standard of living when they stop working. Now is the time for you and your employees to start planning for retirement. As an employer, you have an important role in helping America's workers save.

By starting a retirement savings plan, you will help your employees save for their future. Retirement plans may also help you attract and retain qualified employees, and they offer tax savings to your business. You will help secure your own retirement as well. You can establish a plan even if you are self-employed.

Any Tax Advantages?

A retirement plan has significant tax advantages:

• Employer contributions are deductible from the employer's income,
• Employee contributions (other than Roth contributions) are not taxed until distributed to the employee,
• Money in the plan grows tax-free, and
• Distributions may be eligible for tax-favored rollovers or transfers into other retirement programs.

Any Other Incentives?

It's easy to establish a retirement plan that benefits you, your business and your employees, and there are additional incentives for having a plan:

• High contribution limits so you and your employees can set aside large amounts for retirement;
• "Catch-up" rules that allow employees age 50 and over to set aside additional contributions. The "catch-up" amount varies, depending on the type of plan;
• A tax credit for small employers that enables them to claim a credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or certain other types of retirement plans (more on these later);
• A tax credit for certain low– and moderate-income individuals (including self-employed) who make contributions to their plans ("Saver's Credit"). The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10 percent or as high as 50 percent, depending on the participant's adjusted gross income; and
• A Roth program that can be added to a 401(k) plan to allow participants to make after-tax contributions into separate accounts, providing an additional way to save for retirement. Distributions upon death or disability or after age 59½ from Roth accounts held for 5 years, including earnings, are generally tax-free.

A Few Retirement Facts

Most private-sector retirement vehicles are either Individual Retirement Arrangements (IRAs), defined contribution plans, or defined benefit plans.

People tend to think of an IRA as something that individuals establish on their own, but an employer can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the earnings (or losses) on those funds.

Defined contribution plans are employer-established plans that do not promise a specific benefit at retirement. Instead, employees or their employer (or both) contribute to employees' individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). At retirement, an employee receives the accumulated contributions plus earnings (or minus losses) on the invested contributions.

Defined benefit plans, on the other hand, promise a specified benefit at retirement, for example, $1,000 a month. The amount of the benefit is often based on a set percentage of pay multiplied by the number of years the employee worked for the employer offering the plan. Employer contributions must be sufficient to fund promised benefits.

Small businesses may choose to offer IRAs, defined contribution plans, or defined benefit plans. Many financial institutions and retirement plan practitioners make available one or more of these retirement plans that have been pre-approved by the IRS.

On the following two pages you will find a chart outlining the advantages of each of the most popular types of IRA-based and defined contribution plans and an overview of a defined benefit plan.

The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, signed into law December 29, 2022, amends ERISA regarding retirement plans. This publication has not yet been updated to reflect the SECURE 2.0 Act changes. For updates on the law, visit DOL's website .

Payroll Deduction IRAs

Even if an employer doesn't want to adopt a retirement plan, the employer can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for employees to save. In this type of arrangement, the employee always makes the decisions about whether, when, and how much to contribute to the IRA (up to $6,500 for 2023 and $7,000 for 2024; and $7,500 for 2023 and $8,000 for 2024 if age 50 or older, increasing thereafter).

Some individuals eligible to contribute to an IRA wait until the end of the year to set aside the money and then find that they don't have sufficient funds to do so. Payroll deductions allow employees to plan ahead and save smaller amounts each pay period. Payroll deduction contributions are tax-deductible by the employee, to the same extent as other IRA contributions.

Simplified Employee Pensions (SEPs)

A SEP plan allows employers to set up SEP IRAs for themselves and each of their employees. Employers generally must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. Employer contributions are limited to the lesser of 25 percent of pay or $66,000 for 2023 and $69,000 for 2024. (Note: the dollar amount is indexed for inflation and may increase.) Most employers, including those who are self-employed, can establish a SEP.

SEPs have low start-up and operating costs and can be established using a two-page form (Form 5305-SEP). And you can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary.

SIMPLE IRA Plans

A SIMPLE IRA plan is a savings option for employers with 100 or fewer employees.

This plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions. Under SIMPLE IRA plans, employees can set aside up to $15,500 in 2023 and $16,000 in 2024 ($19,000 in 2023 and $19,500 in 2024 if age 50 or older) by payroll deduction (subject to cost-of-living adjustments in later years). Employers must either match employee contributions dollar for dollar – up to 3 percent of an employee's compensation – or make a fixed contribution of 2 percent of compensation for all eligible employees, even if the employees choose not to contribute.

If your plan provides for it, you can choose to automatically enroll employees in SIMPLE IRA plans as long as the employees are allowed to choose not to have salary reduction contributions made to their SIMPLE IRAs or to have salary reduction contributions made in a different amount.

SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs (to hold contributions made under the SIMPLE IRA plan) are established for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low.

You may have your employees set up their own SIMPLE IRAs at a financial institution of their choice or have all SIMPLE IRAs maintained at one financial institution you choose.

Employees can decide how and where the money will be invested, and keep their SIMPLE IRAs even when they change jobs.

Profit Sharing Plans

Employer contributions to a profit sharing plan can be discretionary. Depending on the plan terms, there is often no set amount that an employer needs to contribute each year.

If you do make contributions, you will need to have a set formula for determining how the contributions are allocated among plan participants. The funds are accounted separately for each employee.

Profit sharing plans can vary greatly in their complexity. Many financial institutions offer prototype profit sharing plans that can reduce the administrative burden on individual employers.

