ContentsImportant Changes for 1998 ............. 1

Important Changes for 1999 ............. 2

Important Reminders ......................... 2

Introduction ........................................ 2

Definitions You Need To Know ........ 4

Simplified Employee Pension (SEP) 5Setting Up a SEP ........................... 5How Much Can You Contribute? .... 6How Much Can You Deduct? ......... 6Salary Reduction Simplified

Employee Pension (SARSEP) . 7Distributions (Withdrawals) ............. 8Additional Taxes ............................. 8Reporting and Disclosure

Requirements ........................... 8

SIMPLE Plans ..................................... 8SIMPLE IRA Plan ........................... 8SIMPLE 401(k) Plan ....................... 10

Keogh Plans ....................................... 10Kinds of Plans ................................. 11Setting Up a Keogh Plan ................ 11Minimum Funding Requirements .... 11Contributions ................................... 12Employer Deduction ....................... 12Elective Deferrals (401(k) Plans) .... 13Distributions .................................... 14Prohibited Transactions .................. 15Reporting Requirements ................. 16Keogh Plan Qualification Rules ...... 17

Appendix A—Rate Table, RateWorksheet, and DeductionWorksheet for Self-EmployedIndividuals With Keogh or SEPPlans ............................................. 19

How To Get More Information .......... 21

Index .................................................... 22

Important Changesfor 1998Participant's compensation. Beginning in1998, a participant's compensation includescertain deferrals unless you elect not to in-clude any amount contributed under a salaryreduction agreement (that is not included inthe gross income of the employee). The newrule, which takes into account amounts de-ferred in certain employee benefit plans, willincrease the tax-deferred amount that youmay contribute to a deferred contribution planat the election of the employee. See Com-pensation under Definitions You Need ToKnow, later.

Matching 401(k) plan contributions forself-employed individuals. Beginning in1998, matching contributions to a 401(k) planon behalf of a self-employed individual will nolonger be treated as elective contributionssubject to the limit on elective deferrals. Thematching contributions for partners and otherself-employed individuals will receive thesame treatment as the matching contributionsof other employees. For more information,

Departmentof theTreasury

InternalRevenueService

Publication 560Cat. No. 46574N

RetirementPlansfor SmallBusiness(SEP, SIMPLE, andKeogh Plans)

For use in preparing

1998 Returns

see Limit on Elective Deferrals under KeoghPlans.

Contributions to a SEP-IRA or a SIMPLEIRA. A SEP-IRA or a SIMPLE IRA cannotbe designated as a Roth IRA. Contributionsto a SEP-IRA or a SIMPLE IRA will not affectthe amount that an individual can contributeto a Roth IRA. For more information aboutRoth IRAs, see Publication 590.

Grace period for SIMPLE IRA plans aftera merger, acquisition, or similar trans-action. A new rule applies to the grace periodfor SIMPLE IRA plans when an acquisition,disposition, or similar transaction occurs after1996. If an employer fails to meet the100-employee limit, the exclusive plan re-quirement, or the coverage rules for partic-ipation because of this type of transaction, theSIMPLE IRA plan will be treated as satisfyingthe statutory requirements for the year of thetransaction and the 2 following years. But thegrace period will apply only if certain require-ments are met. For these requirements, seeGrace period for employers who cease tomeet the 100-employee limit under SIMPLEPlans.

Important Changesfor 1999Hardship distributions are not eligiblerollover distributions. Certain hardshipdistributions from a 401(k) or tax-shelteredannuity plan (section 403(b) plan) that occurafter 1998 cannot be rolled over into an IRAor other eligible retirement plan. They aresubject to the 10% additional tax on prema-ture distributions. However, they are not sub-ject to the 20% withholding tax that generallyapplies to eligible rollover distributions thatare not transferred directly to another retire-ment plan or IRA.

The IRS has made application of this newrule optional for 1999. For more information,see Notice 99–5, printed on page 10 ofInternal Revenue Bulletin 1999–3.

Safe harbor 401(k) plans. Beginning in1999, a 401(k) plan under which participantsreceive a certain level of matching or none-lective contributions does not have to passthe special nondiscrimination tests that applyto elective deferrals and matching contribu-tions. For more information, see Notice98–52, printed on page 16 of Internal Reve-nue Bulletin 1998–46.

Important RemindersRepeal of a salary reduction arrangementunder a SEP (SARSEP). You are no longerallowed to establish a salary reduction sim-plified employee pension (SARSEP) plan.However, if you have employees who areparticipants (including new participants), de-fined under Definitions You Need To Know,in a SARSEP that was established before1997, the employees can continue to elect tohave you contribute part of their pay to theplan.

Plan amendments required by changes inthe law. If your Keogh plan needs to be re-vised to conform to recent legislation, youmay choose to get a determination letter fromthe IRS approving the revision. Generally,master and prototype plans are amended bysponsoring organizations. However, thereare instances when you may need to requesta determination letter regarding a master orprototype plan that is a nonstandardized planthat you maintain. Your request should bemade on the appropriate form (generallyForm 5300, or Form 5307 for a master orprototype plan) and should be filed with Form8717, User Fee for Employee Plan Determi-nation Letter Request, and the appropriateuser fee.

You may have to amend your plan tocomply with tax law changes made by theSmall Business Job Protection Act of 1996,Public Law 104–188; the Uruguay RoundAgreements Act, Public Law 103–465; andthe Taxpayer Relief Act of 1997, Public Law105–34; and the Internal Revenue ServiceRestructuring and Reform Act of 1998, PublicLaw 105–206. You need to make theseamendments on or before the last day of thefirst plan year beginning after 1998.

IntroductionThis publication discusses retirement plansthat you can set up and maintain for yourselfand your employees. In this publication,“you” refers to the employer. See DefinitionsYou Need To Know, later. It covers the fol-lowing types of retirement plans.

• SEP (Simplified Employee Pension)plans.

• SIMPLE (Savings Incentive Match Planfor Employees) plans.

• Keogh plans (also called H.R. 10 plans).

