Ea Ea2 Su19 Outline

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STUDY UNIT NINETEEN

RETIREMENT PLANS FOR SMALL BUSINESSES
19.1 Simplified Employee Pension (SEP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

19.2 Savings Incentive Match Plans for Employees (SIMPLE) . . . . . . . . . . . . . . . . . . . . . . . . 4
19.3 Qualified Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
19.4 Retirement Distributions and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
This study unit discusses retirement plans that the owner of a small business, including a self-
employed person, can set up and maintain for employees. The IRS tests three types of plans:
simplified employee pension (SEP) plans, SIMPLE plans, and qualified plans. A SEP is a simple plan
that allows contributions to retirement plans without involvement with the more complex qualified
plan. However, some advantages available to qualified plans, such as special tax treatment that may
apply to qualified plan lump-sum distributions, do not apply to SEP.
19.1 SIMPLIFIED EMPLOYEE PENSION (SEP)

1. A simplified employee pension (SEP) is a written agreement (a plan) that allows an employer to
make contributions toward his or her retirement (if a self-employed individual) and his or her
employees’ retirement without becoming involved in more complex retirement plans.
a. Under a SEP, IRAs are set up for, at a minimum, each qualifying employee and/or self-
employed individual.
1) The employer can set up a SEP plan for a year as late as the due date (including
extensions) for the business income tax return for the year.
2) The employer must make contributions to the SEP plan by the due date of the
employer’s return, including extensions.
a) Contributions are reported on Form 5498.
b. The employer can have another retirement plan.
Self-Employed Individual
2. A self-employed individual is an employee for SEP purposes. (S)he is also the employer.
a. Even if the self-employed individual is the only qualifying employee, (s)he can have a
SEP-IRA.
b. Self-employment services must represent a material income-producing factor. In addition,
any salaries and wages that are received in addition to self-employment income should
be included in compensation. In the occasion of a net loss from self-employment, it
should not be subtracted from any salaries and wages received when determining
compensation.
c. The deduction is taken on Form 1040, Schedule 1.
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2 SU 19: Retirement Plans for Small Businesses
Qualifying Employee
3. A qualifying employee is one who meets all of the following conditions:
a. (S)he is at least 21 years old.
b. (S)he has worked for the employer during at least 3 of the 5 years immediately preceding
the tax year.
c. (S)he has received from the employer at least $650 in compensation during the tax year.
Excludable Employees
4. The following groups of employees can be excluded from coverage under a SEP:
a. Employees who are covered by a union agreement and whose retirement benefits were
bargained for in good faith by their union and their employer
b. Nonresident alien employees who have no U.S. source earned income from their
employer
5. A leased employee may have to be included in the SEP of the organization receiving the
services if certain conditions are met.
6. A SEP does not require contributions every year, but it must not discriminate in favor of highly
compensated employees.
Highly Compensated Employee
a. A highly compensated employee is any employee who meets either of the following two
conditions:
1) The employee owns (or owned last year) more than 5% of
a) The capital or profits interest in the employer,
b) The outstanding stock, or
c) The total voting power of all stock of the employer corporation.
2) The employee’s compensation from the employer for the preceding year is more
than $130,000 if the preceding year is 2020, and (if the employer elects to apply
this clause for last year) the employee was in the top 20% when ranked on the
basis of last year’s compensation.
7. Contributions
a. An employer is permitted to contribute (and deduct) each year to each participating
employee’s SEP up to the lesser of
1) 25% of the employee’s compensation or
2) $58,000.
b. These limits apply to contributions the employer makes for employees to all defined
contribution plans, which includes SEPs. Compensation up to $290,000 in 2021 may be
considered.
c. A 10% excise tax is generally imposed on the employer on contributions in excess of the
deductible amount.
SU 19: Retirement Plans for Small Businesses 3
8. Special rules apply for self-employed individuals who contribute to their own SEPs.
a. Compensation for the self-employed is equal to net earnings from self-employment.
1) For SEP purposes, the individual’s net earnings must take into account the
deduction for contributions to a SEP.
a) Because the deduction amount and net earnings are dependent on each other,
the worksheets below must be used.
b) The maximum rate becomes 20% after the computation.
2) First, a new rate must be determined to take into account the contribution deduction.
Self-Employed Person’s Rate Worksheet