401(k) Plans

401(k) plans have become a widely accepted retirement savings vehicle for small businesses. An estimated 60 million U.S. workers participate in 401(k) plans that have total assets of about $6.9 trillion.

With a 401(k) plan, employees can choose to defer a portion of their salary. So instead of receiving that amount in their paycheck today, the employees can contribute the amount into a 401(k) plan sponsored by their employer. These deferrals are accounted separately for each employee. Deferrals are made on a pretax basis but, if the plan allows, the employee can choose to make them on an after-tax (Roth) basis. Many 401(k) plans provide for employer matching or other contributions. The Federal Government and most state governments do not tax employer contributions and pretax deferrals (plus earnings) until distributed.

Like most profit sharing plans, 401(k) plans can vary significantly in their complexity. However, many financial institutions and other organizations offer IRS pre-approved 401(k) plans, which can greatly lessen the administrative burden of establishing and maintaining these plans.

Safe Harbor 401(k) Plans

A safe harbor 401(k) plan is intended to encourage plan participation among rank-and-file employees and to ease the administrative burden by eliminating the tests ordinarily applied under a traditional 401(k) plan. This plan is ideal for businesses with highly compensated employees whose contributions would be limited in a traditional 401(k) plan.

A safe harbor 401(k) plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions. In a safe harbor 401(k) plan, the mandatory employer contribution is always 100 percent vested.

Automatic Enrollment 401(k) Plans

Automatic enrollment 401(k) plans can increase plan participation among rank-and-file employees and make it more likely that the plan will pass the tests ordinarily required under a traditional 401(k) plan. Some automatic enrollment 401(k) plans are exempt from the testing. This type of plan is for employers who want a high level of participation, and who have highly compensated employees whose contributions might be limited under a traditional 401(k) plan.

Employees are automatically enrolled in the plan and contributions are deducted from their paychecks, unless they opt out of contributing after receiving notice from the plan. There are default employee contribution rates, which may rise incrementally over the first few years, although the employer can choose different amounts.

Employer Association and Professional Employer Organization Retirement Plans

You can join with other employers in your geographic area or industry as an employer group or association to offer a defined contribution retirement plan, such as a 401(k), to your employees. Also, if you use a professional employer organization (PEO) as part of your business, your PEO may sponsor a defined contribution plan that you can offer to your employees. A well-run employer association or PEO multiple employer plan can help groups of small employers obtain economies of scale for administrative costs and investment choices currently enjoyed by large businesses. The employer association or PEO can act as plan administrator and assume many of the responsibilities of operating the plan, allowing you to keep more of your day-to-day focus on managing your business.

Pooled Employer Plans

Pooled employer plans provide a way for unrelated employers with no common interest or other organizational relationship to participate in a multiple employer defined contribution retirement plan, such as a 401(k), and offer a retirement savings option to their employees. A pooled employer plan allows many of the administrative and fiduciary responsibilities of sponsoring a retirement plan to be transferred to a pooled plan provider. Similar to employer association and PEO plans, a well-run pooled employer plan can offer employers, especially small employers, a workplace retirement savings option with reduced burdens and costs compared to sponsoring their own separate retirement plan.

Defined Benefit Plans

Some employers find that defined benefit plans offer business advantages. For instance, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. In addition, employees often value the fixed benefit provided by this type of plan and can often receive a greater benefit at retirement than under any other type of retirement plan. However, defined benefit plans are often more complex and, likely, more expensive to establish and maintain than other types of plans.

To Find Out More…

The following jointly developed publications are available for small businesses on the DOL and IRS websites and through DOL's toll-free number listed below:

• 401(k) Plans for Small Businesses (Publication 4222)
• Automatic Enrollment 401(k) Plans for Small Businesses (Publication 4674)
• Payroll Deduction IRAs for Small Businesses (Publication 4587)
• Profit Sharing Plans for Small Businesses (Publication 4806)
• SEP Retirement Plans for Small Businesses (Publication 4333)
• SIMPLE IRA Plans for Small Businesses (Publication 4334)

For business owners with a plan

• Adding Automatic Enrollment to Your 401(k) Plan (Publication 4721)
• Retirement Plan Correction Programs (Publication 4224)

DOL website

Publications request number: 866-444-3272

IRS website

Also available from the U.S. Department of Labor

DOL sponsors an interactive website – the Small Business Retirement Savings Advisor – that encourages small business owners to choose the appropriate retirement plan for their business and provides resources on maintaining plans.

Publications for small businesses

• Meeting Your Fiduciary Responsibilities
• Understanding Retirement Plan Fees and Expenses
• Selecting an Auditor for Your Employee Benefit Plan
• Selecting and Monitoring Pension Consultants - Tips for Plan Fiduciaries
• Tips for Selecting and Monitoring Service Providers for Your Employee Benefit Plan

Also available from the Internal Revenue Service

• Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (Publication 560)
• Contributions to Individual Retirement Arrangements (IRAs) (Publication 590-A)
• Distributions from Individual Retirement Arrangements (IRAs) (Publication 590-B)
• Designated Roth Accounts under 401(k), 403(b), or Governmental 457(b) Plans (Publication 4530)
• Maximum compensation on which contributions can be based is $330,000 for 2023 and $345,000 for 2024. Return to text
• Maximum compensation on which employer 2% contributions can be based is $330,000 for 2023 and $345,000 for 2024. Return to text

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Mutual Funds and Mutual Fund Investing - Fidelity Investments

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Fidelity's Savings Incentive Match Plan for Employees (SIMPLE IRA) makes it easier for self-employed individuals and small-business owners with 100 or fewer employees to offer tax-advantaged retirement plans.