SEP, SIMPLE, and Keogh plans offer youand your employees a tax favored way tosave for retirement. You can deduct contri-butions you make to the plan for your em-ployees. If you are a sole proprietor, you candeduct contributions you make to the plan foryourself. You can also deduct trustees' feesif contributions to the plan do not cover them.Earnings on the contributions are generallytax free until you or your employees receivedistributions from the plan in later years.

Under some plans, employees can electto have you contribute limited amounts oftheir before-tax pay to a plan. These amounts(and earnings on them) are generally tax freeuntil your employees receive distributionsfrom the plan in later years.

What this publication covers. This publi-cation contains the information you need tounderstand 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 isdeductible.

• How to treat certain distributions.

• How to report information about the planto the IRS and your employees.

Basic features of retirement plans. Somebasic features of SEP, SIMPLE, and Keoghplans are discussed below. The key rules forSEP, SIMPLE, and Keogh plans are outlinedin Table 1.

SEP plan. SEPs provide a simplifiedmethod for you to make contributions to aretirement plan for your employees. Insteadof establishing a profit-sharing or money pur-chase plan with a trust, you can adopt a SEPagreement and make contributions directly toan individual retirement account or an indi-vidual retirement annuity (SEP-IRAs) estab-lished for each eligible employee.

SIMPLE plan. A SIMPLE plan can be setup by an employer who had 100 or feweremployees who earned at least $5,000 incompensation for the preceding calendar yearand meets certain other requirements. Undera SIMPLE plan, employees can choose tomake salary reduction contributions ratherthan receiving these amounts as part of theirregular compensation. In addition, you willcontribute matching or nonelective contribu-tions. The two types of SIMPLE plans are theSIMPLE IRA plan and the SIMPLE 401(k)plan.

Keogh plan. The term “Keogh plan” re-fers to the qualified retirement plan of a self-employed individual. But a corporation canalso establish and maintain the retirementplans discussed later under Keogh Plans. TheKeogh plan rules are more complex than theSEP plan and SIMPLE plan rules. However,there are some advantages available toKeogh plans, such as the special tax treat-ment that may apply to Keogh plan lump-sumdistributions.

What is not covered in this publication.Although the purpose of this publication is toprovide general information about retirementplans that an employer (including a sole pro-prietor) can establish for its employees, thispublication does not contain all of the rulesand exceptions that apply to these plans. Youmay also need professional assistance andguidance.

Also, this publication does not cover all therules that may be of interest to employees.For example, it does not cover the followingtopics.

• The comprehensive IRA rules an em-ployee needs to know. These rules arecovered in Publication 590, IndividualRetirement Arrangements (IRAs).

• The comprehensive rules that apply todistributions from retirement plans. Theserules are covered in Publication 575,Pension and Annuity Income.

Useful ItemsYou may want to see:

Publications

m 535 Business Expenses

m 575 Pension and Annuity Income

m 590 Individual Retirement Arrange-ments (IRAs) (Including RothIRAs and Education IRAs)

Forms (and Instructions)

m W–2 Wage and Tax Statement

m 1099–R Distributions From Pensions,Annuities, Retirement or Profit-

Page 2

Table 1. Key Retirement Plan Rules

Due date of employer’s return(including extensions).

TypeofPlan Maximum Contribution

Maximum Deduction

Same as maximumcontribution.

Smaller of $30,000 or 15%1 of participant’s compensation2

Last Date forContribution

Due date of employer’s return(including extensions).

Defined Contribution PlansDefined Contribution Plans

Money Purchase–Smaller of$30,000 or 25%1 ofparticipant’s compensation2.

SEP

Keogh

Profit-Sharing–Smaller of$30,000 or 25%1ofparticipant’s compensation2.

Defined Benefit Plans

Amount needed to provide an annual retirement benefit nolarger than the smaller of $130,000 or 100% of theparticipant’s average taxable compensation for his or herhighest 3 consecutive years.

1 Net earnings from self-employment must take the contribution into account.2 Generally limited to $160,000.3 Does not apply to SIMPLE 401(k) plans. The deadline for Keogh plans applies instead.

Elective employercontributions: 30 daysfollowing the end of themonth with respect to whichthe contributions are to bemade.3

Employee: Salary reduction contribution, up to $6,000.SIMPLEIRAandSIMPLE401(k)

Matching contributions ornonelective contributions:Due date of employer’s return(including extensions).

Employer contribution: either dollar-for-dollar matchingcontributions, up to 3% of employee’s compensation4, orfixed nonelective contributions of 2% of compensation2.

15% of all participants’compensation2 excluding SEPcontributions.

When To Set Up Plan

Any time between 1/1 and10/1 of the calendar year.3

By the end of the tax year.

For a new employer cominginto existence after 10/1, assoon as administrativelyfeasible.3

Any time up to due date ofemployer’s return (includingextensions).

Same as maximumcontribution.

Money Purchase–Same asmaximum contribution.

Profit-Sharing–15% of allparticipants’ compensationexcluding plan contributions.2

Defined Benefit Plans

Based on actuarialassumptions andcomputations.

Note: For a defined benefitplan subject to minimumfunding requirements,contributions are due inquarterly installments. SeeMinimum FundingRequirements under KeoghPlans.

4 Under a SIMPLE 401(k) plan, compensation is generally limited to $160,000.

Pag

e3

Sharing Plans, IRAs, InsuranceContracts, etc.

m 5304–SIMPLE Savings Incentive MatchPlan for Employees of Small Em-ployers (SIMPLE) (Not Subject tothe Designated Financial Institu-tion Rules)

m 5305–SEP Simplified EmployeePension-Individual RetirementAccounts Contribution Agreement

m 5305A–SEP Salary Reduction and OtherElective Simplified EmployeePension-Individual RetirementAccounts Contribution Agreement

m 5305–SIMPLE Savings Incentive MatchPlan for Employees of Small Em-ployers (SIMPLE) (for Use With aDesignated Financial Institution)

m 5329 Additional Taxes Attributable toIRAs, Other Qualified RetirementPlans, Annuities, Modified En-dowment Contracts, and MSAs

m 5330 Return of Excise Taxes Relatedto Employee Benefit Plans

m 5500–C/R Return/Report of EmployeeBenefit Plan (With fewer than 100participants)

m 5500–EZ Annual Return of One-Participant (Owners and TheirSpouses) Retirement Plan

Help from the Internal Revenue Service(IRS). See How To Get More Informationnear the end of this publication for informationabout getting publications and forms. Addi-tionally, for further information, contact em-ployee plans taxpayer assistance telephoneservice between the hours of 1:30 p.m. and3:30 p.m. Eastern Time, Monday throughThursday at (202) 622–6074/6075. (Theseare not toll-free numbers.)