(1) Plan contribution rate as a decimal (for example, 10 1/2% would be 0.105)
(2) Rate in line 1 plus one (for example, 0.105 plus one would be 1.105)
(3) Self-employed rate as a decimal rounded to at least 3 decimal places (divide
line 1 by line 2)
3) Then the maximum deduction may be computed.
Self-Employed Person’s Deduction Worksheet

Step 1: Enter the rate from the “Self-Employed Person’s Rate Worksheet.”
Step 2: Enter net profit from Schedule C. $
Step 3: Enter the deduction for self-employment tax. $
Step 4: Subtract Step 3 from Step 2 and enter the result. $
Step 5: Multiply Step 4 by Step 1 and enter the result. $
Step 6: Multiply $290,000 by the plan contribution rate.

Enter the result but not more than $58,000. $
Step 7: Enter the smaller of Step 5 or Step 6.
This is the maximum deductible contribution. $
9. Income passed through to shareholders of S corporations is not considered to be earnings from

self-employment (i.e., it is not subject to self-employment taxes).
10. Unlike contributions to IRAs, contributions to SEP-IRAs are excluded from an employee’s income
rather than deducted from it. Any excess employer contributions must be included in income
without any offsetting deduction.
11. An employee’s deduction for contributions to a qualified plan, including a SEP, is generally
allowed for the tax year in which contributions are paid.
a. Contributions paid on or before the due date of returns, including extensions, for a
particular tax year are deemed paid on the last day of that tax year.
Credits
12. When an employer starts up a SEP, SIMPLE, or qualified retirement plan, the firm may be
eligible for a credit, which is equal to 50% of all ordinary and necessary costs of starting up the
plan (minimum $500 up to maximum $5,000) for the first 3 years of the plan.
a. Eligible small businesses are those that have 100 or fewer employees who receive at
least $5,000 in compensation from the employer in the year preceding the start-up of the
retirement plan.
19.2 SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE)

1. Employers with 100 or fewer employees who received at least $5,000 in compensation from the
employer in the preceding year may adopt a SIMPLE retirement plan if they do not maintain
another qualified plan.
EXAMPLE 19-1 SIMPLE Plan Eligibility

A corporation has 70 eligible employees, and its subsidiary has 50 eligible employees. The corporation is not
eligible for a SIMPLE plan.
2. If a SIMPLE plan has been adopted, it must be available to every employee who (a) received
at least $5,000 in compensation from the employer during any 2 preceding years and (b) is
reasonably expected to receive at least $5,000 in compensation during the current year.
Individuals who are self-employed may also participate in a SIMPLE plan.
a. Generally, compensation means the sum of wages, tips, and other compensation subject
to federal income tax withholding as well as elective salary deferral contributions the
participant made to the SIMPLE IRA plan.
3. The plan allows employees to make elective contributions of up to $13,500 for 2021 ($16,500 if
50 or older) and requires employers to make matching contributions.
4. A SIMPLE plan is not subject to nondiscrimination rules or other complex requirements
applicable to qualified plans.
a. An employer can choose to cover all employees without restriction, or (s)he can limit the
employees covered to those who received at least $5,000 in compensation during any
2 preceding years and who are reasonably expected to receive at least $5,000 in the
current year.
5. SIMPLE plans may be structured as an IRA or as a 401(k) qualified cash or deferred
compensation.
6. Contributions to a SIMPLE IRA account are limited to employee elective contributions and
require employer matching contributions or nonelective contributions.
7. There are two formulas for employer matching:

Matching
a. Matching contribution formula
1) Employers are generally required to match employee contributions on a dollar-for-
dollar basis up to 3% of an employee’s compensation for the year (not limited by
the annual compensation limit).
EXAMPLE 19-2 SIMPLE Plan Contribution

