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One More Incentive to Offer a Retirement Plan: 100% Start-Up Cost Credit

Part of a series  |  SECURE 2.0 Act Insights

Ronald Ulrich

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By Christopher Magno, SVP/General Manager, Retirement Services, ADP

The new SECURE Act 2.0 and other legislation focuses on making it easier for small businesses to offer a retirement savings plan, including a significantly higher tax credit to cover start-up costs.

[NOTE: An updated article is now available: SECURE 2.0 Act of 2022 .]

With hundreds of provisions included in the recent flurry of retirement plan-related legislation, it's easy to miss those that could have the most immediate positive effect on your small business.

But here is one that's truly a no-brainer in terms of impact — proposed changes to the current tax credit legislation for small employers. Changes to the current legislation are being proposed in both House and Senate Finance Committee bills. Both bills offer positive changes to the existing legislation, but it remains to be seen what language will make it into the final bill.

ADP SECURE Act 2.0 comparison chart

The two bills vary in the amount and structure of the tax credits, as well as the timing for rollout. We'll advise as soon as final decisions are made, so your business can be sure to take advantage all applicable new provisions.

Employees want (and need) a retirement savings plan

During the past decade, access to an employer-sponsored retirement plan has consistently ranked high on employees' lists of must-have benefits. In the current volatile labor market, it's become an even more vital component for attracting qualified employees, staying ahead of the competition and controlling expensive turnover.

Not convinced? Sixty percent of employees now identify retirement benefits as the reason they stay with their current employer, up from just 40 percent a decade ago. Further, 47% said those retirement benefits were a primary reason why they joined their employer in the first place, nearly double the employees who felt the same in 2010.

Of course, the retirement-focused legislation — including the EARN Act and Starter 401(k) Act in addition to the SECURE Act 2.0 — has many more benefits for businesses beyond tax credits, including provisions to:

  • Cut down on paperwork required of plan sponsors
  • Reduce penalties for certain reporting errors
  • Consolidate multiple plan participant notices into a single document
  • Require automatic enrollment to increase plan participation

By reducing or eliminating common barriers for small businesses and making it easier for employees to save, more Americans will hopefully be on the path to retirement readiness sooner rather than later.

What's next?

As all the legislation mentioned above is still being finalized, check back often to stay current on potential impacts to your business. And if you're among the small businesses that currently don't have a plan in place, there's no time like the present to start evaluating your options .

For information on how the legislation might impact your current retirement plan — or to start the process to offer a retirement plan — reach out to ADP today.

ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor. ADPRS-20220920-3614

Up Next In This Series

Student Loan Debt: Boosting Financial Wellness with Employer Matching

Your Questions Answered: SECURE 2.0 Act

Keeping Up With SECURE 2.0: The Benefits of Retirement Plan Integration

Legislation

Treasury Delays SECURE 2.0 Mandatory Roth Catch-Up Contributions to 2026

Student Loans or Retirement Savings? Now Workers Won't Have to Choose

A New Savings Incentive for Lower Income Workers is on the Way

Coming Soon: A New Way for Employees to Build an Emergency Savings

SECURE 2.0: A Closer Look at Auto Enrollment & Catch-up Contributions

Your Complete Guide to the SECURE 2.0 Act of 2022

Setting the Record Straight: SECURE 2 Act FAQ

SECURE 2.0: New Small Business Tax Incentives for Retirement Plans

New RMD Provisions: A Closer Look at What's Changing with SECURE 2.0

SECURE 2.0 Act and the Future of Retirement Plans: Guidance for Plan Sponsors

SECURE 2.0 Act of 2022: What it Means for Your Business

SECURE 2.0 Act of 2022 Makes Sweeping Changes to Retirement Savings Plans

Turning Student Loan Debt into Retirement Savings

The Emergency Savings Act of 2022: Reducing Employees' Financial Stressors

SECURE 2.0: What Employers Need to Know – Now

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ADP 401k Review

Table of contents.

adp small business retirement plan

ADP is our choice for the best PEO/HRO for benefits administration. ADP’s HRO plans include various HR features. Additionally, ADP TotalSource is a comprehensive PEO with bundled HR features. Both provide an intuitive benefits administration process.

  • ADP offers a variety of employee retirement plans to meet all small businesses’ needs.
  • The retirement plans integrate with ADP’s popular payroll system, thus automating manual tasks and saving time.
  • The company has a mobile app that makes it easy for employees to enroll in their retirement plan, make changes and track their funds’ performance.
  • The vendor’s customer service includes a dedicated manager, which takes the complexity out of setting up a retirement savings plan for your staff.
  • ADP doesn’t list its prices on its website, making it hard to know how much the plan will cost your business without speaking to a company representative.
  • ADP doesn’t disclose its investment fees on its website, forcing you to contact the company for important cost information.
  • User reviews suggest ADP’s customer support may not be as great as promised.

It’s clear that ADP had all small businesses, from sole proprietors to 100-person organizations, in mind when developing its employee retirement plans. This plan sponsor understands that small businesses are unique and want retirement programs that meet their specific needs. When you partner with ADP, you can choose from a traditional 401(k), an individual or solo 401(k), a SIMPLE IRA, a safe harbor 401(k) and a Roth 401(k). Adding to the company’s appeal, ADP’s retirement plans integrate with its highly rated payroll services . In fact, this single vendor can handle virtually all of your HR needs. It doesn’t get any easier than that for time-crunched small business owners.

ADP Editor's Rating:

Why we chose adp as best for small businesses.

Small business owners don’t have excessive amounts of time to shop around for a retirement plan sponsor that meets their needs. They may find it easier — and safer — to go with a well-known brand like ADP that can offer a variety of plans and valuable features that can be customized. After all, a sole proprietor won’t want the same plan as a business with 100 employees. Thanks to its many attractive plan options, ranging from a traditional 401(k) to a SIMPLE IRA , ADP is capable of satisfying all types of small (and large) businesses.

ADP’s employee retirement plans integrate with the company’s popular payroll software, automating data entry and flagging any potential mistakes. This saves small business owners and their HR staff countless hours by eliminating the need to manually enter payroll and retirement information. When we researched retirement plan providers, we found in our review of Paychex that it was the only other vendor to offer a native integration with its payroll service. Other solutions, if they offer payroll integrations at all, require connecting products from two different companies (e.g., Human Interest’s employee retirement service with Gusto’s payroll service). By keeping everything in one unified system, business owners can streamline and improve their HR operations.

Among the other reasons ADP is the best retirement plan vendor for small businesses is the company’s customer service. Business owners have access to a dedicated account manager who can assist during implementation and beyond. Small business owners will also appreciate the company’s mobile app, which makes accessing plan information particularly easy for both employers and their employees.

If your business is just starting out, you should aim for a retirement plan program that can grow with your company. This is another aspect that makes ADP the best employee retirement plan provider for small businesses: You can start with the company’s solo 401(k) plan for yourself and roll it into a traditional 401(k) plan as you hire staff.

ADP retirement account dashboard

Plan participants can get a snapshot of their retirement account on their ADP dashboard. Source: ADP

Ease of Use

Small business owners don’t have hours to spend to set up an employee retirement savings plan; they need it to be quick and easy to implement and simple for employees to enroll in. The more hurdles there are, the less likely anyone is to participate. It’s apparent that ADP had these considerations in mind when it developed its user-friendly digital dashboard. With this portal, ADP makes it simple to set up a retirement plan for your staff by breaking down the process into easily digestible tasks you need to complete.

Our research also revealed how safe and straightforward ADP makes it to upload and store the documents that are necessary to establish your retirement plan. How-to videos and links to more help embedded in the company’s dashboard are other features we like. Most small business owners aren’t retirement plan experts; they need fast access to assistance and comprehensive information at their fingertips. In addition to an easy-to-use dashboard and its built-in resources, ADP gives small business owners access to a dedicated account manager to make sure everything runs smoothly for your organization.

If you want a retirement plan that’s easy to implement and manage — with a digital dashboard, a mobile app and access to dedicated support — ADP is the ideal solution for your small business.

ADP retirement intuitive dashboard

ADP’s intuitive dashboard makes it easy to get your small business’s employee retirement plan up and running. Source: ADP

Features and Services

ADP’s retirement plans come with a range of services and features that small businesses will value regardless of how many employees they have.

Fiduciary Services

ADP serves as your fiduciary for both administration and plan management for the company’s 401k Essential plan. If you select the regular 401(k) plan, someone at your business will need to be responsible for all the administrative and managerial tasks. The smaller your business, the more that option might make sense, because the fewer employees you have, the less there is to manage.