Note: All references to “section” in thefollowing discussions are to sections of theInternal Revenue Code (which can be foundat most libraries) unless otherwise indicated.

DefinitionsYou Need To KnowSome of the terms used in this publication aredefined below. The same term used in an-other publication may have a slightly differentmeaning.

Annual additions. Annual additions are thetotal amounts of all of your contributions in ayear, employee contributions (not includingrollovers), and forfeitures allocated to a par-ticipant's account.

Annual benefits. Annual benefits are thebenefits to be paid yearly in the form of astraight-life annuity (with no extra benefits)under a plan but excluding the benefit attrib-utable to employee contributions or rollovercontributions.

Business. A business is an activity in whicha profit motive is present and some type ofeconomic activity is involved. Service as anewspaper carrier under age 18 is not abusiness, but service as a newspaper dealer

is. Service as a sharecropper under anowner-tenant arrangement is a business.Service as a public official is not.

Common-law employee. A common-lawemployee is any individual who, under com-mon law, would have the status of an em-ployee. A common-law employee can alsoinclude a leased employee.

A common-law employee is a person whoperforms services for an employer who hasthe right to control and direct both the resultsof 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 are not self-employed and cannot set up retirement planswith respect to income from their work, evenif that income is self-employment income forsocial security tax purposes. For example,common-law employees who are ministers,members of religious orders, full-time insur-ance salespeople, and U.S. citizens em-ployed in the United States by foreign gov-ernments cannot establish retirement planswith respect to their earnings from those em-ployments, even though their earnings aretreated as self-employment income.

However, a common-law employee canbe self-employed as well. For example, anattorney can be a corporate common-lawemployee during regular working hours andalso practice law in the evening as a self-employed person. In another example, aminister employed by a congregation for asalary is a common-law employee eventhough the salary is treated as self-employment income for social security taxpurposes. However, fees reported on Sched-ule C (Form 1040) for performing marriages,baptisms, and other personal services areself-employment earnings for Keogh planpurposes.

Compensation. Compensation for plan allo-cations is the pay a participant received fromyou for personal services for a year. You cangenerally define compensation as including:

1) Wages and salaries,

2) Fees for professional services, and

3) Other amounts received (cash or non-cash) for personal services actually ren-dered by an employee, including, but notlimited to:

a) Commissions and tips,

b) Fringe benefits, and

c) Bonuses.

Compensation also includes amounts de-ferred in the following employee benefit plans,unless you elect not to include any amountcontributed under a salary reduction agree-ment (that is not included in the gross incomeof the employee).

1) Qualified cash or deferred arrangement(section 401(k) plan).

2) Salary reduction agreement to contributeto a tax-sheltered annuity (section 403(b)plan), a SIMPLE IRA plan, or aSARSEP.

3) Section 457 nonqualified deferred com-pensation plan.

4) Section 125 cafeteria plan.

The limit on elective deferrals is discussedlater under Salary Reduction Simplified Em-ployee Pension (SARSEP) and Keogh Plans.

Other options. In figuring the compen-sation of a participant, you can treat any ofthe following amounts as the employee'scompensation.

1) The employee's wages as defined forincome tax withholding purposes.

2) The employee's wages that you reportin box 1 of Form W–2.

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

Compensation generally cannot include:

• Reimbursements or other expense al-lowances (unless paid under a nonac-countable plan), or

• Deferred compensation (either amountsgoing in or amounts coming out), otherthan certain elective deferrals unless youelect not to include those elective defer-rals in compensation.

For a self-employed individual, compen-sation means the earned income, discussedlater, of that individual.

Contribution. A contribution is an amountyou pay into a plan for all those (includingself-employed individuals) participating in theplan. Limits apply to how much, under thecontribution formula of the plan, can be con-tributed each year for a participant.

Deduction. A deduction is the amount of plancontributions you can subtract from gross in-come on your federal income tax return.Limits apply to the amount deductible.

Earned income. Earned income is netearnings from self-employment, discussedlater, from a business in which your servicesmaterially helped to produce the income.

You can have earned income from prop-erty that your personal efforts helped create,such as books or inventions on which youearn royalties. Earned income includes netearnings from selling or otherwise disposingof the property, but it does not include capitalgains. It includes income from licensing theuse of property other than goodwill.

If you have more than one business, butonly one has a retirement plan, only theearned income from that business is consid-ered for that plan.

Employer. An employer is generally anyperson for whom an individual performs or didperform any service, of whatever nature, asan employee. A sole proprietor is treated ashis or her own employer for retirement planpurposes, and a partnership is the employerof each partner. A partner is not an employerfor retirement plan purposes.

Highly compensated employees. Highlycompensated employees are individuals who:

• Owned more than 5% of the capital orprofits in your business at any time duringthe year or the preceding year, or

• For the preceding year, received com-pensation from you of more than $80,000and, if you so elect, was in the top 20%

Page 4

of employees when ranked by compen-sation.

Leased employee. A leased employee whois not your common-law employee must gen-erally be treated as your employee for retire-ment plan purposes if he or she:

1) Provides services to you under anagreement between you and a leasingorganization,

2) Has performed services for you (or foryou and related persons) substantiallyfull time for at least 1 year, and

3) Performs services under your primarydirection or control.

Exception. A leased employee is nottreated as your employee if the employee iscovered by the leasing organization under itsqualified pension plan and leased employeesare not more than 20% of your nonhighlycompensated work force. The leasing organ-ization's plan must be a money purchasepension plan providing:

• Immediate participation,

• Full and immediate vesting, and

• A nonintegrated employer contributionrate of at least 10% of compensation foreach participant.