With Fidelity, you have no account fees and no minimums to open an account. 1 You'll get exceptional service and guidance from our team.

Plan details

Maintaining your plan, 1. key things to know, 2. open your plan, 3. enroll employees, 4. funding your plan.

• Fidelity SIMPLE IRA Plan Agreement (PDF)
• Fidelity Funding Account Agreement (PDF)
• Plan Adoption Agreement (PDF)
• Company Profile Form (PDF)
• Corporate Resolution Form (PDF) - This form is required if your business is incorporated.

Fidelity Investments PO Box 770001 Cincinnati, OH 45277-0038

• Keep copies of all forms and documents for your company's plan records.
• Once we have received the completed required documents in Step 2, you are ready to enroll your employees. Please see Enroll Employees for more information.
• If you intend to deliver plan-related materials to your employees via email, please consult the Department of Labor's guidance for the use of electronic delivery of required plan-related materials.
• Fidelity SIMPLE IRA Plan Summary Description (PDF)
• Fidelity SIMPLE IRA Plan Participant Notice (PDF)

You are required to provide eligible employees with the Sample Summary Description and Participant Notice on an annual basis (by November 2). Fidelity SIMPLE IRA Plans receive a Summary Description and Participant Notice when the plan is established and annually thereafter in September.

You are legally required to give all eligible employees at least 60 days to make or modify any salary reductions elections each year.

• Have every participating employee print and review the SIMPLE IRA Employee Enrollment Brochure (PDF)
• Have every participating employee open a SIMPLE IRA account. For anyone choosing to open his or her account with Fidelity, visit Fidelity.com/simpleiraapplication .
• Have every participating employee complete a Salary Reduction Agreement (PDF) and forward the completed agreement to your payroll vendor or payroll processor. The employer should keep a copy of the employee's elections on file for their records.

If you have any questions, call 800-544-5373 to speak with a Fidelity small business retirement plan associate.

Once you have opened your SIMPLE IRA Plan and employee accounts have been established, the next step is to set up electronic funding for the plan. You have two options:

Option 1: Use Fidelity's Electronic Funding Service, which is available through our Plan Manager site:

Print and review the Using Plan Manager (PDF) guide, then go to Plan Manager to register so that you can make contributions to your plan. For more information on Fidelity Plan Manager, please visit the FAQs

Option 2: Use your external bank or payroll vendor to fund your plan electronically:

Print, review, and provide your bank or payroll vendor with a copy of the Important Information about Your Fidelity SIMPLE IRA Plan (PDF) .

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Generally, SIMPLE IRA plans can be established by any business with 100 or fewer employees who earned $5,000 or more in the preceding year, and which does not currently maintain any other retirement plan.

Easy-to-follow instructions can be found online—see Open your plan and Enroll Employees , under the Plan Details tab.

Eligibility varies based on the election you chose when you adopted the plan. Employees should be notified no later than as soon as they become eligible. In addition, you are required to provide eligible employees a Summary Description and Participant Notice on an annual basis (by November 2nd). 1. The Fidelity SIMPLE IRA authorized individual receives a Summary Description and Participant Notice when the plan is established and annually thereafter in September.

To open a SIMPLE IRA plan for the current year, the plan must be established and employees notified by October 1; please note that an exception applies for businesses established after October 1. See the Maintaining your plan section for more information.

Your employees complete the Salary Reduction Agreement Form and return it to you or your payroll office (it does not go to Fidelity). A sample salary reduction agreement form is available online and is included in the Fidelity SIMPLE IRA employee enrollment kit. You may use this form or create your own customized version.

You may buy or exchange any mutual funds available to IRAs at Fidelity in your SIMPLE IRA, as long as the minimum initial and subsequent investment limits are met. To be eligible for ongoing SIMPLE IRA contributions, however, a mutual fund must waive all loads, fees and investment minimums for SIMPLE IRA customers.

For copies of your Plan Adoption Agreement or additional Summary Descriptions, please call a retirement representative at 800-544-5373 and say "Small business retirement plans" when prompted. The Summary Description is mailed to plans annually in September. Plan Level Reports are sent on a monthly basis to every SIMPLE IRA plan. The report includes a total of all salary deferral and employer contributions made for the period, is broken out by participants, and includes a participant level breakout of contributions.

Generally speaking, you are eligible for a SIMPLE IRA as long as your business has fewer than 100 employees earning $5,000 or more in the preceding year. As you grow, other retirement plans may become more appropriate. Please contact a Fidelity retirement representative at 800-544-5373  and say "Small business retirement plans" when prompted for more information.

You can make your SIMPLE IRA contributions online using Fidelity PlanManager SM

Fidelity PlanManager SM is an online tool for administration of plan contributions at planmanager.fidelity.com Log In Required .

Maintaining your SIMPLE IRA plan

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is suited for both self-employed individuals with no other employees and small business owners with 100 or fewer employees. It's a "simple" plan to operate, but you should be aware that there are some ongoing administrative responsibilities if your plan is active. The list below doesn't necessarily cover all of your responsibilities. You may want to consult the IRS or a qualified tax advisor if you have additional questions.

Employer responsibilities

1. Establish your plan

a. Establish your plan and notify eligible employees by October 1 of the year you intend to begin your plan. See: Open Your Plan

b. Complete the company profile form  to provide us with information about your company.