Mary Jones has compensation of $95,000 for the year. Mary contributes $8,000 to her SIMPLE IRA. Mary’s
employer makes a matching contribution of 3% of compensation. The employer’s matching contribution is
$2,850 ($95,000 × 3%).
2) However, an employer also may elect to match contributions for all eligible
employees for a given year at a rate not less than 1% of each employee’s
compensation upon notification to the employees.
3) The lower percentage cannot drop below 3% of employee compensation in more
than 2 years in a 5-year period ending with that year.
Alternative
b. Alternative formula
1) An employer may elect to make a nonelective contribution of 2% of compensation for
each eligible employee who has earned at least $5,000 in compensation from the
employer during the year.
a) Only the first $290,000 of compensation is considered.
8. The employees vest immediately in employer SIMPLE contribution.
9. Self-employed individuals may participate in a SIMPLE plan.
10. An employer may establish a SIMPLE plan even if none of its employees wish to participate.
Employer Contributions
11. Employer contributions are expressed as a percentage of compensation, not as a flat dollar
amount.
a. Employers must continue to make contributions even in lean years of at least 1% of
employee compensation.
b. Employers must contribute an employee’s elective deferral to the employee’s SIMPLE
account no later than 30 days after the last day of the month for which the contributions
are made.
c. An employer must make matching contributions by the due date of the tax return, including
extensions.
Deduction
12. Employers may deduct contributions for the year in which they are made.
a. Matching contributions are deductible for the year only if made by the due date of the tax
return, including extensions.
13. Distributions from a SIMPLE IRA plan are generally taxed like distributions from an IRA.
a. Distributions can be rolled over tax-free from one SIMPLE account to another SIMPLE
account.
b. Distributions can be rolled over tax-free to an IRA after 2 years.
c. Distributions can be rolled over to a qualified plan after 2 years.
Penalties
14. Withdrawals
a. Withdrawals before age 59 1/2 are subject to a 10% tax.
b. Withdrawals within the first 2 years are subject to a 25% tax.
c. Distributions from a SIMPLE account are includible in a participant’s income when
withdrawn.
15. An employee’s elective contributions will be treated as wages for purposes of employment tax.
a. The employer’s matching or nonelective contributions are not wages.
Rollover
16. A participant may roll over distributions tax-free from one SIMPLE account to another SIMPLE
account. In addition, a participant may roll over distributions from a SIMPLE account to an IRA
or a qualified plan without penalty if the individual has participated in the SIMPLE plan for at
least 2 years.
17. Tax-free rollovers to tax sheltered annuities are not allowed.
19.3 QUALIFIED PLANS

1. A qualified employer plan set up by a self-employed person is sometimes called a Keogh or
HR10 plan.
a. The plans described here can be set up and maintained by employers that are
corporations, sole proprietors, or partnerships.
b. A common-law employee or a partner cannot set up one of these plans. 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
1) Provides the employee’s tools, materials, and workplace and
2) Can fire the employee.
c. Qualified plans must be set up by year end.
2. For qualified plan purposes, a self-employed person is both an employer and an employee.
3. To set up a qualified plan, an employer must either
a. Adopt an IRS-approved prototype or master plan offered by a sponsoring organization and
communicate it to the employees or
b. Prepare and adopt a written plan that satisfies the qualification requirements of the Internal
Revenue Code and communicate it to the employees.
1) Although advance IRS approval is not required, approval may be applied for by
paying a fee and requesting a determination letter.
Minimum Participation Requirements
4. An employee must be allowed to participate in the plan if (s)he
a. Has reached age 21 and
b. Has at least 1 year of service (2 years if the plan is not a 401(k) plan and provides that,
after not more than 2 years of service, the employee has a nonforfeitable right to all of his
or her accrued benefits).
1) The employee must complete at least 1,000 hours of service within the 1 year of
service.
5. A plan cannot exclude an employee because (s)he has reached a specified age.
6. Two Basic Kinds of Qualified Plans