However, if the leased employee is yourcommon-law employee, that employee will beyour employee for all purposes, regardlessof any pension plan of the leasing organiza-tion.

Net earnings from self-employment.Compensation is your net earnings from self-employment. For SEP and Keogh plans, netearnings from self-employment is your grossincome from your trade or business (providedyour personal services are a materialincome-producing factor) minus allowabledeductions for your business. Allowable de-ductions include contributions to SEP andKeogh plans for common-law employees andthe deduction allowed for one-half of yourself-employment tax.

Earnings from self-employment do not in-clude items that are excluded from gross in-come (or their related deductions) other thanforeign earned income and foreign housingcost amounts. For the deduction limits,earned income is net earnings for personalservices actually rendered to the business.You take into account the income tax de-duction for one-half of self-employment taxand the deduction for contributions to a qual-ified plan made on your behalf when figuringnet earnings. Net earnings include a partner'sdistributive share of partnership income orloss (other than separately stated items, suchas capital gains and losses). It does not in-clude income passed through to shareholdersof S corporations. Guaranteed payments tolimited partners qualify as net earnings fromself-employment if they are paid for servicesto or for the partnership. Distributions of otherincome or loss to limited partners do notqualify.

For SIMPLE plans, compensation is yournet earnings from self-employment (line 4 ofShort Schedule SE (Form 1040)) before sub-tracting any contributions made to theSIMPLE IRA plan for yourself.

Owner-employee. An owner-employee is:

• A sole proprietor, or

• A partner who owns more than 10% ofeither the capital interest or the profitsinterest in a partnership.

Participant. A participant is an eligible em-ployee who is covered by your retirementplan.

Partner. A partner is an individual who sharesownership of an unincorporated trade orbusiness with one or more persons. For re-tirement plans, a partner is treated as anemployee of the partnership.

Self-employed individual. An individual inbusiness for himself or herself is self-employed. Sole proprietors and partners areself-employed. Self-employment can includepart-time work.

Not everyone who has net earnings fromself-employment for social security tax pur-poses is self-employed for Keogh plan pur-poses. See Common-law employee, earlier.Also see Net earnings from self-employment.

In addition, certain fishermen may beconsidered self-employed for setting up aKeogh plan. See Publication 595, Tax High-lights for Commercial Fishermen, for thespecial rules that apply.

Sole proprietor. A sole proprietor is an in-dividual who owns an unincorporated busi-ness by himself or herself. For retirementplans, a sole proprietor is treated as both anemployer and an employee.

Simplified EmployeePension (SEP)A simplified employee pension (SEP) is awritten plan that allows you to make contri-butions toward your own (if you are self-employed) and your employees' retirementwithout getting involved in the more complexKeogh plan. But, some advantages availableto Keogh plans, such as the special taxtreatment that may apply to Keogh planlump-sum distributions, do not apply to SEPs.

Under a SEP, you make the contributionsto an individual retirement arrangement(called a SEP-IRA) established by or for eacheligible employee. SEP-IRAs are owned andcontrolled by the employee, and you makecontributions to the financial institution wherethe SEP-IRA is maintained.

SEP-IRAs are set up for, at a minimum,each eligible employee (defined later). ASEP-IRA may have to be set up for a leasedemployee (defined earlier under DefinitionsYou Need To Know), but does not need tobe set up for excludable employees (definedlater).

Eligible employee. An eligible employee isan individual who has:

1) Reached age 21,

2) Worked for you in at least 3 of the last5 years, and

3) Received at least $400 in compensationfrom you for 1998.

TIPYou can establish less restrictiveparticipation requirements than thoselisted, but not more restrictive ones.

Excludable employees. The following em-ployees can be excluded from coverage un-der a SEP.

1) Employees who are covered by a unionagreement and whose retirement bene-fits were bargained for in good faith bytheir union and you.

2) Nonresident alien employees who haveno U.S. source wages, salaries, or otherpersonal services compensation fromyou. For more information about non-resident aliens, see Publication 519,U.S. Tax Guide for Aliens.

Setting Up a SEPThere are three basic steps in setting up aSEP.

1) You must execute a formal writtenagreement to provide benefits to all eli-gible employees.

2) You must give each eligible employeecertain information about the SEP.

3) An IRA account must be established byor for each eligible employee.

TIPMany financial institutions will helpyou set up a SEP.

Formal written agreement. You must exe-cute a formal written agreement to providebenefits to all eligible employees under aSEP. You can satisfy the written agreementrequirement by adopting an IRS model SEPusing Form 5305–SEP. However, see Whennot to use Form 5305–SEP, later.

If you adopt an IRS model SEP usingForm 5305–SEP, no prior IRS approval ordetermination letter is required. Keep the ori-ginal form. Do not file it with the IRS. Also,using Form 5305–SEP will usually relieve youfrom filing annual retirement plan informationreturns with the IRS and the Department ofLabor. See the Form 5305–SEP instructionsfor details.

When not to use Form 5305–SEP. Youcannot use Form 5305–SEP if any of the fol-lowing apply.

• You currently maintain any other qualifiedretirement plan. This does not preventyou from maintaining another SEP.

• You have maintained a defined benefitplan (defined later under Keogh Plans),even if it is now terminated.

• You have any eligible employees forwhom IRAs have not been established.

• You use the services of leased employ-ees (as described earlier under Defi-nitions You Need to Know ).

• You are a member of an affiliated servicegroup (as described in section 414(m)),a controlled group of corporations (asdescribed in section 414(b)), or trades orbusinesses under common control (asdescribed in section 414(c)), unless alleligible employees of all the members ofthese groups, trades, or businesses par-ticipate under the SEP.

• You do not pay the cost of the SEP con-tributions.

Page 5

Information you must give to employees.You must give each eligible employee a copyof Form 5305–SEP, its instructions, and theother information listed in the Form5305–SEP instructions. An IRS model SEPis not considered adopted until you give eachemployee this information.