Advisory Services

We like how ADP provides advisory services to reduce the risk small businesses face when selecting investments for their retirement plans. For ADP’s plans that work with an adviser, third-party company Mesirow offers co-fiduciary or investment management services. Otherwise, ADP Strategic Plan Services provides fiduciary and investment services.

Implementation Services

ADP empowers you and your HR leaders with access to useful technology and tools that help you get your business’s retirement plan up and running. The vendor also has a team of dedicated managers to help with implementation.

ADP Payroll Integration  

With ADP’s SMARTSync tool, you can integrate your retirement plan data with ADP’s payroll software, thus eliminating manual entry and reducing potential errors. This is vital for saving time and increasing accuracy. Learn more in our ADP payroll review .

ADP retirement SmartSync

ADP’s SMARTSync tool makes it easy to integrate payroll information with your employee retirement plan. Source: ADP

ADP handles regulatory compliance, including trustee services, ERISA bond, and Form 5500 completion and filing. In our view, this service adds immense value, since most small business owners aren’t well versed in the laws and regulations surrounding employee retirement plans.

We were impressed with how easy ADP’s mobile app makes it for employees to enroll in your business’s retirement plan. After the team member answers a few questions about their annual income, retirement age and location, the app offers a personal savings target and suggested savings amount to achieve that goal. Once enrolled, employees can conveniently take several actions via the mobile app, including the following:

  • Transfer money into their retirement account
  • Rebalance investments
  • Request a loan
  • Check account balances
  • Review rates and returns
  • Make changes to investment choices

ADP retirement mobile app

With ADP’s mobile app, employees have access to their retirement account information no matter where they are. Source: ADP

Retirement Planner

We appreciate that ADP makes it simple for employees to plan for retirement and track their financial goals. The company’s Retirement Readiness calculator, for example, estimates how much money they’ll need for retirement based on their lifestyle goals and how well they are tracking toward those goals. It’s a fairly effortless way for workers to stay engaged in their financial planning and contribute to their future success.

ADP retirement calculator

ADP’s Retirement Readiness calculator helps employees plan for retirement. Source: ADP

ADP offers a variety of plans for every size business that may be interested in not just 401(k) plans but also SIMPLE IRAs and SEP IRAs. While the company’s website is very transparent about the features available with each type, what you won’t find are guaranteed prices. Rather, the site has a tool that lets you “estimate your baseline cost” for the 401k Essential option based on a $150 monthly fee, an additional $4 per employee per month, and a $20.83 investment service fee.

To get a more exact quote, as well as pricing information for the other available plans, you’ll need to contact the company. This is an added step that some rivals don’t require. For instance, see our review of USA 401k for a plan provider that shares all of its costs upfront.

When you contact ADP, you’ll also want to inquire about any setup fees. If you’re already using ADP for payroll or other HR services, you may be entitled to special pricing for adding employee retirement plans to your package. Bundling is often a great way to save money.

Implementation/Onboarding

ADP makes it easy to establish a retirement plan for your business, especially with a team of implementation managers at your disposal. The company even has English and Spanish language assistance, which opens up the program to more business owners. With the help of this support staff, your business’s plan can be established the very same day you ink a deal with ADP.

If you’re a business owner rolling over an existing retirement plan, the Document tab in the ADP portal clearly outlines what forms you need to fill out. The Communication tab lets you know if your employees have been notified of the plan, while the Activate tab tells you when your HR staff will be trained on the plan and when payroll is set up. We like that the dashboard also includes target dates to keep you on track with your plan implementation. Another great feature is that once the system is launched, employees can enroll on demand and employers can send a text to each staffer for text-to-enroll capabilities that encourage participation. 

Customer Service

ADP provides business owners with a lot of personalized customer service, which is one reason it’s our best pick for small businesses. When you work with ADP, you have access to a dedicated team that will help you implement and manage your retirement plan. To get support, all you need to do is call the retirement services participant service team at 800-695-7526. Agents are available Monday through Friday from 7:30 a.m. to 10:00 p.m. ET. Notably, those are longer support hours than most competitors offer.

We found a lot of helpful information directly on ADP’s digital dashboard. Additionally, the ADP website has a resource center, including sections specifically for small businesses; answers to frequently asked questions; a blog; and webinars.

ADP has been in business for over 70 years and has a strong reputation in the marketplace. It sports an A+ rating with the Better Business Bureau (BBB), but similar to Paychex, it has a rather low customer review score: 1.05 out of 5 stars. That’s surprising and disconcerting given all the support ADP promises to provide.

Limitations

ADP is a top employee retirement plan provider for small businesses, but one limitation in particular gave us pause: the company’s lack of transparent, upfront pricing. Busy small business owners want to know how much a plan costs from the beginning, and ADP doesn’t provide that information online. Although the vendor is only a call away, we prefer that plan sponsors list pricing on their websites. The more information a small business owner has from the start, the more informed a decision they can make for their organization.

Another potential downside is the poor customer reviews on the BBB website, which notes that ADP has closed nearly 900 complaints in the past three years. If you’d rather not have to rely on customer support, you may want to check out our review of ShareBuilder 401k , which we found to be a great option for business owners who are interested in a do-it-yourself employee retirement plan solution. Going it alone could be better than dealing with subpar or inconsistent customer support.

Take the time to call ADP to get a specific quote if you are seriously considering the vendor for your retirement plan. Yes, it’s an extra step, but it’s the only way you’ll know precisely what the plan will cost you and your employees so you can accurately compare the costs with those of competing plan providers.

Methodology

During our investigation of the best employee retirement plan providers, we compared and contrasted the companies based on their plan types, features and services, pricing, usability, setup, integrations, customer support and drawbacks. To determine the ideal plan sponsor for small businesses in general, we looked for those that kept costs and investment fees low, made it easy to implement and manage the plan, and offered mobile tools to boost enrollment and engagement rates.

We also wanted a vendor that leads with technology but is capable of offering dedicated one-on-one service. We vetoed any plans that were hard to understand, would take a lot of time and effort to implement, and would be time-consuming to manage. Small business owners aren’t experts at creating retirement savings plans; many need the help of a reputable plan provider. Furthermore, small businesses need the same access to investment advice and research as larger enterprises. For these reasons, ADP stood out to us as the best solution for small businesses.

What type of employee retirement plans does ADP offer?

ADP offers many types of employee retirement plans, including traditional 401(k), individual or solo 401(k), SIMPLE IRA, safe harbor 401(k) and Roth 401(k).

How does ADP’s payroll system integrate with the company’s employee retirement plans?

ADP’s payroll system integrates with the company’s employee retirement plans by connecting your data sets through the vendor’s SMARTSync tool. This eliminates the need for manual data entry, automatically flags potential errors and saves small business owners valuable time by streamlining recordkeeping. SMARTSync works with certain ADP payroll and all-in-one HR solutions, including RUN Powered by ADP and ADP Workforce Now.

Bottom Line

We recommend ADP for …

  • Small business owners who want to keep their payroll information and retirement benefits in one system.
  • Business owners who want to offer their employees enrollment and plan access via a mobile app and an online dashboard.
  • Small business owners who want personalized attention when implementing an employee retirement plan.

We don’t recommend ADP for …

  • Small business owners who don’t want to integrate payroll services with their employee retirement program.
  • Business owners who need to know upfront how much an employee retirement plan will cost.

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ADP Launches Retirement Plan Service for Small Businesses

ADP Launches Retirement Plan Service for Small Businesses

Edited by John Griffiths

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HR Tip of the Week

6 retirement plan options for small businesses.

adp small business retirement plan

The right retirement benefit can help employers attract and retain talented employees and demonstrate their commitment to employees' long-term financial goals. While small employers may have concerns about the cost and complexity of administering a retirement plan, there are a number of options that are easy to establish and may be more affordable than you think.

#1: SIMPLE IRA

The Savings Incentive Match Plan for Employees (SIMPLE) is a tax-favored retirement plan that allows both employees and employers to contribute to traditional IRAs. Key elements include:

  • Eligibility: In general, employers must have 100 or fewer employees and no other retirement plan to establish a SIMPLE IRA . Employers with such a plan must generally offer it to any employee earning $5,000 or more in compensation during any preceding two years. In addition, employees are fully vested in all contributions from day one of participation.
  • Tax credits: Tax credits of $500 for the first three years of the SIMPLE IRA plan may be available to employers to offset the costs of establishing and administering the plan.
  • Filing and testing: There is no tax or other government filing required for the Plan and non-discrimination testing is not required.
  • Contributions:  Employers must make a matching contribution to participating employees (between one and three percent depending on the circumstances) or contribute two percent of each employee's compensation.
  • Tax deductions: Employer contributions are generally tax deductible to the employer.