Defined Contribution Plan
a. 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 and
losses, and any forfeitures of other accounts that may be allocated to an account. There
are two types of defined contribution plans:
1) Profit-sharing plan. A profit-sharing plan is a plan for sharing employer profits with
the firm’s employees.
a) An employer does not have to make contributions out of net profits to have a
profit-sharing plan.
2) Money purchase pension plan. Contributions to a money purchase pension plan
are fixed and are not based on the employer’s profits.
a) This applies even if the compensation of a self-employed individual as a
participant is based on earned income derived from business profits.
Defined Benefit Plan
b. A defined benefit plan is any plan that is not a defined contribution plan. Contributions to a
defined benefit plan are based on a computation of the contributions needed to fulfill the
requirements established by an employer.
c. To be a qualified plan, a defined benefit plan must benefit at least the lesser of
50 employees or the greater of 40% of all employees or two employees.
Contributions
7. Generally, contributions made to a qualified plan, including those made for a self-employed
individual’s own benefit, are deductible and subject to limits.
a. Self-employed individuals may make contributions on their own behalf only if they have net
earnings from self-employment.
1) Common-law employees are not self-employed and cannot set up retirement plans
for income from their work, even if that income is self-employment income for
Social Security tax purposes.
a) Common-law employees who are ministers, members of religious orders, full-
time insurance salespeople, and U.S. citizens employed in the U.S. by foreign
governments cannot set up retirement plans for their earnings from those
employments, even though their earnings are treated as self-employment
income.
2) A person who is a common-law employee also can be considered self-employed in
other circumstances. For example,
a) 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.
b) 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 Form 1040, Schedule C,
Profit or Loss From Business, for performing marriages, baptisms, and other
personal services are self-employment earnings for qualified plan purposes.
b. Limits
1) Defined contribution plan. A defined contribution plan’s annual contributions and
other additions (excluding earnings) to the account of a participant cannot exceed
the lesser of
a) 100% of the employee’s compensation or
b) $58,000.
NOTE: For purposes of these limits, contributions to more than one such plan must
be added. Since a SEP is considered a defined contribution plan for purposes of
these limits, employer contributions to a SEP must be added to other contributions
to defined contribution plans.
2) Defined benefit plan. For 2021, the annual benefit for a participant under a defined
benefit plan cannot be more than the lesser of
a) 100% of the participant’s average compensation for his or her highest
3 consecutive calendar years or
b) $230,000.
NOTE: Compensation is the pay a participant receives from an employer for
personal services for a year. It includes wages and salaries, fees, commissions,
tips, fringe benefits, and bonuses. It does not include reimbursement or other
expense allowances.
3) Each year, the annual limit on deductions to a qualified plan starts again. If
contributions made in a prior year were less than the deductible limit, the unused
limitation may not be carried forward to another year.
Excess Contributions
8. If the total of an employee’s elective deferrals (salary reduction) under a qualified 401(k) plan
exceeds the limit for the year, the employee can elect to withdraw the excess or leave the
excess in the plan.
a. If the employee takes out the excess deferral by April 15 of the year following the
contribution year, it will be reported in the employee’s gross income for the year of
contribution.
b. If the employee takes out any income earned on the excess deferral, it will be taxable in
the tax year in which it is taken out. The distribution is not subject to the additional 10%
tax on premature distributions.
c. If the employee takes out the excess deferral by April 15 of the year following the
contribution year, the amount will be considered contributed for purposes of satisfying
(or not satisfying) the nondiscrimination requirements of the plan.
d. If the employee does not take out the excess deferral by April 15 of the year following the
contribution year, the excess, though taxable in the contribution year, will not be included
in the employee’s cost basis in figuring the taxable amount of any eventual benefits or
distributions under the plan.
Employer Deduction
9. The deduction is limited based on the type of plan.
a. Profit-sharing plan. The deduction for contributions to a profit-sharing plan cannot
be more than 25% of the compensation from the business paid to all common-law
employees participating in the plan.
b. Money purchase pension plan. The deduction for contributions to a money purchase
pension plan is generally limited to 25% of the compensation paid to participating
common-law employees.
c. Defined benefit plan. Because the deduction for contributions to a defined benefit plan is
based on actuarial assumptions, an actuary must compute the deduction.
d. If an employer contributes more than can be deducted in the current year, the excess may
be carried over and deducted in later years, in addition to contributions for those years.
10. Elective Deferrals [401(k) Plans]
a. A qualified plan can include a cash or deferred arrangement under which eligible
employees can elect to have part of their before-tax pay contributed to the plan rather
than receive the pay in cash.
1) This contribution, called an elective deferral, remains tax-free until it is distributed.
b. An employer may, under a qualified 401(k) plan, also make contributions (other than
matching contributions) for participating employees without giving them a choice to take
cash instead.
c. For 2021, the basic limit on elective deferrals is $19,500 ($26,000 if 50 or older).
d. If an excess deferral exists and is not withdrawn by April 15 of the following year, the
amount will be included in income and not included in cost basis when determining a
future gain.
1) If it is withdrawn by April 15, it will be included in gross income but no penalty will
apply.
11. Rollovers
a. The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it
by rolling it over into an IRA or another eligible retirement plan.
b. Rollovers may be subject to withholding tax. If a recipient receives an eligible rollover
distribution that is expected to total more than $200, the payor must withhold 20% of
each distribution for federal income tax.
1) Tax will not be withheld if the taxpayer has the plan administrator pay the eligible
rollover distribution directly to another qualified plan or an IRA in a direct rollover.
c. An eligible rollover distribution is any distribution that is not
1) A required distribution
2) An annual (or more frequent) distribution under a long-term (10 years or more)
annuity contract or as part of a similar long-term series of substantially equal
periodic distributions
3) The portion of a distribution that represents the return of an employee’s
nondeductible contributions to the plan
4) A distribution, such as a return of excess contributions or deferrals under a 401(k)
plan
5) A hardship distribution
6) Loans treated as distributions
7) Dividends on employer securities
8) The cost of any life insurance coverage provided under a qualified retirement plan
19.4 RETIREMENT DISTRIBUTIONS AND LOANS