• Choose the authorized individual(s) on the company profile form . It's a good idea to name the business owner as the primary authorized individual for the plan. because that's the person who will have the ability to add and remove authorized individuals.
• Set up your company bank for Plan Manager . Even if you don't intend to use Plan Manager , it 's a good idea to set up a company bank link in the event there's an issue with your outside funding mechanism.

2. Notify eligible employees

• Provide the Summary Description, Participant Notice, Salary Reduction Agreement and, for new participants, a SIMPLE Application (available online) to eligible employees. See: Enroll Employees
• The annual 60-day election period allows employees to enter into or modify their salary reduction agreements. The election period starts when the employer satisfies the plan notification requirements.
• For the first plan year, the election period can be any 60-day period which includes the plan effective date.
• The election must start by the plan effective date.
• Employers may notify employees earlier, but the election period cannot end before the effective date.
• For subsequent plan years, the election period is the 60-day period immediately preceding January 1 of the calendar plan year. Employers must provide the notification by November 2 prior to the plan year.

3. Keep records

It's important to keep your original adoption agreement and any subsequent adoption agreements you fill out for the life of your plan, and possibly for years after termination. You should retain the Salary Reduction Agreements your employees return to you, and records of any contributions made to the plan on their behalf, as well as other documents related to your plan.

4. Contribute to participant accounts

• There are two options to fund the accounts in your SIMPLE IRA Plan: Plan Manger or by using an external bank or payroll vendor. See: Funding Your Plan
• Company contributions can be made up to your business tax filing dead line, plus extensions. Salary deferral contributions need to be made as soon as possible, but no later than 30 days after the end of the month in which they were deferred. See the IRS rules for more information.

5. Notify employees eligible to participate annually

• You must decide before November 2 of the current year whether or not you wish to continue the plan for the upcoming year, and if you want to make changes to what you offer.
• Be aware that if your plan provides a matching contribution, you must match dollar for dollar up to 3% of compensation for at least three years out of a five year period.
• By November 2 you need to notify your employees if there will or will not be a plan for the upcoming year. If the plan is continuing the employees must also be informed of what the terms are by distributing a new Summary Description and Participant notice. These must be completed and distributed by November 2 to give your employees 60 days for their elections before January 1.

6. Abide by the terms defined in the plan agreement

• Fidelity SIMPLE IRA Plan Agreement

7. Correct errors of operation

• Despite your best efforts, there may be errors of operation that arise in running your plan. Most errors occur around contributions. A good practice is to double check the following before submitting a contribution: Is it going to the right person? Is it marked for the correct year? Is it the right type of contribution (company vs. salary deferral)? Did you already process this contribution, and would this result in a duplicate? Some minor errors may be fixable within the plan. Please call a Retirement Representative to see if we can help 1-800-544-5373 (say "Small Business Retirement Plan" when prompted.) In some cases, the error may result in an excess contribution.
• Excess contributions: There is no formal IRS method to correct SIMPLE IRA excesses. You should consult your tax advisor for guidance if you determine you have an excess that must be removed, prior to completing the SIMPLE IRA RETURN OF EXCESS FORM . Additional information may also be found in the IRS SIMPLE IRA FIX-IT GUIDE .

NOTE: Fidelity cannot withdraw funds from a client's account without their permission. Both the plan's Authorized Individual and the account owner must sign off on a request for a return of excess.

8. Terminate your plan when appropriate

• If you are discontinuing your SIMPLE IRA Plan. you should notify your employees prior to November 2 of the current year that there will not be a plan effective the following January 1. NOTE: You cannot terminate your plan in the middle of a calendar year. Once you have notified your employees of this benefit you must continue with the funding promised to your employees.
• Notify Fidelity in writing only after you have made all final contributions by sending a letter of instructions signed by the Authorized Individual to: Fidelity Investments P.O. Box 770001 Cincinnati, Oh 45277 - 0037
• In the future, should you want to restart your plan you must notify eligible employees by November 2 of the year prior to the start of your plan on the following January 1. You cannot start a plan mid-year after your initial year.

Fidelity's responsibility

1. Provide and maintain the Plan Agreement

NOTE: Fidelity does not use the IRS Model documents 5304 or 5305 - SIMPLE

2. Maintain accounts

Fidelity will provide individual brokerage SIMPLE IRA accounts on our platform for each eligible employee and the Fidelity SIMPLE IRA Customer Agreement and Important Disclosures that outlines the rules and agreement for the account, and will be provided to your employee upon account opening.

3. Prepare tax forms for employees

• IRS tax form 5498 each year there is activity in the account (including contributions).
• IRS tax form 1099-R for each year distributions or rollovers are processed out of an account.

4. Offer planning and investment guidance to your eligible employees who set up their SIMPLE IRAs at Fidelity

• They can choose investments using our exceptional online tools and data as well as through our experienced Representatives.
• For more information on how we can help you with investment management, planning and advice, please see What We Offer .

5. Provide and maintain a platform for Plan Administration

Our Plan Manager website is available to Authorized Individuals to contribute to your plan and perform plan maintenance.

6. Statements

Provide monthly plan statements for months that there are any contributions to the plan.