#2: 401(k) Plan

A 401(k) plan allows both employers and employees to make contributions toward retirement savings. Key elements include:

  • Contributions: Unlike a SIMPLE IRA, there is no employer contribution requirement. In a traditional 401(k), an employee's contributions are generally made on a pre-tax basis, and taxes on contributions and earnings are deferred until they are distributed, usually at retirement. Compared with IRA-based plans, the 401(k) plan is attractive to employees because the maximum contributions are generally higher than the SIMPLE IRA.
  • Roth option: There is also a Roth 401(k) option in which an employee contributes on a post-tax basis, and distributions (including earnings) may be made tax-free after meeting certain conditions.
  • Administrative costs:  401(k) plans may have higher administrative costs than IRA-based plans because 401(k) plans are more complicated than SIMPLE IRAs to maintain.
  • Non-discrimination testing:  401(k) plans require non-discrimination testing (which is intended to ensure the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees/owners). Highly compensated employees/owners seeking to maximize their personal contributions without nondiscrimination testing can establish a Safe Harbor 401(k).

#3: Profit Sharing

A profit-sharing plan can be an attractive retirement savings plan option for employers that have concerns about cash flow. With this type of plan, the employer can decide from year to year whether (and how much) to contribute to the plan based on what they can afford in that particular year. However, these plans tend to have higher administrative costs and more requirements than SIMPLE IRA plans or SEP Plans (see below). For example, employers with profit-sharing plans must file Form 5500 annually with the federal government and provide a summary to participants of their account activity each year.

#4: SEP Plan

A Simplified Employee Pension (SEP) plan is a retirement plan where an IRA is established for each employee, which is funded solely through company contributions. Key elements include:

  • Eligibility: An employer of any size may establish a SEP Plan, although these plans are more common when there are few or no employees other than owners.
  • Contributions: A business establishing a SEP Plan may decide whether, and how much, to contribute each calendar year up to a certain amount set by the IRS.
  • Tax credits: Qualified employers may also be eligible for a tax credit ($500 per year for the first three years of the plan) for establishing a SEP Plan and employer contributions are tax deductible on the employer's tax return.

#5: Payroll Deduction IRA

A payroll deduction IRA (Individual Retirement Account) allows employees to save for retirement without an employer-sponsored retirement plan. The employee establishes the IRA with a financial institution and then authorizes the employer to make payroll deductions from the employee's salary and contribute them to the IRA. This may not be as beneficial to employees as the employer cannot negotiate with the financial institution to obtain cost effective, or other special terms, for employees or help select investments for the IRA.

This type of plan was started by the federal government in 2014 and is a Roth IRA that invests in a U.S. Treasury retirement savings bond. Key elements include:

  • Contributions: With a Roth IRA, an employee contributes on a post-tax basis, but earnings and distributions are generally tax-free. Employees may contribute to their my RA account through payroll deductions, a checking or savings account, or income tax refunds.
  • Cost: As with payroll deduction IRAs, employers don't administer employee my RA accounts or make contributions. Therefore, there is no cost to the employer other than the time it takes to share information about my RA with employees and set up payroll deductions (if applicable).

Conclusion:

Providing retirement benefits can help improve recruitment, retention, and employee morale. Carefully evaluate the options that are available to your business and consider those that work best for your company and your employees' needs.

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Betterment for business, charles schwab index advantage, edward jones, employee fiduciary, fidelity investments, merrill edge, sharebuilder 401(k), t. rowe price, the bottom line.

  • Retirement Planning

Top 10 Small Business 401(k) Plan Providers

adp small business retirement plan

Historically, small employers have steered clear of offering 401(k) plans , seeing them as complicated to establish and costly to administer. The rules for running a plan properly are admittedly complex. But increasingly, 401(k) management companies are helping to make the task easier by providing plans geared to the little guys of the business world.

If you are a small business owner considering initiating a 401(k) plan for your employees (and yourself), here are ten of the top retirement plan providers. They not only offer affordable plans but can act as administrators and investment fiduciaries—relieving you of the headache-inducing homework that comes with any plan.

Key Takeaways

  • Companies large and small that want to offer their employees 401(k) retirement plans have several options these days to easily and efficiently get one up and running.
  • With many providers to choose from, costs have dropped dramatically, along with added services like plan administration and payroll common.
  • Here we list ten of the top 401(k) plan providers that serve small businesses.

ADP's 401(k) plans offer investment options from more than 300 investment managers.   Three investment line-ups are available for participants, based on their familiarity with investing and financial assets.

In addition to retirement plans, ADP specializes in payroll , tax filing, HR , insurance and administrative services. ADP’s small business division (1 to 49 employees) provides integration of payroll and recordkeeping with 401(k) plans, an important benefit for small employers.  

Employees with existing 401(k) accounts have the option to transfer those plans into the new plan, and a mobile app lets employees check their retirement accounts from their smartphones and other devices.

With more than 360,000 retirement plans overall, American Funds provides 401(k) account options that can be tailored to any size company, including startups and those that have recently merged or made acquisitions.  

Their plans include both traditional and Roth versions.   Investment choices can be objective-focused (preservation, balance, and growth) or individual mutual funds. 

A newer player, Betterment for Business started offering its 401(k) plans to smaller businesses in 2016.  

As a robo-adviser , Betterment addresses many of the cost issues associated with the administration and management of a company 401(k) plan by using proprietary algorithms. In addition, Betterment says it eliminates fee hiding by using  exchange traded funds (ETFs). 

Schwab designed its Index Advantage 401(k) plan to “lower costs, simplify investing and help workers better prepare for retirement,” to quote the company literature.   The key is in the title: The plan uses index mutual funds or exchange traded funds (ETFs) with low operating expenses instead of actively managed mutual funds. Schwab claims operating expense savings by as much as 82%.  

Plans have no annual fees and participants get full access to all of Charles Schwab’s brokerage and banking services, including an interest-bearing, FDIC -insured savings account through Schwab Bank.

Automatic enrollment is available and employees can get help or use a self-directed brokerage account .

Edward Jones offers small employers a variety of options when it comes to investments in its 401(k) retirement plans.   They include stocks, bonds, mutual funds, and government securities .

The company offers education and administrative support to both business owners and employees. After the plan is established, employees can review their accounts online or through mobile apps made available by Edward Jones. 

Employee Fiduciary comes out of the gate offering to let business owners compare their current providers’ 401(k) fees to Employee Fiduciary fees. And indeed, Employee Fiduciary has very low fees. It costs just $500 to start a new plan or $1,000 to convert an old one.   Small employers pay $1,500 a year for up to 30 employees plus 0.08% of assets under management .

Employees have access to 377 mutual fund families (including Vanguard), all available ETFs and even a brokerage window through TD Ameritrade .  

Despite its low fees, Employee Fiduciary offers all the services of a full-price provider: tax return forms, annual report summaries, and benefit statements.

Fidelity Investments has consultants to help business owners select a plan and then, once the plan is established, provides access for employees and owners via the internet.   The company also offers a mobile app that allows employees to monitor their individual accounts.

Employees can transfer old retirement accounts into their new 401(k). Fidelity provides integration with payroll services, an advantage for small-business owners, as well as the full roster of services (plan administration, record-keeping, trading, and investment advisory).

Merrill Edge lists streamlining, convenience and affordability as key advantages to its small business 401(k) plan.   Also included are the usual benefits— tax deductions for the employer, investment fiduciary support, and educational support for employees.

With an annual asset-based fee of 0.52%, Merrill boasts pricing that is lower than many competitors.   Its plan includes online account management—a common feature in most 401(k) plans. An automatic enrollment option, as well as a Roth 401(k) option, are also available. Employers have the flexibility to contribute on a year-to-year basis.

ShareBuilder 401(k) has retirement plans specifically designed for small employers. There are four different 401(k) options—individual, simplified, customized, and tiered profit sharing.  

Each plan has distinct matching, vesting , and profit-sharing options and once the plans are established, employees are able to transfer existing retirement accounts into their new 401(k) account. In addition, ShareBuilder retirement plans integrate with the majority of payroll providers. 

Advertising its small business 401(k) plans as appropriate for companies with fewer than 1,000 employees, T. Rowe Price says it offers a “cost-effective structure” for both sponsors and participants.  