1. Distributions from Qualified Plans
Lump-Sum Distributions
a. Annuity distributions are taxed using an exclusion ratio.
1) Joint and survivorship annuity stops being paid when both spouses are deceased.
2) Single life annuity stops being paid when the employee dies.
3) A nonannuity distribution made on or after an annuity starting date is generally
included in full in gross income.
2. Excess Accumulations and Required Minimum Distributions (RMDs)
a. If distributions are less than the required minimum distribution (RMD) for the year, a 50%
excise tax will be imposed on the amount not distributed.
b. Generally, a taxpayer must begin receiving distributions by April 1 of the calendar year
following the later of the employee attaining age 72 or retiring from the employer offering
the plan.
1) For a traditional IRA, the beginning distribution date is April 1 of the calendar year
following the taxpayer attaining age 72.
2) For each year following the initial distribution, the required distribution date is
December 31.
3. Borrowing from the Plan
a. The terms of a qualified plan may permit the plan to lend money to participants without
adverse income or excise tax results if certain requirements are met.
b. Loans are basically treated as distributions.
1) A loan will not be treated as a distribution to the extent loans to the employee do not
exceed the lesser of
a) $50,000 or
b) The greater of one-half of the present value of the employee’s vested accrued
benefit under such plans or $10,000.
2) The $50,000 maximum sum is reduced by the participant’s highest outstanding
balance during the preceding 12-month period.
EXAMPLE 19-3 Multiple Loans Distribution Limitation