Establishing IRA accounts. An IRA accountmust be established by or for each eligibleemployee. IRA accounts can be establishedwith banks, insurance companies, or otherqualified financial institutions. You send SEPcontributions to the financial institution wherethe IRA is maintained.

How MuchCan You Contribute?The SEP rules permit you to contribute alimited amount of money each year to eachemployee's SEP-IRA. If you are self-employed, you can contribute to your ownSEP-IRA. Contributions must be in the formof money (cash, check, or money order). Youcannot contribute property. However, youmay be able to transfer or roll over certainproperty from one retirement plan to another.See Publication 590 for more informationabout rollovers.

You do not have to make contributionsevery year. But if you make contributions,they must be based on a written allocationformula and must not discriminate in favor ofhighly compensated employees (defined ear-lier under Definitions You Need To Know).When you contribute, you must contribute tothe SEP-IRAs of all participants who actuallyperformed personal services during the yearfor which the contributions are made, evenemployees who die or terminate employmentbefore the contributions are made.

The contributions you make under a SEPare treated as if made to a qualified pension,stock bonus, profit-sharing, or annuity plan.Consequently, contributions are deductiblewithin limits, as discussed later, and generallyare not taxable to the plan participants.

A SEP-IRA cannot be designated as aRoth IRA. Contributions to a SEP-IRA will notaffect the amount that an individual can con-tribute to a Roth IRA.

Time limit for making contributions. Todeduct contributions for a year, you mustmake the contributions by the due date (in-cluding extensions) of your tax return for theyear.

Contribution LimitsContributions that you make for a year to acommon-law employee's SEP-IRA cannot bemore than the smaller of 15% of the employ-ee's compensation or $30,000. Compen-sation generally does not include your contri-butions to the SEP. However, if you have asalary reduction agreement, discussed later,see Employee compensation under SalaryReduction Simplified Employee Pension(SARSEP), later.

Example. Your employee, Mary Plant,earned $21,000 for 1998. The maximumcontribution that you can make to herSEP-IRA is $3,150 (15% x $21,000).

Contributions for yourself. The annuallimits on your contributions to a common-lawemployee's SEP-IRA also apply to contribu-tions you make to your own SEP-IRA. How-

ever, special rules apply when figuring yourmaximum deductible contribution. See De-duction Limit for Self-Employed Individuals,later.

Annual compensation limit. You generallycannot consider the part of compensation ofan employee that is over $160,000 when fig-uring your contribution limit for that employee.Therefore, the maximum contribution amountfor an eligible employee for which the$160,000 limit applies is $24,000.

More than one plan. If you contribute to adefined contribution plan (defined later underKeogh Plans), annual additions to an accountare limited to the lesser of (1) $30,000 or (2)25% of the participant's compensation. Whenyou figure these limits, you must add yourcontributions to all defined contribution plans.Since a SEP is considered a defined contri-bution plan for these limits, your contributionsto a SEP must be added to your contributionsto other defined contribution plans.

Tax treatment of excess contributions.Excess contributions are your contributions toan employee's SEP-IRA (or to your ownSEP-IRA) for a year that are more than thesmaller of:

• 15% of the employee's compensation (or,for you, 13.0435% of your net earningsfrom self-employment), or

• $30,000.

Excess contributions are included in the em-ployee's income for the year and are treatedas contributions by the employee to his or herSEP-IRA. For more information on employeetax treatment of excess contributions, seechapter 4 in Publication 590.

Reporting on Form W–2. Do not includeSEP contributions on your employee's FormW–2, Wage and Tax Statement, unless con-tributions were made under a salary reductionarrangement (discussed later).

How Much Can You Deduct?Generally, you can deduct the contributionsyou make each year to each employee'sSEP-IRA. If you are self-employed, you candeduct the contributions you make each yearto your own SEP-IRA.

Deduction Limitfor Your Contributionson Behalf of EmployeesThe most you can deduct for your contribu-tions for participants is the lesser of:

1) Your contributions (including any electivedeferrals and excess contributionscarryover), or

2) 15% of the compensation (limited to$160,000 per participant) paid to themduring the year from the business thathas the plan.

Deduction Limit forSelf-Employed IndividualsIf you contribute to your own SEP-IRA, youneed to make a special computation to figureyour maximum deduction for these contribu-tions. When figuring the deduction for contri-butions made to your own SEP-IRA, com-pensation is your net earnings from

self-employment (defined under DefinitionsYou Need To Know), which takes into ac-count:

1) The deduction for one-half of your self-employment tax, and

2) The deduction for contributions to yourown SEP-IRA.

The deduction for contributions to yourown SEP-IRA and your net earnings dependon each other. For this reason, you determinethe deduction for contributions to your ownSEP-IRA indirectly by reducing the contribu-tion rate called for in your plan. To do this,use either the Rate Table for Self-Employedor the Rate Worksheet for Self-Employed inAppendix A. Then figure your maximum de-duction by using the Deduction Worksheet forSelf-Employed in Appendix A.

Deduction Limitsfor Multiple PlansFor the deduction limits, treat all of yourqualified defined contribution plans and all ofyour qualified defined benefit plans as a sin-gle plan. See Kinds of Plans, later underKeogh Plans for the definitions of definedcontribution plans and defined benefit plans.If you have both kinds of plans, a SEP istreated as a separate profit-sharing (definedcontribution) plan. A qualified plan is a planthat meets the requirements discussed laterunder Keogh Plan Qualification Rules.

SEP and profit-sharing plans. If you alsocontribute to a qualified profit-sharing plan,you must reduce the 15% deduction limit forthat profit-sharing plan by the allowable de-duction for contributions to the SEP-IRAs ofthose participating in both the SEP plan andthe profit-sharing plan.

Defined contribution and defined benefitplans. If you contribute to one or more de-fined contribution plans (including a SEP) andone or more defined benefit plans, specialdeduction limits may apply. For informationabout the special deduction limits, see De-duction limit for multiple plans under KeoghPlans, later.