Investment options include a range of T. Rowe Price and non-T. Rowe Price investments. There is a plan sponsor resource center as well as 24/7 website access for participants. Sponsors may select from more than 100  no-load mutual funds  and common trusts as well as over 5,400 non-proprietary funds. 

Of course, nothing replaces due diligence and good old-fashioned homework when it comes to checking out various 401(k) plan providers. Make sure you ask enough questions and more important, the right questions when considering a 401(k) plan for yourself and your employees.

ADP. " ADP Advisor Access: Dedicated to Your Success ."

ADP. " Design a Better 401(k) Retirement Plan ."

Capital Group American Funds. " Employers & Plan Sponsors ."

Capital Group American Funds. " 401(k) Retirement Plans ."

Betterment. " Betterment for Business: The Best 401(k) for Employers and Employees ."

Charles Schwab. " Charles Schwab Launches Unique 401(k) Plan Solution Designed to Address Barriers to Retirement Saving and Investing ."

Charles Schwab. " A Unique View on the 401(k) ."

Edward Jones. " 401(k) Plans for Your Employees ."

Employee Fiduciary. " Employee Fiduciary 401(k) Fees are Low and 100% Transparent ."

Employee Fiduciary. " Low Cost 401(k) Investments ."

Fidelity Investments. " 401(k) for Small Businesses ."

Merrill Edge. " Small Business 401(k) ."

Merrill Edge. " How Does Your Plan Compare? "

ShareBuilder 401K. " Simple, Low-Cost Business 401(k) Plans ."

T. Rowe Price. " Small Business 401(k) ."

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Looking for more options?

For more options, check out the rest of Business News Daily’s picks for the The Best Employee Retirement Plans for Small Businesses 2024.

ADP Employee Retirement Review

Table of contents.

adp small business retirement plan

ADP offers small businesses a variety of employee retirement plans. Integration with its payroll software, strong customer service and a hand-holding customer service approach makes it our best pick for small businesses.

  • ADP offers a variety of investment options and retirement account types appropriate for businesses of all sizes.
  • The 401k Essential plan offers transparent pricing and full-service retirement plan administration.
  • The company offers a comprehensive suite of payroll, HR, and benefits tools and services.
  • ADP does not disclose fees for services other than its 401k Essential package.
  • The 401k Essential plan may be cost-prohibitive for businesses already equipped to administer retirement plans in-house.
  • ADP is primarily known as a large payroll company.
  • The company offers employee retirement benefits suitable for any small business.
  • ADP’s 401k Essential plan offers transparent pricing and full-service plan administration.
  • This review is for small business owners and HR professionals who are considering ADP as their employee retirement provider. 

Many businesses want to outsource the management of their employee retirement benefits to a company that has the expertise and resources to take the burden off of employees. The best employee retirement service providers are equipped to do just that, and ADP is a great example.

ADP is a large, established payroll services company that provides retirement benefits through an all-in-one platform. The company also offers employee retirement benefit accounts. It can be a cost-effective and easy-to-use solution for businesses of all sizes.

ADP Employee Retirement Editor's Rating:

Why adp is best for small businesses.

If your business has employees, it’s usually a good idea to use an independent payroll services provider. Whether you already use ADP or still need a payroll provider, it’s an easy way to streamline payroll, retirement and health benefits. The 401k Essential plan makes it easier to offer an employee retirement plan by simplifying employee account setup and maintenance, and ADP Run is a cost-efficient payroll option as well. The brand is undoubtedly one of the best employee retirement plan providers .

ADP Retirement Plan Features

ADP offers employers a 401(k) retirement plan that puts the company administrator in charge of selecting and monitoring investments over time. Plan administrators get access to a specialized ADP manager to help with implementation, as well as technology and tools that assist in building, implementing and administering a companywide 401(k). ADP’s 401(k) plan can also be synced with the ADP payroll software and ADP HR outsourcing tools through SMARTSync Comprehensive Plan Automation.

While this may be a good option for very small businesses with investing and recordkeeping experience, managing a retirement plan can be extremely overwhelming for larger operations. These companies may fare better with ADP’s 401k Essential plan.

401k Essential

ADP’s 401k Essential plan offers a full-featured 401(k) with additional assistance with administration and compliance. The plan is also fully customizable, making it easy to adjust every aspect of the plan to meet the needs of your business. This includes tailored automatic enrollment options, employee eligibility requirements, employer contributions, vesting schedules and safe harbor plans.

Because of the efficiency and peace of mind that come with these added services, ADP’s 401k Essential plan is a great fit for large businesses seeking efficiency and automation. It’s similar to the fully managed plans that ShareBuilder 401k offers, though often more expensive. In fact, ShareBuilder 401k is our top pick for low fees; read our ShareBuilder 401k review for more information.

Additional Features

  • Onboarding and support: Every ADP plan administrator gets access to a specialized ADP manager who helps with retirement service implementation. This service is on par with most employee retirement vendors.
  • Automation: ADP’s SMARTSync Comprehensive Plan Automation lets current ADP payroll and all-in-one HR clients integrate their payroll system with 401(k) plan recordkeeping systems. Administrators can use this feature to save time, improve accuracy and reduce the risk of compliance oversights.
  • Investment manager services: Companies can opt to work with financial services firm Mesirow to get co-fiduciary or investment manager services. Alternatively, ADP’s affiliate, ADP Strategic Plan Services LLC, can assist with investment fiduciary services. Either option can take the pressure of selecting and monitoring investments off your business’s HR team and reduce the risk of being audited by the IRS or the Department of Labor.
  • Compliance: ADP provides independent recordkeeping services to help your business stay on top of compliance requirements without the risk of bias. Its automation tools also reduce the risk of compliance-related errors, and the 401(k) Essential plan includes compliance readiness and testing, as well as government filings.
  • Online resources: ADP customers have access to a large library of online resources to help with plan administration, tax and compliance requirements, and investment decisions. Because ADP is a full-service HR platform, there are also resources related to payroll, recruiting and hiring, and other types of employee benefits .
  • Mobile app: The ADP mobile app makes it easier for employees to enroll. The integrated MyADP Retirement Snapshot calculator also lets employees calculate their retirement savings and plan for the future. On this front, ADP wins over ShareBuilder 401k, which entirely lacks a mobile app.
  • Employee tools: In addition to accessing ADP’s mobile app, employees can take advantage of the ADP Achieve employee education resources and financial wellness program. The company also leverages its employee records data to offer plan participants personalized insights and benchmarking so they can make smarter investment decisions.

ADP offers a variety of services in addition to employee retirement benefits. Consider using ADP if you also want to take advantage of the company’s other offerings, such as payroll services.

Account Types

Businesses that choose ADP as their employee retirement benefits provider can select from a few types of employee retirement plans. Each plan has its own rules and regulations, as determined by the IRS.

  • 401(k): ADP offers a 401(k) plan wherein plan administrators must select and monitor investment options and handle compliance-related issues. Business owners can also select the 401k Essential plan, which includes more substantial customization, administration and compliance support.
  • SIMPLE IRA: With administration fees as low as $480 per year, ADP’s SIMPLE IRAs involve less paperwork and fewer compliance requirements than a 401(k) plan. There are also no minimum requirements for participation. Notably, ADP’s main name-brand competitor in the HR services and benefits space, Paychex, also offers SIMPLE IRAs.
  • SEP IRA: A SEP IRA through ADP is designed for small business owners and self-employed individuals who want flexible contribution amounts and no required compliance filings. This gives ADP an advantage over Human Interest, which doesn’t offer retirement plans for solo business owners and entrepreneurs. That said, Human Interest is our top pick for affordability; read our Human Interest review to learn why.

Investment Options

Companies that offer employee retirement plans through ADP get access to a wide selection of investment options, including the following:

  • Money market
  • Stock and income mutual funds
  • Index funds and lifestyle funds
  • Specialty funds, including real estate and technology
  • Socially responsible equity funds
  • Treasury Inflation-Protected Securities (TIPS) bonds

While ADP offers most of the typical investment options available in employer-sponsored retirement plans, the list of individual funds is relatively short. We felt that other retirement vendors we reviewed, such as Human Interest and USA 401k, were more transparent about the investment options they offer. It’s also unclear whether ADP allows companies to offer employee stock purchase plans through their retirement accounts.

ADP does not publish its pricing online for some of its services. The two services for which it does list prices are 401k Essential and, to a lesser extent, SIMPLE IRA.

For 401k Essential, the base monthly fee is $150, with an additional fee of $4 per participant. On top of that, ADP charges 0.10% of eligible assets as an annual fee for investment management services. The minimum you must pay for this fee, which is billed monthly, is $20.83 per month. These prices are about on par with, if just a touch more expensive than, some competitors’ prices.