Helpful resources:

1. IRS Plan Checkup List 2. Retirement Plans for Small Business 3. Employee Plans Compliance Resolution System (EPCRS) 4. SIMPLE IRA FIX-IT GUIDE 5. IRS SIMPLE IRA PAGE 6. Remove Terminated Participant Form 7. Plan Maintenance Form 8. SIMPLE IRA RETURN OF EXCESS FORM

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1. No account fees or minimums to open Fidelity retail IRA accounts. Expenses charged by investments (e.g., funds, managed accounts, and certain HSAs) and commissions, interest charges and other expenses for transactions may still apply. See Fidelity.com/commissions for further details.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

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Small Business Retirement Plans: How Firms Perceive Benefits & Costs

Issue Brief by Anqi Chen

The  brief’s  key findings are:

• Our  2023 Small Business Retirement Survey looks at why some small firms offer a retirement savings plan and others do not.
• Factors that affect whether small firms offer a plan include firm size, wages, and industry, as well as beliefs on whether it will help attract workers.
• The main barriers to offering a plan are concerns about the stability/size of the firm and the perceived costs of a plan.
• Concerns about costs are driven by misperceptions; many firms are unaware of lower-cost options for employers and tax credits.
• The results also suggest that state auto-IRA programs are more likely to encourage than discourage firms from offering their own plan.

Introduction 

At any given time, only about half of U.S. private sector workers are covered by an employer-sponsored retirement plan, and few workers save without one.  The coverage gap, which undermines the retirement security of the nation’s workers, is driven by a lack of coverage among small employers.  Interestingly, however, about half of firms with less than 100 employees do offer a plan for their employees.  This brief, which is based on a recent study, presents the results of a new survey of small employers to understand why some offer retirement plans and others do not. 1 Chen (2023).

The discussion proceeds as follows.  The first section describes the new survey and identifies factors that make a firm likely to provide coverage.  The second section reports the barriers that firms perceive to offering a plan and assesses the accuracy of these perceptions.  The third section examines whether the presence of state-sponsored retirement programs – which generally require firms without a plan to enroll their workers in the state program – shifts firm perceptions. 

The final section concludes that important drivers to offering a plan, currently or in the near future, are a firm’s beliefs, such as whether they think retirement plans matter for employee hiring and retention.  Importantly, many employers without a plan hold misperceptions about the financial and time costs of offering one.  Therefore, better awareness of the many available options for small firms may help close the coverage gap.  Finally, state-sponsored retirement programs are more likely to encourage than discourage the adoption of employer plans.

The 2023 Small Business Retirement Survey

The 2023 Small Business Retirement Survey, which was produced in collaboration with the Employee Benefit Retirement Institute (EBRI) and Greenwald Research, was conducted between February and April 2023 and includes 703 firms with 100 or fewer employees.  This survey replicates the last major survey focused on small business retirement plans, which was conducted in 1998 by EBRI and Greenwald Research.  What is unique about the 2023 survey is that it includes a sample of 100 firms with 0-4 employees – a group usually excluded from surveys of small employers.  Among all firms sampled, 46 percent offered a retirement plan, while the other 54 percent did not.  Since 92 percent of all small firms have fewer than 20 employees, this pattern is fairly consistent with nationwide data (see Figure 1). 2 U.S. Bureau of Labor Statistics, Business Employment Dynamics (2022).

The survey responses can relate various factors to the likelihood of a firm offering a plan (see Figure 2).  As expected from earlier studies, firms with 50-100 employees, those with higher average salaries, and firms in professional, technical, and scientific services industries are much more likely to offer a retirement plan.  Meanwhile, firms in retail sales, wholesale sales, and accommodations (hospitality and food services) are much less likely to offer a plan.  But other factors also mattered.  Beliefs about whether having a retirement plan is important for hiring and retaining good employees are also a strong driver.  Notably, a firm’s beliefs about revenue growth had little to no effect on having a retirement plan.  Interestingly, for firms without a plan, beliefs are also an important predictor of their likelihood of adopting a plan in the near future. 3 For example, similar to firms currently offering a plan, firms without a plan that believe having one is important for hiring and retaining good employees are more likely to offer a plan in the near future.  In addition, firms without a plan that think they will have strong future revenue growth are also more likely to adopt a plan in the future.

What Keeps Firms from Offering a Plan? 

Historically, small firms that do not offer a plan have cited three main reasons: 1) uncertain revenues; 2) costs; and 3) employee preferences for wages.  The third reason, employee preferences for wages, has dropped down the list, but costs remain important, while concerns about revenue stability/size have grown to become the biggest barrier (see Figure 3). 4 The 1998 survey did not include firms with fewer than 5 employees.  If we compared the share of firms with 5-100 employers, the main takeaway remains the same; a rise in the share of firms – from 49 percent to 56 percent – that cite revenue stability or being too small as a major barrier to offering a retirement plan.

As one would expect, concern about revenues declines as firm size increases (see Figure 4). 5 It is important to note that revenue predictions are not the same as citing a concern for revenue stability.  Figure 2 shows that revenue expectations do not influence the likelihood of offering a retirement plan, all else equal.  But firms can expect higher revenue growth next year and still feel uneasy about revenue stability.  For example, over half of the firms that believe revenue growth will be more than 10 percent higher next year still cite revenue stability as a major barrier to offering a plan.   Indeed, close to 80 percent of firms with 0-4 employees cited revenue and size as a major barrier to offering a plan.  The smallest of these small firms may simply have too much on their plate to add an additional benefit. 6 Some respondents provided explanations of why they did not offer a retirement plan.  Many firms with 0-4 employees were self-employed or worked with part-time employees or contractors on an as-needed basis.  They may not be aware of options such as solo-401(k)s and SEP IRAs or they may not consider having a retirement plan for themselves as “offering” a retirement plan.   For established firms, costs and administrative burdens become the most important factor for not offering a plan. 