Participant A has a vested account balance of $100,000 and took a plan loan of $40,000 on January 1,
20X0, to be paid in 20 quarterly installments of $2,491. On January 1, 20X1, when the outstanding balance
is $33,322, Participant A wants to take another plan loan. The difference between the highest outstanding
loan balance for the preceding year ($40,000) and the outstanding balance on the day of the loan ($33,322)
is $6,678. Since the new loan plus the outstanding loan cannot be more than $43,322 ($50,000 – $6,678),
the maximum amount that the new loan can be is $10,000 ($43,322 – $33,322).
c. Plan loans generally have to be repaid within 5 years, unless the funds are to acquire a
principal residence for the participant.
d. Plan loans must be amortized in level payments, made not less frequently than quarterly
over the term of the loan.
e. A pledge of the participant’s interest under the plan or an agreement to pledge such
interest as security for a loan by a third party, as well as a direct or indirect loan from the
plan itself, is treated as a loan.
f. Any outstanding loan balance when a plan terminates (e.g., due to death or severance
from employment of the plan participant) must be contributed (i.e., rolled over) to a
qualified plan (i.e., an IRA) before the tax return due date (instead of the usual 60-day
rollover period) in order to avoid taxation as a distribution.
4. Tax on Premature Distributions
a. If a distribution is made to the taxpayer under the plan before (s)he reaches age 59 1/2,
the taxpayer may have to pay a 10% additional tax on the premature distribution. This tax
applies to the amount received that the taxpayer must include in income.
Exceptions
b. The 10% tax will not apply if distributions before age 59 1/2
1) Are made to a beneficiary (or to the estate of the taxpayer) on or after the death of
the taxpayer
2) Result from the taxpayer having a qualifying disability
3) Are 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 taxpayer or the joint lives or life expectancies of the taxpayer and his or her
designated beneficiary
4) Are made to the taxpayer after (s)he separated from service if the separation
occurred during or after the calendar year in which the taxpayer reached age 55
(not applicable to SEP or traditional IRAs)
5) Are made to the taxpayer for medical care up to the amount allowable as a medical
expense deduction (determined without regard to whether the taxpayer itemizes
deductions)
6) Are made to an alternate payee under a qualified domestic relations order (QDRO)
7) Are made because of an IRS levy on the plan
8) Are made as a qualified U.S. reservist distribution (those called to active duty)
9) Are from dividends on employer securities
10) Are from federal retirement funds of a phased program
11) Are hurricane or wildfire distributions
12) Are qualified higher education expenses, including those related to graduate-level
courses (IRAs only)
a) However, the amount of qualified higher education expenses is reduced by
the amount of any qualified scholarship, educational assistance allowance, or
payment (other than by gift, bequest, device, or inheritance) for an individual’s
educational enrollment, which is excludable from gross income.
13) Are used to pay medical insurance premiums of an unemployed individual (IRAs
only)
14) Are used to pay up to $10,000 used in a qualified first-time home purchase (IRAs
only)
15) Are timely made to reduce excess contributions or excess deferrals (IRAs only)
Withholding on Distributions
c. If a participant receives a distribution that is not eligible for rollover treatment, such as a
long-term periodic distribution or a required distribution, the 20% withholding requirement
does not apply.
1) Although other withholding rules may apply, a taxpayer may still choose not to have
tax withheld from these distributions.
5. Prohibited Transactions
a. Certain transactions between a plan and a disqualified person are prohibited and are
subject to a 15% excise tax on the amount involved.
1) If the transaction is not corrected within the taxable period, an additional tax of
100% of the amount involved is imposed.
a) Both taxes are payable by any disqualified person who participated in the
transaction.
b. Prohibited transactions generally include
1) A transfer of plan income or assets to, or use of them by or for the benefit of, a
disqualified person
2) Dealing with plan income or assets by a fiduciary in his or her own interest
3) The receiving of consideration by a fiduciary for his or her own account from a party
that is dealing with the plan in a transaction that involves plan income or assets
4) Any of the following acts between the plan and a disqualified person:
a) Selling, exchanging, or leasing property
b) Lending money or extending credit
c) Furnishing goods, services, or facilities
Disqualified Persons
c. The following are disqualified persons:
1) A fiduciary of the plan
2) A person providing services to the plan
3) An employer, if any employees are covered by the plan
4) An employee organization, if any members are covered by the plan
5) Any direct or indirect owner of 50% or more of any of the following:
a) The combined voting power of all classes of stock entitled to vote, or the total
value of shares of all classes of stock of a corporation that is an employer or
employee organization described in 3) or 4).
b) The capital interest or profits interest of a partnership that is an employer or
employee organization described in 3) or 4).
c) The beneficial interest of a trust or unincorporated enterprise that is an
employer or employee organization described in 3) or 4).
6) A member of the family of any individual described in 1), 2), 3), or 5).
a) A member of a family is the spouse, ancestor, lineal descendant, or any
spouse of a lineal descendant.
7) 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:
a) The combined voting power of all classes of stock entitled to vote or the total
value of shares of all classes of stock of a corporation.
b) The capital interest or profits interest of a partnership.
c) The beneficial interest of a trust or estate.
8) An officer, director (or an individual having powers or responsibilities similar to
those of officers or directors), a 10% or more shareholder, or highly compensated
employee (earning 10% or more of the yearly wages of an employer) of a person
described in 3), 4), 5), or 7).
9) A 10% or more (in capital or profits) partner or joint venturer of a person described in
3), 4), 5), or 7).
Exemption
d. Prohibited transactions do not take place if a disqualified person receives benefits to which
(s)he is entitled as a plan participant and beneficiary. However, the same terms apply as
for other qualified persons.
EXAMPLE 19-4 Age Requirement for Distributions

The owner of a business with an established plan must meet the age requirement of 59 1/2 before receiving
a distribution.
Qualified Plan Qualification Rules