For SIMPLE IRAs, the ADP website indicates that administrative fees start at $480 per month. This is the only pricing information given for this type of employee retirement plan.

Outside this, in general, ADP prices vary based on plan customizations. If your business already uses ADP for payroll and other HR services, contact your account representative to learn more about ADP’s retirement plan pricing. You can also get a quote via telephone or by navigating to Start Quote from the homepage.

If you prefer more transparent pricing from your employee retirement vendor, USA 401k may suit you better. Read our USA 401k review to learn why this brand is our top pick for transparency.

Ease of Use

Even though pricing is not disclosed on ADP’s website, it’s easy to build a plan and get a quote. Just click the Start Quote button on ADP’s website and provide contact information and relevant details about your business. Once your request is submitted, an ADP representative will contact you to schedule a consultation. You can also get a quote by calling the company.

Once you sign up for ADP’s retirement benefit services, you can automate a number of tasks through the SMARTSync Comprehensive Plan Automation tool. You will also be assigned a specialized ADP manager who will help streamline the setup and implementation. Customizations and implementation assistance are even more robust with the 401k Essential plan, which includes administrative fiduciary support, investment management support, compliance readiness and testing, and government filings.

From the employee perspective, ADP’s mobile app makes it easy to enroll in 401(k) benefits and to change investments, while the Retirement Snapshot calculator and online resources help employees research funds.

These ease-of-use factors place ADP on par with or just above many of its competitors. We were especially impressed with the extent of automation available through the 401k Essential plan.

ADP benefits dashboard

The ADP benefits dashboard provides an overview of employee benefits and allows team members to manage their retirement benefits directly. Source: ADP

Customer Service

Beyond setup and implementation, automation tools make it easy to administer an ADP retirement plan by integrating the platform with a business’s existing ADP payroll and HR services. There is also a client administrator support page that answers common questions.

Likewise, employees can access several popular customer support topics to get quick answers and the most relevant contact information. There are also a number of educational resources and tools, including the ADP mobile app and the MyADP Retirement Snapshot calculator.

ADP lists several numbers on its website at which it can be reached. We like that the company keeps itself so available to both prospective and current customers.

While ADP is a very strong company, its retirement benefit services do have some drawbacks. For one, ADP does not disclose online the fees for some of its retirement solutions. This could inflate the overall cost a small business expects to pay once it signs up for ADP’s employee retirement plans.

Additionally, smaller businesses with the capacity for in-house administration may struggle to justify paying for the 401k Essential plan. Keeping employee retirement plan administration in-house may be the better option for these businesses.

Methodology

To choose our top employee retirement vendor pick for small businesses, we compared several retirement plan providers known for their breadth of services. Many small business owners are so pressed for time that they need to streamline their operations as much as possible, ideally through relatively few vendors. In other words, the best employee retirement vendor for small businesses should be able to cover retirement alongside all related business needs.

In particular, the best small business employee retirement plan provider should also offer HR, payroll and employee benefits services. It should be a household name in all these spaces so that the quality of its work speaks for itself. Its website should also be clear, upfront and easily navigable. ADP met all these criteria better than any other provider.

Read our review of Paychex employee retirement benefits to learn about another well-established company that provides comprehensive service.

Is ADP better than Gusto?

ADP is a much larger, more established company than Gusto. That said, Gusto is among our picks for the best HR services and best payroll services . Given ADP’s size and legacy, the brand has considerably more robust offerings. However, ADP is also less transparent about its pricing and likely to be more expensive in many cases.

How do I contact ADP?

You can call 877-537-1196 or 877-749-1852 to start the process of registering for ADP’s employee retirement services. Current customers can call 800-929-2170 or 844-227-5237.

Overall Value

We recommend ADP for …

  • Small businesses of all stripes, especially those that use ADP to manage their payroll and other HR needs.
  • Large businesses that need help with IRS compliance and other recordkeeping requirements.

We don’t recommend ADP for …

  • Small businesses that can administer plans in-house.
  • Businesses that require fully transparent pricing to make informed employee retirement vendor decisions.

Dock Treece also contributed to this article.

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Which Employee Retirement Plans Are Best for Your Business?

by ADP Contributor

This article was updated on Oct. 23, 2018.

Employee retirement plans are a key component of any benefits package. Such a plan keeps your company competitive in the search for talented candidates and helps retain current employees. Employer-sponsored plans also offer some tax benefits, as contributions to employees’ accounts can be a deductible business expense.

Depending on the size of your business, you have several plan options to consider. Here are the three basic types.

Through a Simplified Employee Pension (SEP) plan, employers set aside money in retirement accounts both for their employees and for themselves. This plan is available to businesses of any size and permits contributions of up to 25 percent of each employee’s pay. Its structure is similar to a traditional individual retirement account (IRA): it is invested in the stock market, has a required minimum distribution at the age of 70.5 and the option for tax-free rollovers into another qualified plan. Employers don’t need to file annual paperwork with the IRS, and employees are 100 percent vested in, or own, their funds.

The SIMPLE (Savings Incentive Match Plan for Employees) IRA plan is often favored by businesses with 100 or fewer employees. Business owners create the plan through a financial institution, which is responsible for its administration. To participate, employees must have earned a minimum of $5,000 in compensation in any two prior calendar years from their current employer and be on track to earn at least the same amount in the current year. Employees can elect to make contributions from their salary, and employers are required to contribute to it every year. They have the option to alternate between the mandatory 2 percent nonelective contribution and a 3 percent matching contribution, as long as they adhere to IRS regulations.

401(k) Plan

In a 401(k) plan, employees contribute through pretax deductions from their paychecks, which employers can choose to match, within limits. The IRS sets inflation-indexed employee contribution limits that are reassessed annually. Depending on the type of plan, employees either select the investments they wish to fund or let the employer hire professionals to manage investments. These contributions are tax deductible in the year in which they are made, and earnings from the investments grow on a tax-deferred basis.

All 401(k) plans restrict the amount of money employees can withdraw from their funds and when. If employees take money before reaching the plan’s designated retirement age, they may face tax penalties.

Variations on this plan include:

  • A Roth 401(k) plan, which collects after-tax contributions.
  • A 403(b) plan for nonprofit organizations such as hospitals and public school systems.
  • A 457 plan for state and local government employees.

When choosing employee retirement plans that best match the needs of your small business, be sure to explore the tax advantages of each and opportunities to deduct contributions as a business expense. That way, you won’t just be looking after your employees’ future; you’ll be helping your business’s future, too.

This article originally appeared on the ADP Spark blog .

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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 2022 and 2023. For 2022, the maximum compensation used for figuring contributions and benefits is $305,000. This limit increases to $330,000 for 2023.

Elective deferral limits for 2022 and 2023. The limit on elective deferrals, other than catch-up contributions, is $20,500 for 2022 and $22,500 for 2023. 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 2022 and 2023. The limit on contributions, other than catch-up contributions, for a participant in a defined contribution plan is $61,000 for 2022 and increases to $66,000 for 2023.

Defined benefit limits for 2022 and 2023. The limit on annual benefits for a participant in a defined benefit plan is $245,000 for 2022 and increases to $265,000 for 2023.

SIMPLE plan salary reduction contribution limits for 2022 and 2023. The limit on salary reduction contributions, other than catch-up contributions, is $14,000 for 2022 and increases to $15,500 for 2023.

Catch-up contribution limits for 2022 and 2023. 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 limitation for defined contribution plans other than SIMPLE plans is $6,500 for 2022 and increases to $7,500 for 2023. The catch-up contribution limitation for SIMPLE plans is $3,000 for 2022 and increases to $3,500 for 2023.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 required minimum distribution until April 1 of the year following the year in which they turn age 73. This change in the age for making these beginning required minimum distributions applies to both IRA owners and participants in a qualified retirement plan.

Consolidated Appropriations Act, 2023. The Consolidated Appropriations Act, 2023, P.L. 117-328, made changes to certain rules affecting SEP, SIMPLE, and qualified plans. Many of these rules are effective after December 29, 2022, and will be reflected in future editions of this publication.

Maximum age for traditional IRA contributions. The age restriction for contributions to a traditional IRA has been eliminated.

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 Consolidated Appropriations Act, 2023, P.L. 117-328, further amended section 45E to increase the credit for tax years beginning after December 31, 2022.

See the instructions for Form 3800 and Form 8881 for more information on the 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 (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.