Interestingly, most firms surveyed that cite costs and administrative burden/compliance as barriers do not have a good sense of how much money or time is actually required to set up a plan.  A quick Google search yielded several 401(k) options where annual employer costs would only be about $2,500 for a firm with 10 employees and $5,000 for a firm with 50 employees. 7 As of late 2023, the mid-tier plan offered by Guideline costs $79 a month and $8 a month per participant.  The mid-tier plans from Betterment and Human Interest cost $150 a month and $6 a month per participant.  Fidelity offers a small business retirement plan that charges a $500 start-up fee and a $300 per-quarter administration fee.  However, it also requires employers to match employee contributions, which can increase costs.   But, over half of small firms believe providing a retirement plan would cost more than $10,000 per year; and nearly 30 percent think it would cost more than $20,000 per year (see Figure 5).

Not only do small firms overestimate the cost of offering a plan, but the vast majority – particularly those with fewer than 50 workers – are not aware that they can claim a tax credit of up to $5,000 for three years to help offset the costs of starting a plan (see Table 1).  Interestingly, about 80 percent of employers say that such a credit would make offering a plan more attractive.

Additionally, small firms do not have a good sense of how much time it would take to administer a retirement plan (see Figure 6).  Most firms believe it would take several days to a whole week every month.  But in reality, after the initial set-up, operating a retirement plan should only take a few hours a year. 8 Drobleyn (2023).

Many small firms are also unfamiliar with the various retirement plan options that are designed to help ease the cost and administrative burden of offering a plan.  While most small firms are at least somewhat familiar with 401(k)s, the vast majority are not familiar with SIMPLE, SEP, and MEP/PEP plans (see Figure 7).  And this percentage has barely budged in the last 25 years.

These results suggest that many firms overestimate the financial and time costs required to offer a plan, so better awareness of actual costs as well as available options could help reduce the barriers that small firms perceive. 

Will State-sponsored Programs Impact Firm Behavior?

Currently, 14 states have launched or are preparing to launch programs requiring employers without a plan to automatically enroll their employees in an Individual Retirement Account (“auto-IRAs”).  The survey asked all employers in the sample – not just those in states with auto-IRAs – whether the presence of such a program would make them less or more likely to have their own plan. 9 Theoretically, it is unclear how firms might respond to mandates for state-sponsored retirement programs.  Firms could stop offering their own plan and treat state-sponsored plans as an alternative to offering a retirement plan.  Alternatively, a state mandate could be the catalyst needed to encourage firms to offer their own plans and change business or industry norms.

The results show that, overall, the presence of state-sponsored programs does not make firms less likely to offer their own retirement plan (see Figure 8).  Among firms that already offer a plan, about 70 percent say they would continue to offer their own if their state introduced a mandate.  Among firms that did not offer a plan, almost 60 percent said a mandate would actually make offering their own retirement plan more attractive. 10 A recent study, linking Form 5500 data and individual-level Census data, found that auto-IRA mandates increase the probability of firms offering a retirement plan by 3 percent and the probability that a worker participates in an employer plan by 33 percent (Bloomfield et al. 2023).  A similar study by Guzoto, Hines, and Shelton (2022) also found that state auto-IRAs complement the private market for retirement plans.

The coverage gap is a pressing concern for the nation’s retirement income security, and the gap is driven by small employers.  In order to encourage growth in coverage, it is important to understand the characteristics of small firms that do and do not offer a plan.

For firms that offer or are considering offering a retirement plan in the near future, their beliefs are important – such as whether they think retirement plans matter for employee hiring and retention. 

For firms that do not offer a plan, two major longstanding barriers – revenue stability/size and costs or administrative burden of having a plan – remain top concerns among small firms today. 

Revenue concerns are highly associated with firm size, particularly firms with fewer than 10 employees.  It is understandable that firms may need to become established before setting up a workplace retirement plan is seen as a viable option.  

Views on cost or administrative burdens, however, seem to be driven by misperceptions about the financial costs and the time it would take to operate a plan.  These results suggest that better awareness of the actual costs as well as plan options designed for small firms could help reduce the barriers that small firms perceive.

Finally, the growth of state-sponsored retirement programs may actually encourage firms without a plan to adopt one. 

Bloomfield, Adam, Kyung Min Lee, Jay Philbrick, and Sita Slavov. 2023. “How Do Firms Respond to State Retirement Plan Mandates.” Working Paper 31398. Cambridge, MA: National Bureau of Economic Research.

Center for Retirement Research at Boston College, Employee Benefit Research Institute, and Greenwald Research. 2023. 2023 Small Employer Retirement Survey.

Chen, Anqi. 2023. “Small Business Retirement Plans: The Importance of Employer Perceptions of Benefits and Costs.” Special Report. Chestnut Hill, MA: Center for Retirement Research at Boston College.

Drobleyn, Eric. 2023. “How Much Time Does Annual 401(k) Administration Take?” Mobile, AL: Employee Fiduciary.

Guzoto, Theron, Mark Hines, and Allison Shelton. 2022. “State Auto-IRAs Continue to Complement Private Market for Retirement Plans.” Washington, DC: Pew Charitable Trusts.

U.S. Bureau of Labor Statistics. Business Employment Dynamics , 2022. Washington, DC.

U.S. Bureau of Labor Statistics. National Compensation Survey , 2021. Washington, DC.

Yakoboski, Paul and Pamela Ostuw. 1998. “Small Employers and the Challenge of Sponsoring a Retirement Plan: Results of the 1998 Small Employer Retirement Survey.” Issue Brief Number 202. Washington, DC: Employee Benefit Research Institute.