Carryover ofExcess SEP ContributionsIf you made SEP contributions in excess ofthe deduction limit (nondeductible contribu-tions), you can carry over and deduct the ex-cess in later years. However, the excesscontributions carryover, when combined withthe contribution for the later year, cannot bemore than the deduction limit for that year. Ifyou also contributed to a defined benefit planor defined contribution plan, see Carryoverof Excess Contributions, later under KeoghPlans for the carryover limit.

Excise tax. If you made nondeductible (ex-cess) contributions to a SEP, you may besubject to a 10% excise tax. For informationabout the excise tax, see Excise Tax forNondeductible (Excess) Contributions underKeogh Plans, later.

When To Deduct ContributionsWhen you can deduct contributions made fora year depends on the tax year on which theSEP is maintained.

• If the SEP is maintained on a calendar

Page 6

year basis, you deduct contributionsmade for a year on your tax return for theyear with or within which the calendaryear ends.

• If you file your tax return and maintain theSEP using a fiscal year or short tax year,you deduct contributions made for a yearon your tax return for that year.

Where To Deduct ContributionsDeduct contributions for yourself on line 29of Form 1040. You deduct contributions foryour employees on Schedule C (Form 1040),on Schedule F (Form 1040), on Form 1120S,or on Form 1065, whichever applies to you.

If you are a partner, the partnershippasses its deduction to you for the contribu-tions it made for you. The partnership will re-port these contributions on Schedule K–1(Form 1065). You deduct the contributionson line 29 of Form 1040.

Salary ReductionSimplified EmployeePension (SARSEP)A SARSEP is a SEP established before 1997that includes a salary reduction arrangement.(See the Caution, next). Under a SARSEP,your employees can elect to have you con-tribute part of their compensation to theirSEP-IRAs. The income tax on the part con-tributed is deferred. This choice is called anelective deferral, which remains tax free untildistributed (withdrawn).

CAUTION!

You are not allowed to establish aSARSEP after 1996. However, par-ticipants (including employees hired

after 1996) in a SARSEP that was establishedbefore 1997 can continue to elect to have youcontribute part of their pay to the plan. If youare interested in a retirement plan that in-cludes a salary reduction arrangement, seeSIMPLE Plans, later.

Who can have a SARSEP? A SARSEP thatwas established before 1997 is available toyou and your eligible employees only if:

1) At least 50% of your employees eligibleto participate choose the salary re-duction arrangement,

2) You have 25 or fewer employees whowere eligible to participate in the SEP (orwould have been eligible to participate ifyou had maintained a SEP) at any timeduring the preceding year, and

3) The SEP meets the ADP test.

ADP test. Under the ADP test, theamount deferred each year by each eligiblehighly compensated employee as a percent-age of pay (the deferral percentage) cannotbe more than 125% of the average deferralpercentage (ADP) of all other employees eli-gible to participate. A highly compensatedemployee is defined earlier under DefinitionsYou Need To Know.

Deferral percentage. The deferral per-centage for an employee for a year is figuredusing the following ratio.

The amount of elective employercontributions paid to the SEP for the

employee for the year

The employee’s compensation(limited to $160,000)

Who cannot have a SARSEP. A SEPthat is maintained by a state or local govern-ment or any of its political subdivisions,agencies, or instrumentalities, or by a tax-exempt organization cannot include a salaryreduction arrangement.

Limits on Elective DeferralsThe most compensation a participant canelect to defer for calendar year 1998 is thesmaller of:

• 15% of the participant's compensation(limited to $160,000 of the participant'scompensation), or

• $10,000.

The $10,000 limit applies to the totalelective deferrals the employee makes for theyear to a SEP and any of the following.

• Cash or deferred arrangement (section401(k) plan).

• Salary reduction arrangement under atax-sheltered annuity plan (section 403(b)plan).

• SIMPLE IRA plan.

Overall limit on SEP contributions. If youalso make nonelective contributions to aSEP-IRA, the total of the nonelective andelective contributions to that SEP-IRA cannotbe more than the smaller of $30,000 or 15%of the employee's compensation. The samerule applies to contributions you make to yourown SEP-IRA. See Contribution Limits, ear-lier.

Employee compensation. For figuring theelective deferral amount, compensation isgenerally the amount you pay to the em-ployee for the year. Compensation includesthe elective deferral amount and otheramounts deferred in certain employee benefitplans. See Compensation, earlier under De-finitions You Need To Know. These amountsare included in figuring your employees' totalcontributions even though they are not in-cluded in the income of your employees forincome tax purposes.

TIPYou can choose not to treat thedeferral amount as compensation, asdiscussed later.

When figuring the deferral amount, youmultiply the employee's compensation by thedeferral contribution rate. However, the re-duced rate method must always be used todetermine the maximum deductible contribu-tion (13.0435% of unreduced compensation).This is the same method you use to figureyour deduction for contributions you make toyour own SEP-IRA.

Example 1. Jim's SARSEP calls for adeferral contribution rate of 10% of his salary.Jim's salary for the year is $30,000 (beforereduction for the deferral). You multiply Jim'ssalary by 10% to get his deferral amount of$3,000. Your maximum deduction for elective

deferrals and any nonelective contributionswould be $3,913.05 ($30,000 × .130435).

On Jim's Form W–2, you show his totalwages as $27,000 ($30,000 − $3,000). Socialsecurity wages and Medicare wages will eachbe $30,000. Jim will report $27,000 as wageson his individual income tax return.

Election not to treat deferrals as com-pensation. You can choose not to treatelective deferrals (and other amounts de-ferred in certain employee benefit plans) fora year as compensation under your SARSEP.This method may be used for calculatingdeferral percentages for the ADP test.

The deferral amount and the compen-sation (minus the deferral) depend on eachother. For this reason, the deferral amount isfigured indirectly by reducing the contributionrate for deferrals called for under the salaryreduction arrangement. This method is thesame one that you use to figure your de-duction for contributions you make to yourown SEP-IRA. The reduced rate methodmust also be used to determine the maximumdeductible contribution (13.0435% of unre-duced compensation).