Qualified automatic contribution arrangement (QACA) safe harbor plans. Effective for plan years beginning after December 31, 2019, when an employee doesn’t make an affirmative election specifying a deferral percentage, the maximum default deferral percentage increases from 10% to 15%.

Hardship distribution rules for section 401(k) plans. The Bipartisan Budget Act of 2018, P.L. 115-123, made the following hardship distribution rules for plan years beginning after December 31, 2018.

Removes the 6-month prohibition on contributions following a hardship distribution.

Permits hardship distributions to be made from contributions, earnings on contributions, and employer contributions.

Eliminates any requirement to take plan loans prior to taking a hardship distribution.

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 2022

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 $130,000 (if the preceding year is 2021 and increased to $135,000 for 2022), more than $150,000 (if the preceding year is 2023), 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 $650 in compensation from you in 2022. This amount increases to $750 in compensation in 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 attained after December 31, 2019) must take RMDs.

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 turn 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 2022 to a common-law employee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $61,000. 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 2022 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 $305,000 when figuring your contribution limit for that employee. However, $61,000 is the maximum contribution for an eligible employee. These limits increase to $330,000 and $66,000, respectively, in 2023.

Your employee has earned $260,000 for 2022. Because of the maximum contribution limit for 2022, you can only contribute $61,000 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 $61,000 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 2022 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 $305,000 per participant) paid to the participants during 2022, from the business that has the plan, not to exceed $61,000 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 2022 on your tax return for your tax year ending June 30, 2023.

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 2022 is the lesser of the following amounts.

25% of the participant's compensation (limited to $305,000 of the participant's compensation).

The $20,500 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 2023, the $305,000 limit increases to $330,000, and the $20,500 limit increases to $22,500.

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 $6,500 for 2022 and increases to $7,500 for 2023. Elective deferrals aren't treated as catch-up contributions for 2022 until they exceed the elective deferral limit (the lesser of 25% of compensation or $20,500), 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 $20,500 in 2022 and $22,500 in 2023).

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 $61,000 for 2022 ($66,000 for 2023). 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) tax.

For 2022, excess deferrals are the elective deferrals for the year that are more than the $20,500 limit discussed earlier. For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $27,000. 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. Mark 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 attained 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 reduction SEP).

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 $14,000 for 2022 and increases to $15,500 for 2023. 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 $14,000 limit for 2022 ($15,500 for 2023).

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 ($20,500 for 2022; $22,500 for 2023) 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 $3,000 for 2022 and increases to $3,500 for 2023. Salary reduction contributions aren't treated as catch-up contributions until they exceed $14,000 for 2022 ($15,500 for 2023). 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 2022, 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 $305,000 of the employee's compensation can be taken into account to figure the contribution limit in 2022 ($330,000 in 2023).

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 2022, 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 2022 for most plans is Monday, April 17, 2023.

Your tax year is the fiscal year ending June 30. Contributions under a SIMPLE IRA plan for calendar year 2022 (including contributions made in 2022 before July 1, 2022) are deductible in the tax year ending June 30, 2023.

You are a sole proprietor whose tax year is the calendar year. Contributions under a SIMPLE IRA plan for the calendar year 2022 (including contributions made in 2023 by April 17, 2023) are deductible in the 2022 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 Form 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. Mark 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 attained 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 $14,000 for 2022 ($15,500 for 2023). If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $3,000 for 2022 and increases to $3,500 for 2023. 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 $305,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2022 ($330,000 in 2023). 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).

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 attained 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.

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, 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 attains 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 (December 31 for calendar-year employers).

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 2020-4, 2020-1 I.R.B. 148, available at IRS.gov/irb/2020-01_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 2022, 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.

$245,000 for 2022 ($265,000 for 2023).

For 2022, 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.

$61,000 for 2022 ($66,000 for 2023).

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 2022 is $305,000 ($330,000 in 2023).

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 deduction for your own contributions and your net earnings depend on each other. For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. 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.

The plan can't require, as a condition of participation, that an employee complete more than 1 year of service.

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 $305,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2022. This limit is $330,000 for 2023.

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 $20,500 for 2022 and increases to $22,500 for 2023. 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 $6,500 for 2022 and increases to $7,500 for 2023. Elective deferrals aren't treated as catch-up contributions for 2022 until they exceed the $20,500 limit ($22,500 limit for 2023), 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 tax.

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. Mark 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) nor 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 2022, 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, 2023 (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 2022, by April 15, 2023.

If the employee takes out the excess deferral by April 15, 2023, it isn't reported again by including it in the employee's gross income for 2023. However, any income earned in 2022 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, 2023, the excess, though taxable in 2022, 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) nor 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. Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. However, unlike other elective deferrals, designated Roth contributions aren't excluded from employees' gross income, but qualified distributions from a Roth account are excluded from employees' 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 2022, $20,500 if under age 50 and $27,000 if age 50 or over; amounts increase in 2023 to $22,500 and $30,000, 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 $20,500 for 2022 ($22,500 in 2023), with an additional $6,500 if age 50 or over;

Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $61,000 for 2022 ($66,000 for 2023);

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 attains 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 the employee made a contribution 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 contribution to a Roth account on Form W-2 and a distribution from a Roth account on Form 1099-R. See the Form W-2 and Form 1099-R instructions for detailed information.

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 attained 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 attained after December 31, 2019). For more information, see Tax on Excess Accumulation in Pub. 575 about distributions prior to 2020.

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.

The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. See Employee Contributions , earlier, and Rollover of nontaxable amounts next.

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 2014-74, 2014-50 I.R.B. 937, available at IRS.gov/irb/2014-50_IRB/ar09.html , 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.

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 in 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 next.) 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 she or he deals 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 Form 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 Form 5500-SF.

If you don't meet the requirements for filing Form 5500-EZ or Form 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 B. Enter the rate from Column B in 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 in 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 on this page.

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.

Go to IRS.gov to see your options for preparing and filing your return online or in your local community, if you qualify, which include the following.

Free File. This program lets you prepare and file your federal individual income tax return for free using brand-name tax-preparation-and-filing 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 filed electronically 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 on a number of tax law topics and provide answers.

IRS.gov/Forms : Find forms, instructions, and publications. You will find details on 2022 tax changes and hundreds of interactive links to help you find answers to your questions.

You may also be able to access tax law information in your electronic filing software.

There are various types of tax return preparers, including tax preparers, enrolled agents, certified public accountants (CPAs), attorneys, 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).

Although the tax preparer always signs the return, you're ultimately responsible for providing all the information required for the preparer to accurately prepare your return. Anyone paid to prepare tax returns for others should have a thorough understanding of tax matters. For more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on IRS.gov.

Go to IRS.gov/Coronavirus for links to information on the impact of the coronavirus, as well as tax relief available for individuals and families, small and large businesses, and tax-exempt organizations.

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 our multilingual customers 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. 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 Disaster Assistance and Emergency Relief for Individuals and Businesses 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.

You can also download and view popular 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, your EIP amounts, 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.

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 fastest way to receive a tax refund is to file electronically 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, 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.

The quickest way to get a copy of your tax transcript is to go to IRS.gov/Transcripts . Click on either “Get Transcript Online” or “Get Transcript by Mail” to order a free copy of your transcript. If you prefer, you can order your transcript by calling 800-908-9946.

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.

The IRS can’t issue refunds before mid-February 2022 for returns that claimed the EIC or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.

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 or Credit Card : Choose an approved payment processor to pay online, by phone, or by mobile device.

Electronic Funds Withdrawal : Offered only 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.

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Operator: Greetings and welcome to the IRS Program on Retirement Plans for Small Employers and Self-Employed. We're just now to begin, we'll begin with Don. Please go ahead. Donald: Thanks for attending this webinar on Retirement Plans for Small Employers and Self-Employed. I'm Don.

Martin: And I'm Martin. Donald: The information in today's webinar is not official guidance.

Let's get started. Saving for retirement is a lifelong commitment for most people. A retirement plan can help small employers and their employees, and self-employed taxpayers can save for their retirement as well. If you find the plan that's the best fit for your business or other entity, you'll keep it longer, have fewer problems and be more satisfied with your commitment. As we go through today's presentation, we're using plan contribution amounts for 2021 to give you a way to compare the different plans. If you're viewing this as a recording after 2021, please go to irs.gov/retirement for the latest plan and contribution limits. Martin: Slide 2. This presentation takes a quick look at the types of retirement plans available for small businesses and the key features, pros and cons of these plans and the final requirement, if any, to each plan.