6. To qualify for the tax benefits available, a qualified plan must meet certain requirements of the
tax law, which include but are not limited to the following:
a. Plan assets must not be diverted.
b. Minimum coverage requirements must be met. To be a qualified plan, a defined benefit
plan must benefit at least the lesser of
1) 50 employees or
2) The greater of
a) 40% of all employees or
b) 2 employees.
NOTE: If there is only one employee, the plan must benefit that employee.
c. Contributions or benefits must not discriminate in favor of highly compensated employees.
d. Contribution and benefit limits must not be exceeded.
e. Minimum vesting standards must be met. A benefit becomes vested when it becomes
nonforfeitable.
f. Benefit payments must begin when required, except in the case of early retirement
payments.
g. Benefits must not be assigned or alienated.
h. Benefits must not be reduced for Social Security increases.
i. Elective deferrals must be limited.
Reporting Requirements
7. Generally, an annual return/report form is required to be filed by the last day of the 7th month
after the plan year ends.
a. Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, is
a simplified annual reporting form that can be used if the plan meets all of the following
conditions:
1) The plan is a small plan (generally fewer than 100 participants at the beginning of
the plan year).
2) The plan meets the conditions for being exempt from the requirement that the plan’s
books and records be audited by an independent qualified public accountant.
3) The plan has 100% of its assets invested in certain secure investments with a readily
determinable fair value.
4) The plan holds no employer securities.
5) The plan is not a multi-employer plan.
b. Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses)

Retirement Plan, is used for a one-participant plan if either of the following is true:
1) The plan covers only the participant (or the participant and the participant’s spouse),
and the participant (or the participant and the participant’s spouse) owns the entire
business (whether incorporated or unincorporated).
2) The plan covers only one or more partners [or partner(s) and spouse(s)] in a
business partnership.
NOTE: Every one-participant plan that is required to file an annual return for 2021 must also
file either Form 5500-SF or Form 5500-EZ. If the one-participant plan(s) had total assets of
$250,000 or less at the end of the plan year, Form 5500-EZ for that plan year is not required.
All plans must file a Form 5500-EZ for the final plan year to show that all plan assets have
been distributed.
c. Form 5500, Annual Return/Report of Employee Benefit Plan, is used when the
requirements for filing Form 5500-EZ or Form 5500-SF are not met and a return or report
is required.
d. Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc., is generally the form on which distributions
from pensions, annuities, profit-sharing and retirement plans (including Sec. 457 state
and local government plans), IRAs, insurance contracts, etc., are reported to recipients.
e. Period statements of the participants’ account benefits are to be provided by the plan
providers.
1) The following organizations generally can provide IRS-approved master or prototype
plans:
a) Banks (including some savings and loan associations and federally insured
credit unions)
b) Trade or professional organizations
c) Insurance companies
d) Mutual funds
Electronic Filing
8. All Forms 5500 and 5500-SF are required to be filed electronically with the Department of Labor
through EFAST2.
a. One-participant plans have the option of filing Form 5500-SF electronically rather than
filing a Form 5500-EZ on paper with the IRS.

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1

STUDY UNIT NINETEEN

19.1 Simplified Employee Pension (SEP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

19.1 SIMPLIFIED EMPLOYEE PENSION (SEP)

Self-Employed Person’s Rate Worksheet

3) Then the maximum deduction may be computed.

Self-Employed Person’s Deduction Worksheet

Step 3: Enter the deduction for self-employment tax. $

Step 4: Subtract Step 3 from Step 2 and enter the result. $

Step 5: Multiply Step 4 by Step 1 and enter the result. $

Step 6: Multiply $290,000 by the plan contribution rate.

9. Income passed through to shareholders of S corporations is not considered to be earnings from

19.2 SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE)

EXAMPLE 19-1 SIMPLE Plan Eligibility

7. There are two formulas for employer matching:

EXAMPLE 19-2 SIMPLE Plan Contribution

19.3 QUALIFIED PLANS

6. Two Basic Kinds of Qualified Plans

19.4 RETIREMENT DISTRIBUTIONS AND LOANS

EXAMPLE 19-3 Multiple Loans Distribution Limitation

EXAMPLE 19-4 Age Requirement for Distributions

Qualified Plan Qualification Rules

b. Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses)

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