To figure the deferral amount, use eitherthe rate table or rate worksheet in AppendixA. Use the rate table if the deferral contribu-tion rate called for under the SARSEP is awhole number. Otherwise, use the rate work-sheet. When using the rate table, first locatethe deferral contribution rate in Column A.Then read across to find the reduced rate inColumn B. Multiply the reduced rate by youremployee's compensation to get the deferralamount.

Example 2. The facts are the same as inExample 1 except that you elected not to treatdeferrals as compensation under the ar-rangement. To figure the deferral amount,you multiply Jim's salary of $30,000 by0.090909 (the reduced rate equivalent of10%) to get the deferral amount of $2,727.27.Your maximum deduction for elective defer-rals and any nonelective contributions wouldbe $3,913.05 ($30,000 × .130435).

On Jim's Form W–2, you show his totalwages as $27,272.73 ($30,000 minus$2,727.27). Social security wages and Medi-care wages will each be $30,000. Jim will re-port $27,272.73 as wages on his individualincome tax return.

Alternative definitions of compen-sation. In addition to the general definitionof compensation under Definitions You NeedTo Know and the election described in thepreceding paragraphs, you can use any defi-nition of compensation that:

• Is reasonable,

• Is not designed to favor highly compen-sated employees, and

• Provides that the average percentage oftotal compensation used for highly com-pensated employees as a group for theyear is not more than minimally higherthan the average percentage of totalcompensation used for all other employ-ees as a group.

Compensation of self-employed indi-viduals. If you are self-employed, compen-sation is your net earnings from self-employment as defined earlier underDefinitions You Need To Know.

To figure the deferral amount, you mustuse a reduced rate instead of the deferral

Page 7

contribution rate called for under theSARSEP. Use either the rate table or rateworksheet in Appendix A to get the reducedrate. Then use the deduction worksheet tofigure the deferral amount.

Compensation for this purpose does notinclude tax-free items (or deductions relatedto them) other than foreign earned incomeand housing cost amounts.

Compensation of disabled participants.You may be able to elect to use special rulesto determine compensation for a participantwho is permanently and totally disabled. Un-der these rules, compensation means thecompensation the participant would have re-ceived if paid at the rate of compensation paidimmediately before becoming permanentlyand totally disabled. See Internal RevenueCode section 415(c)(3)(C) for details.

Tax treatment of deferrals. You can deductyour deferrals that, when added to your otherSEP contributions, are not more than thelimits under How Much Can You Deduct,earlier.

Elective deferrals that are not more thanthe limit discussed earlier are excluded fromyour employees' wages subject to federal in-come tax in the year of deferral. However,these deferrals are included in wages for so-cial security, Medicare, and federal unem-ployment (FUTA) tax.

Excess deferrals. For 1998, excessdeferrals are the elective deferrals for theyear that are more than the $10,000 limit (orthe limit figured under ADP test in the caseof a highly compensated employee) dis-cussed earlier. The treatment of excessdeferrals made under a SARSEP is similar tothe treatment of excess deferrals made undera Keogh plan. See Treatment of ExcessDeferrals under Keogh Plans, later.

You must notify your highly compensatedemployees of their deferrals that are morethan the ADP limit within 21/2 months after theend of the plan year. If you do not notify themwithin this time period, you must pay a 10%tax on the excess deferrals. For an explana-tion of the notification requirements, seeRevenue Procedure 91–44, printed on page733 of Cumulative Bulletin 1991–2. If youadopted a SARSEP using Form 5305A–SEP,the notification requirements are explained inthe instructions for that form.

Reporting on Form W–2. Do not includeelective deferrals in the “Wages, tips, andother compensation” box of Form W–2. Youmust, however, include them in the “Socialsecurity wages” and “Medicare wages andtips” boxes. You must also include them inbox 13. Mark the “Deferred compensation”checkbox in box 15. For more information,see the Form W–2 instructions.

Distributions (Withdrawals)As an employer, you cannot prohibit distribu-tions from a SEP-IRA. Also, you cannot makeyour contributions on the condition that anypart of them must be kept in the account.

Distributions are subject to IRA rules. Forinformation about IRA rules, including the taxtreatment of distributions, rollovers, required

distributions, and income tax withholding, seePublication 590.

Additional TaxesThe tax advantages of using SEP-IRAs forretirement savings can be offset by additionaltaxes. There are additional taxes for:

• Making excess contributions,

• Making early withdrawals (taking prema-ture distributions), and

• Allowing excess amounts to accumulate(not making required withdrawals).

For information about these taxes, seechapter 1 in Publication 590. Also, a SEP-IRAmay be disqualified, or an excise tax mayapply if the account is involved in a prohibitedtransaction, discussed next.

Prohibited transaction. If an employee im-properly uses his or her SEP-IRA, such asby borrowing money from it, the employeehas engaged in a prohibited transaction. Inthat case, the SEP-IRA will no longer qualifyas an IRA. For a list of prohibited trans-actions, see Prohibited Transactions underKeogh Plans, later.

Effect on employee. If a SEP-IRA isdisqualified because of a prohibited trans-action, the assets in the account will betreated as having been distributed to the em-ployee of that SEP-IRA on the first day of theyear in which the transaction occurred. Theemployee must include in income the excessof the assets' fair market value (on the firstday of the year) over any cost basis in theaccount. Also, the employee may have to paythe additional tax on premature distributions.For more information, see Tax on ProhibitedTransactions under Keogh Plans, later.

Reporting andDisclosure RequirementsIf you set up a SEP using Form 5305–SEPor Form 5305A–SEP (see the Caution below),you must give your eligible employees certaininformation about the SEP at the time you setit up. See Setting Up a SEP, earlier. Also, youmust give your eligible employees a state-ment each year showing any contributions totheir SEP-IRAs. If you set up a salary re-duction SEP, you must also give them noticeof any excess contributions. For details aboutother information you must give them, see theinstructions for either of these forms.

Even if you did not use Form 5305–SEPor Form 5305A–SEP to set up your SEP, youmust give your employees information similarto that described above. For more informa-tion, see the instructions for either Form5305–SEP or Form 5305A–SEP.

CAUTION!