The more you know about the types of plans available, the more likely you can pick the best plan for your business. Donald: As we move to Slide 3, many small employers have thought about saving for retirement, but we're too busy running their business or organization to find and adopt a plan. An employer that offers a retirement plan can help employees and the owner save for a more secure future. A retirement plan can also help you attract and keep quality employees. Martin: And there are tax benefits for both the employer and the employee. Donald: Yes, there are Marty. Not only are contributions made to the plan deductible, but the earnings on those contributions grow tax free. Employees are only taxed on benefits when they're distributed from the plan. Also, small employers can claim tax credits for the cost of setting up certain plans.

See irs.gov/new plan credit. Also, low-income and moderate-income employees can take a credit of up to 50% of amounts they contribute to certain plans. See irs.gov/saverscredit for more information. Martin: On to Slide 4. A retirement plan can be adapted by many types of employees from self-employed and sole proprietors to partnerships, corporations and charities. Of course, some will be a better fit than others. No matter how large or small financially successful an employer may be - there is a retirement plan that fit its needs. We view these options on the next slide. Donald: On Slide 5, we talk about the two basic groups of retirement plans we'll discuss. They are IRA-based Plans and Qualified Plans. IRA-based Plans are the least complicated plans to run and include payroll deduction IRAs, simplified employee pension plans known as SEP IRAs and SIMPLE Plans. We'll talk about these momentarily. When you hear Qualified Plans, think of Defined Contribution Plans, which include profit-sharing and 401(k) Plans that we'll cover today and Defined Benefit Plans. Martin: And on to Slide 6, IRA-based Plans are the least complicated plans to administer. Payroll deduction IRAs, SEP IRAs and SIMPLE IRA Plans all use an IRA to hold the contributions. An IRA is set up for each eligible employee and contributions are made to that employee's IRA. Donald: Turning to the next slide, Slide 7, a payroll deduction IRA arrangement can be offered by any employer. It has the fewest legal requirements and is the easiest to administer. An employer doesn't formally adopt a plan or make any contributions. The employer just offers employees the opportunity to have after tax amounts deducted from their pay and then contributed into an IRA. The employer can help set up the IRA or not, employees decide whether and how much to contribute. For 2021 and employee can contribute up to the IRA contribution limit of $6,000 plus an additional $1,000 catch-up contribution if they're age 50 or over. Employees may deduct the contribution under the general rules for IRA deductions, and the employer treats the contributions as ordinary salary or wages. Martin: And on to Slide 8. Next up is a Simplified Employee Pension or SEP IRA. A SEP can be adopted by any employer. A SEP must be established by signing an Official Plan document a form that satisfies certain legal requirements. The document can be an IRS model Form 5305-SEP or an IRS preapproved SEP offered by a financial institution. An eligible employee is at least 21 years of age, worked for the employer three of the last five years and earn $650 or more in compensation during the year. An employer can choose less restrictive eligibility requirements on the adoption agreement for their plan. The employer sets up an IRA for each employee who will meet the plan's eligibility requirements. If the employer decides to contribute to the SEP, contributions must go to all eligible employees and be based on the same percentage of their compensation. There are no employee contributions or deferrals, contributions and deductions are limited to the lesser of $58,000 or 25% of compensation for 2021. Donald: And now on Slide 9, let's talk about the next IRA-based retirement option which is a - a Savings Incentive Match Plan for Employees, also known as a SIMPLE IRA. An employer must have 100 or fewer employees and can't maintain another retirement plan at any time during the year if they're going to sponsor a SIMPLE IRA. It can be easily established by signing IRS Form 5304-SIMPLE or 5305-SIMPLE or an IRS approved document from a financial institution. One IRS model form allows the employer to pick one financial institution to hold the IRAs. The other allows each employee to pick their own financial institution to hold their specific IRA account. A SIMPLE IRA Plan must be offered to all employees with compensation of at least $5,000 in any prior two years, and who are reasonably expected to earn at least $5,000 in the current year. There is no age or hours of service requirement in a SIMPLE IRA. An employer can choose less restrictive eligibility requirements in the adoption agreement. A SIMPLE IRA accepts salary deferrals from employees like a 401(k) Plan does and requires contributions from the employer. Eligible employees can contribute a percentage of their pay through payroll deduction to the plan up to $13,500 in 2021, plus an additional $3,000 if age 50 or over. An employee's salary deferrals are subject to FICA payroll taxes, but they're exempt from federal income tax. Employers are required to contribute to their SIMPLE every year using one or two formulas. They generally can either match employee contributions, dollar for dollar up to 3% of compensation or make a fixed contribution of 2% of compensation for all eligible employees, even for those who do not elect to defer. Whichever formula you choose, must be shared with employees before they make their salary reduction decisions, meaning, before the start of the year. Martin: We're on to Slide 10 With all IR - IRA-based Plans, there is very little administrative paperwork. Administrative expenses are low, and no Form 5500 Series returns are required. While easier to administer, they're less flexible than Qualified Plans. Participants can withdraw money at any time under the usual IRA distribution rules, which may include a 10% additional tax on early distributions if the participant is under the age of 59 1/2. No loans are allowed in an IRA-based Plan. Contributions are limited in a payroll deduction IRA, but it could help jumpstart saving for retirement from employees working for smaller employers. A SIMPLE IRA Plan allows a smaller business to have a plan that allows the salary deferrals without the testing requirements of a 401(k) Plan. A SEP Plan does allow larger employer contributions up to 25% of compensation or $58,000 for 2021. One disadvantage of SEP's and SIMPLE IRA Plans is the eligibility requirements are easy to satisfy.

Employees can work a very limited schedule and be eligible for the plan. Also, as an owner, if you have ownership interest in other businesses, you may be part of a controlled group. So, all employees that work for those related employers that satisfy the eligibility requirements must participate in the IRA-based Plan, no matter which related employer employs them. Donald: Okay, so that's an overview of IRA-based Plans. And now on Slide 11, let's talk about our other major plan category, which are Qualified Plans. Assets in these plans are generally held in a single qualified trust, as opposed to IRA-based Plans, where assets are held in individual IRAs established for each participant. We're covering Profit-Sharing Plans, 401(k) Plans and Defined Benefit Plans here today. These plans are a jump in the administrative burden compared to that associated with IRA-based Plans. Martin: On to Slide 12, We talk about Qualified Plans.

Employees in Qualified Plans enter the plan as participants on the next plan entry date after they reach age 21 and work 1,000 hours over the 12-month period after they are hired. In a Qualified Plan, plan sponsors are required to operate the plan for the benefit of all participants.

Distributions from the plan that generally allowed only after an event specified in the plan, such as retirement, no longer employed, termination of the plan. These plans can allow participants to take loans against their account balances. In a 401(k) Plan, participants that suffer a hardship that meets rules outlined in the plan document can take the hardship distributions from their account. Vesting rules can limit a participant's ownership interest in the employer contributions, like a 401(k) match, requiring up to six years of service to get a 100% ownership of employer contributions. These Qualified Plans generally must file an Annual Form 5500 Series return. And finally, the employer must make sure the plan documents are timely amended for changes in the law. Even an IRS preapproved plan documents must be amended from time to time. A plan document that is not kept up-to-date can jeopardize the plans' tax advantage status.

Donald: Turning to the next slide, Slide 13, let's look at these specific types of Qualified Plans to see what a fit for your small business might be. The first type of Qualified Plan is a Profit-Sharing Plan. And like all Qualified Plans, an employer generally requires all employees who have reached age 21 and worked at least 1,000 hours to participate in the plan. You don't need to have a profit to contribute to a Profit-Sharing Plan. Employer contributions are discretionary.