• 1 Chen (2023).
• 2 U.S. Bureau of Labor Statistics, Business Employment Dynamics (2022).
• 3 For example, similar to firms currently offering a plan, firms without a plan that believe having one is important for hiring and retaining good employees are more likely to offer a plan in the near future.  In addition, firms without a plan that think they will have strong future revenue growth are also more likely to adopt a plan in the future.
• 4 The 1998 survey did not include firms with fewer than 5 employees.  If we compared the share of firms with 5-100 employers, the main takeaway remains the same; a rise in the share of firms – from 49 percent to 56 percent – that cite revenue stability or being too small as a major barrier to offering a retirement plan.
• 5 It is important to note that revenue predictions are not the same as citing a concern for revenue stability.  Figure 2 shows that revenue expectations do not influence the likelihood of offering a retirement plan, all else equal.  But firms can expect higher revenue growth next year and still feel uneasy about revenue stability.  For example, over half of the firms that believe revenue growth will be more than 10 percent higher next year still cite revenue stability as a major barrier to offering a plan.
• 6 Some respondents provided explanations of why they did not offer a retirement plan.  Many firms with 0-4 employees were self-employed or worked with part-time employees or contractors on an as-needed basis.  They may not be aware of options such as solo-401(k)s and SEP IRAs or they may not consider having a retirement plan for themselves as “offering” a retirement plan.
• 7 As of late 2023, the mid-tier plan offered by Guideline costs $79 a month and $8 a month per participant.  The mid-tier plans from Betterment and Human Interest cost $150 a month and $6 a month per participant.  Fidelity offers a small business retirement plan that charges a $500 start-up fee and a $300 per-quarter administration fee.  However, it also requires employers to match employee contributions, which can increase costs.
• 8 Drobleyn (2023).
• 9 Theoretically, it is unclear how firms might respond to mandates for state-sponsored retirement programs.  Firms could stop offering their own plan and treat state-sponsored plans as an alternative to offering a retirement plan.  Alternatively, a state mandate could be the catalyst needed to encourage firms to offer their own plans and change business or industry norms.
• 10 A recent study, linking Form 5500 data and individual-level Census data, found that auto-IRA mandates increase the probability of firms offering a retirement plan by 3 percent and the probability that a worker participates in an employer plan by 33 percent (Bloomfield et al. 2023).  A similar study by Guzoto, Hines, and Shelton (2022) also found that state auto-IRAs complement the private market for retirement plans.

Chen, Anqi. 2024. "Small Business Retirement Plans: How Firms Perceive Benefits & Costs" Issue in Brief 24-7. Chestnut Hill, MA: Center for Retirement Research at Boston College.

The research reported herein summarizes the 2023 Small Business Retirement Survey, which was produced in collaboration with the Employee Benefit Research Institute and Greenwald Research. The Center for Retirement Research gratefully acknowledges Bank of America for supporting this research.

Small Business Retirement Plans: The Importance of Employer Perceptions of Benefits and Costs

Special Report by Anqi Chen

Will Changes to Multiple Employer Plans Put a Dent in the Coverage Gap?

MarketWatch Blog by Alicia H. Munnell

A Multiple Employer Plans Primer: Exploring Their Potential to Close the Coverage Gap

Special Report by Anqi Chen and Alicia H. Munnell

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Tax changes small business owners should be aware of as the tax deadline looms

FILE - A cash register is seen on the front counter at the Alpha Shoe Repair Corp., Feb. 3, 2023, in New York. As Tax Day, April 15, approaches, there are plenty of things small business owners should keep in mind when filing taxes this year. (AP Photo/Mary Altaffer, File)

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As Tax Day approaches, there are plenty of things small business owners should keep in mind when filing taxes this year.

April 15 is still the annual tax deadline for many small businesses although, unlike individuals, small businesses can have varying deadlines depending on the type of company, the state the taxes are filed in, and other factors. Quarterly estimated tax payments are generally required throughout the year. And certain types of small businesses had to file by March 15.

Since business tax filing is complex, most experts recommend small business owners work with a professional tax adviser rather than trying to file on their own or even with tax-filing software.

“Taxes should not be scary, especially when you have a certified tax professional or someone who is your trusted adviser,” said Amber Kellogg, vice president of affiliate origination and management at business consultancy Occams Advisory. “I always say you don’t go to the dentist to get your oil changed, and you certainly shouldn’t do (taxes) yourself unless you’re an expert.”

But even if small business owners aren’t filing taxes themselves, it’s still important to stay informed about any tax changes during the year. Here are things small business owners should consider as the April 15 deadline looms.

Consider an extension

Because of some pending tax legislation in Congress this year, Mitch Gerstein, senior tax adviser at accounting firm Isdaner & Co., said it might be a good idea to file for an extension. When you file an extension you still pay estimated taxes, but final paperwork isn’t due until September.

This gives your tax provider adequate time to file a return. And it’s cheaper to file an extension than an amended return, which costs more in administrative fees.

One reason Gerstein recommends an extension this year: a bonus depreciation write-off used by many small businesses is set to decrease for 2023. The bonus depreciation allowance was designed to spur capital purchases and it let businesses write off 100% of certain new and used assets in 2022. But beginning in 2023, that will decrease to 80% for used assets, dropping another 20% each year thereafter. However, a tax bill pending in Congress could restore the write-off to 100%. It’s rare that there is such a significant tax bill pending in Congress when taxes are due, Gerstein said.