That means, the employer can decide how much to contribute, and a contribution is not required each year. The contributions you make to a Profit-Sharing Plan must be allocated among the participants by a formula outlined in the plan document. Most plans use a compensation to total compensation and allocation formula. For example, a plan participant who received 5% of the compensation paid to participants during the plan year will receive an allocation equal to 5% of the amount the employer contributes to the plan. Allocations of employer contributions are limited to $58,000 for 2021 or 100% of the participants' compensation. The employers' deduction for contributions made to a Profit-Sharing Plan cannot exceed 25% of the aggregate compensation for all participants. Martin: On to Slide 14, Profit-Sharing Plans generally must file an Annual 5500 Series return. Again, you must make sure your Profit-Sharing Plan is kept up-to-date for any changes in the law or regulations. Employees can make that process easier by adopting a document that's been preapproved by the IRS. It will still need to be amended. It may be easy to keep up with the needed law changes. Profit-Sharing Plans are operated by every type and size of employer. What does the Profit-Sharing Plan offer over the SEP? Donald: I can answer that, Marty. They have the same contribution limits, but a Profit-Sharing Plan offers more flexibility to an employer. Martin: That's right. As a matter of fact, the Profit-Sharing Plan can exclude employees that work less than 1,000 hours during the year, for a SEP, $650 per year and three years gets you into a SEP. At a $15 an hour wage, that's about - as little as about 44 hours a year. A Profit-Sharing Plan can be designed so the contribution and allocations are not the same for all employees, it can allow for loans to participants. A Profit-Sharing Plan that doesn't try to exclude classes of employees or provides different allocation formulas for different groups of employees can be easy to administer. If you design the plan to try to maximize benefits for the owner and minimize benefits to the rank-and-file employees, plan administration becomes much more complex and expensive. If you have ownership interest in other businesses, you may be part of a controlled group. In a Profit-Sharing Plan, you may be able to exclude some of these employees or related employers and still meet coverage requirements. While the SEP will have to include all those who meet the $650 per year requirements. If you're looking for a plan that would allow you and your employees to make your own contributions, that would be a 401(k) Plan. Donald: So on Slide 15, let's start talking about a 401(k) Plan, which is a Profit-Sharing Plan that also allows employees to choose to have a portion of their salary deferred into the plan. It will have the same age 21 and one year of service eligibility requirements as a Profit-Sharing Plan. The plan can leave the decision to defer salary entirely to the employees or the plan can provide that a certain percentage of each employee's compensation will automatically be deferred into the plan until the employee elects, otherwise. Research has shown that if an employee's original decision to defer into the plan is made for them by the plan administrator, employees are more likely to save for retirement. Pre-tax salary deferrals are not subject to federal income taxes but are subject to FICA withholding. Each employee's salary deferrals are limited to no more than $19,500 in 2021, plus an additional $6,500 if age 50 or over by the end of the calendar year. An employer can choose to allow for Roth style after tax deferrals. Roth deferrals are subject to full income tax and FICA withholding. An employer may also choose to offer matching or other employer contributions. The total annual additions to the plan for each employee that's the total of all employee and employer contributions in forfeitures cannot exceed $58,000 or 100% of compensation for 2021 or $64,500, including the $6,500 age 50 catch-up contribution. Martin: Now on to Slide 16, 401(k) Plans require an annual non-discrimination tests. Salary deferrals are tested each year using the Actual Deferral Percentage test or ADP test. This ADP test compares the average percentage of compensation deferred by non-highly compensated employees with the average percentage of compensation deferred by highly compensated employees. If the ADP of the highly compensated employees exceeds the ADP, the non-highly compensated employees by too much, the highly compensated employees will have the deferrals limited or reduced. A plan - must also test matching and other contributions using a similar Actual Contribution Percentage or the ACP test.

You must perform the ADP and ACP tests each year. However, certain 401(k) Plan designs may avoid the testing altogether. These are Safe Harbor Plans In the Safe Harbor 401(k) Plan you can avoid the ADP and ACP testing by making either a minimum matching contribution or fixed contribution for all participants. With the matching contribution option, the employer matches 100% of the first 3% of salary deferred by the non-highly compensated employees, plus 50% for the next 2% of elective deferrals for a total match of 4% of compensation. With the fixed contribution option, the employer makes a non-elective contribution of 3% of compensation for all eligible non-highly compensated participants, including those who don't make any elective deferrals for the year.

Meet the Safe Harbor and there's no ADP testing required. If the match is limited to no more than 6% of compensation, the ACP test has also been satisfied. In exchange for providing this minimum level of contribution for all plan participants, highly compensated employees don't have their deferral limited by the deferral of non-highly compensated employees. Don will explain the Auto Enrollment 401(k) Plans. Donald: Thanks Marty. In an Automatic contribution arrangement, employers automatically enroll new employees in the plan to make salary deferrals unless or until the employee opts out. You can avoid the ADP, ACP testing by adopting a Qualified Automatic Contribution Arrangement or QACA. A QACA will allow the sponsor to skip the ATP test if, first, the Automatic Deferral Percentage or ADP is at least 3% for the first year, but less than 10% for the first year and 15% thereafter. Second, the employer contributes either a matching contribution of 100% of the first 1% of salary deferrals, plus 50% of the next 5% of deferrals or contributes a non-elective contribution of 3% of compensation for all participants, including those who choose not to make any elective deferral. And third, the employer must also provide a notice to the employees of their rights under the plan every year before deferral elections have to be made. A Qualified Automatic Contribution Arrangement or a QACA helps build the largest nest egg for participants, while avoiding the need to perform ADP and ACP 401(k) testing. Martin: And now on to Slide 17, 401(k) Plans are required to file an Annual Form 5500 Series return. Go to irs.gov/Form 5500 for more information. 401(k) Plans are the most popular plans for employees right now. The Safe Harbor and Automatic Enrollment 401(k) Plans are becoming more popular each year, since they don't limit the salary deferrals of higher paid employees. These plans also may lessen the administrative burden, while increasing the savings rates for all employees. Common features you'll find in all 401(k) Plans are: High contribution limits, fully vested salary deferrals and the Annual Form 5500 filing requirement. Features that employees may choose to include in their 401(k) Plan are: Designated Roth accounts, loans to participants from their accounts, hardship distributions, automatic enrollments and in-service withdrawals. There are pros and cons. Donald: Administrative costs are higher in the 401(k) Plans than for IRA-based Plans and Profit-Sharing Plans. A traditional 401(k) Plan one that doesn't include a Safe Harbor or a QACA must satisfy the ADP and ACP test every year. So it's very easy to make a testing mistake.

Traditional 401(k) Plans allow more flexible employer contributions. However, the contributions and salary deferrals for highly compensated employees will be limited by how much the non-highly compensated employees defer. An exchange for higher required employer contributions, a Safe Harbor 401(k) Plan and a Qualified Automatic Enrollment 401(k) Plan may allow you to avoid ADP and ACP testing altogether. And both plans may increase the savings rates for all your employees and may even lessen your administrative headaches. Martin: And now on to Slide 18 which is the last category, we're discussing are Defined Benefit Plans. Just like a Profit-Sharing and a 401(k)

Plan, the plan must cover all employees age 21, who worked at least 1,000 hours during the plan yield. A Defined Benefit Plan provides for fixed, pre-established benefits for employees at retirement. The employer contributes an amount each year to fund the future benefits for participants. Required contributions are determined by the plans' actuary based on projected benefits and actuarial assumptions. There are no individual participants' accounts, just an accrued benefit. In a Profit-Sharing Plan, the amount that an employee ends up with the retirement is a combination of the contributions made and their earnings on them. So, the risk of that investing falls on the participants. In a Defined Benefit Plan, the contributions go towards funding a future benefit when that participant retires. The investment risk falls on the plan's sponsor, not the employee. Many large employers have decided they don't want to carry that risk and no longer sponsor Defined Benefit Plans. However, Defined Benefit Plans are still attractive to some employers, since they generally will have the largest contributions and deductions for the employer. These plans are the most complex and costly plans to maintain. Donald: Going on to the next slide, Slide 19, Defined Benefit Plans have an Annual Form 5500 filing requirement. They also include - that form also includes a schedule SP that's completed by and signed by the plans' actuary. Since a Defined Benefit Plan generally has a required contribution each year, it's typical to companies with high, stable earnings adopting Defined Benefit Plans. They're also attractive for small employers with highly paid employees that have long service periods. For those high earning, longer service employees, the plan may have only 10 or 15 years to build up enough assets to pay the accrued benefits. That's why a Defined Benefit Plan provides for the largest contribution, deduction and benefit of any retirement plan. A downside of these plans is a contribution is normally required each year, an excise tax applies if the employer doesn't make those required contributions. Martin: And on to Slide 20. That's a quick look at retirement plan options for small employers. A companion piece of this presentation is Publication 3998.

Choosing a retirement solution for your small business. It has a chart that compares the key features of IRA-based Plans and Qualified Plans. Donald: Also, check out the Small Business resources' section at irs.gov/smallemployerplans. This webinar will be recorded and posted on irsvideos.gov sometime next month. To check out this recorded webinar and others, select the Business tab and then Retirement Plans on the left navigation of that webpage. Martin: We also have an electronic newsletter, the employee plan news. To read old issues and subscribe, go to irs.gov/retirement news. To leave us feedback on the presentation or request a speaker for your next event, send an email to [email protected]. Donald: On behalf of Marty and myself, thank you for participating in today's webinar.

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