Optimize your retirement plan

The Secure Act 2.0 passed by Congress in late 2022 gives small businesses some tax advantages if they offer a retirement plan. There’s a tax credit for small businesses starting new employee plans. The credit is up to 100% of the startup costs for adopting and maintaining a new 401(k) plan, capped at $5,000. There’s also a tax credit based on employer contribution, up to $1,000 annually per employee, over the plan’s first five years.

Changes in research and development write-offs

Scott Orn, chief operating officer of Kruze Consulting, works with startups backed by venture capital. Orn said the number one concern his clients are calling about is “Section 174,” a part of the tax code that involves writing off research and development costs.

In the past, companies were able to deduct 100% of research and development expenses from their taxable income. That was helpful because often that deduction meant the company was operating at a loss and wouldn’t have to pay taxes.

But starting in 2022 due to new legislation, companies have had to “capitalize” the expense – or spread it out over several years. That means they must now write off the expenses over five years for U.S.-based R&D, or 15 years for foreign R&D expenses.

Large and small companies alike are affected by the change, but small businesses are hurt the most, Orn said.

“(Small businesses) are the ones who are swinging into profit where they thought they were like safely losing money and not ever going to pay taxes for a while,” Orn said. “And that’s why it’s such a big surprise for them. It’s hurting people, it’s like it’s a lot of money these companies don’t have.”

Avoid underpayment penalties

Yet another reason for small business owners to use a tax professional is the fact that underpaying will cost more this year. In the past, underpayment penalties hovered at around 3%, but this year they’re more than double at 8% . That’s because the penalties are based on the federal short term interest rate plus three points, said Danny Castro, Florida Market Tax Leader at BDO USA, part of BDO Global, a global accounting network.

“The cost of underpayment is as high as it’s been in a long time,” he said.

One credit to skip: the ERC

At one time, the pandemic-era Employee Retention Credit seemed like a boon for small businesses. Designed to help small businesses keep employees during pandemic-era shutdowns, the generous credit let businesses file amended tax returns to claim the credit.

But that led to a cottage industry of scammers trying to entice small businesses to help them file for the credit – for a fee – even if they didn’t qualify. The IRS has launched several initiatives to claw back some money improperly given to businesses. To date, the IRS said 500 taxpayers have given back $225 million via a voluntary disclosure program, which ended on March 22, that let small businesses who thought they received the credit in error give back the money and keep 20%. And 1,800 businesses have withdrawn unprocessed claims totaling $251 million.

Get organized, stay organized

The best thing small businesses can do to help their tax advisers file their taxes is stay organized. A shoe box full of receipts isn’t helpful when trying to file timely taxes. Owners should log receipts in an orderly database they can turn over to their adviser. And stay on top of quarterly estimated payments.

“(Small business owners) need to be able to keep accurate records throughout the year and not have to go back in April and go, gosh, what what was this receipt for,” said Occams Advisory’s Amber Kellogg, “Keeping those, accurate records is very, very important.”

This story has been corrected to show that BDO USA is part of BDO Global, not BBO Global.

Shannon Edwards: Closing the Retirement Coverage Gap Be More Than A Fiduciary

For over 20 years, Shannon and her team at TriStar Pension Consulting have acted as a secret weapon for financial advisors, CPAs, small businesses, and plan sponsors. They are the go-to resource for plan design, fixing broken retirement plans, client presentation support, and high touch customer service.  Since starting the firm over two decades ago, her goal has been to provide a deeper level of retirement plan knowledge and service for clients, as well as a flexible workplace for employees. Today, they are one of the leading providers of retirement plan administration for small businesses.  Shannon is a credentialed member of the American Society of Pension Professionals and Actuaries (ASPPA) and the National Institute of Pension Administrators (NIPA). She currently serves on the ASPPA Leadership Council and as a member at large on the board of directors of the American Retirement Association (ARA). Shannon co-chaired the ARA Women in Retirement Conference (WiRC) as well as the ASPPA TPA Growth Summit. She has also served on several fund-raising committees and supports many non-profits locally such as Infant Crisis Services, Make a Wish Oklahoma, and Cleats for Kids.  If you are a financial advisor, CPA, or a business owner with retirement plan questions, please be sure to connect with Shannon on LinkedIn. You can also email her at [email protected] In this episode, Eric and Shannon Edwards discuss: What does a TPA do? The advantages of hiring a third-party administratorWhy it’s important to build financial literacy in employees The importance of constant learning for advisors and sponsors  Key Takeaways: The job of a TPA is to make sure that people involved are compliant with all the rules and regulations and that documents like forms, audits, and financial statements are being filed. There are a lot of advantages to hiring a third-party administrator and that include personalized service, quick response times, and a dedicated relationship builder.Companies must focus on building financial literacy for employees in order for them to discover why it’s necessary and advantageous to save in a retirement plan. Employer-sponsored savings vehicles are crucial for encouraging employees to save for retirement.Plan sponsors must strive to educate themselves and keep learning as much as possible about their fiduciary responsibilities. They, along with financial advisors, should also read and learn about changes in the industry in order to stay informed and avoid ignoring important information.  “As a third party administrator, our job is to keep the plan sponsor, and the fiduciary serving the plan out of 401k jail.” - Shannon Edwards Connect with Shannon Edwards: Website: https://tristarpension.com/ LinkedIn: https://www.linkedin.com/in/shannonedwardsplanconsultant/ / https://www.linkedin.com/company/tristar-pension/  Facebook: https://www.facebook.com/TriStarPension/ Connect with Eric Dyson:  Website: https://90northllc.com/ , https://rfp401kadvisor.com/  Phone: (940)20248-4800   Email: [email protected]  LinkedIn: https://www.linkedin.com/in/401kguy/

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