Form 5305A–SEP is used to set upa SEP that includes a salary reductionarrangement. SEPs that include a

salary reduction arrangement cannot be setup after 1996. However, eligible employeeshired after 1996 can elect to have you con-tribute part of their pay to a SARSEP estab-lished before 1997. See Salary ReductionSimplified Employee Pension (SARSEP),earlier.

SIMPLE PlansA Savings Incentive Match Plan for Employ-ees (SIMPLE plan) is a written arrangementthat provides you and your employees with asimplified way to make contributions to pro-vide retirement income. Under a SIMPLEplan, employees can choose to make salaryreduction contributions rather than receivingthese amounts as part of their regular com-pensation. In addition, you will contributematching or nonelective contributions.

SIMPLE plans can only be maintained ona calendar-year basis.

A SIMPLE plan can be set up:

• Using IRAs (SIMPLE IRA plan), or

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

SIMPLE IRA PlanA SIMPLE IRA plan is a retirement plan thatuses SIMPLE IRAs for each eligible em-ployee. SIMPLE IRAs are the individual re-tirement accounts or annuities into which thecontributions must be deposited. Under aSIMPLE IRA plan, a SIMPLE IRA must be setup for each eligible employee. For the defi-nition of an eligible employee, see Who CanParticipate in a SIMPLE IRA Plan?, later.

Who Can Set Upa SIMPLE IRA Plan?You can set up a SIMPLE IRA plan if youmeet both of the following requirements.

• You meet the 100-employee limit.

• You do not maintain another qualifiedplan unless the other plan is for collectivebargaining employees.

100-employee limit. You can set up aSIMPLE IRA plan only if you had 100 or feweremployees who earned $5,000 or more incompensation during the preceding year.Under this rule, you must take into accountall employees employed at any time duringthe calendar year, regardless of whether theyare eligible to participate. Employees includeself-employed individuals who receivedearned income and leased employees (de-fined earlier under Definitions You Need ToKnow).

Once you establish a SIMPLE IRA plan,you must continue to meet the 100-employeelimit each year that you maintain the plan.

Grace period for employers who ceaseto meet the 100-employee limit. If youmaintain the SIMPLE IRA plan for at least oneyear and you cease to meet the100-employee limit in a later year, you will betreated as meeting it for the 2 calendar yearsimmediately following the calendar year forwhich you last met it.

A different rule applies if you do not meetthe 100-employee limit because of an acqui-sition, disposition, or similar transaction. Un-der this rule, the SIMPLE IRA plan will betreated as meeting the 100-employee limit forthe year of the transaction and the 2 followingyears if:

• Coverage under the plan has not signif-icantly changed during the grace period,and

Page 8

• The SIMPLE IRA plan would have cont-inued to qualify after the transaction if youhad remained a separate employer.

CAUTION!

The grace period for acquisitions,dispositions, and similar transactionsalso applies if, because of these types

of transactions, you do not meet the rulesexplained under Other qualified plan or WhoCan Participate in a SIMPLE IRA Plan?.

Other qualified plan. The SIMPLE IRA plangenerally must be the only retirement plan towhich you make contributions, or benefitsaccrue, for service in any year beginning withthe year the SIMPLE IRA plan becomes ef-fective.

Exception. If you maintain a qualifiedplan for collective bargaining employees, youare permitted to maintain a SIMPLE IRA planfor noncollectively bargained employees.

Who Can Participatein a SIMPLE IRA Plan?Any employee who received at least $5,000in compensation during any 2 years preced-ing the current calendar year and is reason-ably expected to earn at least $5,000 duringthe current calendar year is eligible to partic-ipate. The term “employee” includes a self-employed individual who received earned in-come.

You can establish less restrictive eligibilityrequirements (but not more restrictive ones)by eliminating or reducing the prior yearcompensation requirements, the current yearcompensation requirements, or both. For ex-ample, you can allow participation for em-ployees who received $3,000 in compen-sation during any preceding calendar year.However, you cannot impose any other con-ditions on participating in a SIMPLE IRA plan.

Excludable employees. The following em-ployees do not need to be covered under aSIMPLE IRA plan.

1) Employees who are covered by a unionagreement and whose retirement bene-fits were bargained for in good faith bytheir union and you.

2) Nonresident alien employees who haveno U.S. source wages, salaries, or otherpersonal services compensation fromyou.

Compensation. Compensation for employ-ees is the total amount of wages required tobe reported on Form W–2, including electivedeferrals (deferred amounts elected underany 401(k) plans, 403(b) plans, government(section 457(b)) plans, SEP plans, andSIMPLE IRA plans). If you are self-employed,compensation is your net earnings from self-employment (line 4 of Short Schedule SE(Form 1040)) before subtracting any contri-butions made to the SIMPLE IRA plan foryourself.

How To Set Up a SIMPLE IRA PlanYou can use either Form 5304–SIMPLE orForm 5305–SIMPLE to set up a SIMPLE IRAplan. Each form is a model savings incentivematch plan for employees (SIMPLE) plandocument. The form that is used dependson whether you select a financial institutionor your employees select the institution thatwill receive the contributions.

Use Form 5304–SIMPLE if you allow eachplan participant to select the financial institu-tion for receiving his or her SIMPLE IRA plancontributions. Use Form 5305–SIMPLE if yourequire that all contributions under theSIMPLE IRA plan be deposited initially at adesignated financial institution.

The SIMPLE IRA plan is consideredadopted when you have completed all ap-propriate boxes and blanks on the form andit has been executed by you. Keep the ori-ginal form. Do not file it with the IRS.

Other uses of Form 5304–SIMPLE andForm 5305–SIMPLE. If you set up a SIMPLEIRA plan using Form 5304–SIMPLE (or Form5305–SIMPLE), these forms can be used tosatisfy other requirements, including:

1) Meeting employer notification require-ments for the SIMPLE IRA plan. Page 3of Form 5304–SIMPLE and Page 3 ofForm 5305–SIMPLE contain a ModelNotification to Eligible Employees thatprovides the necessary information tothe employee, and

2) Maintaining the SIMPLE IRA plan rec-ords and as proof of having establisheda SIMPLE IRA plan for employees.

Deadline for setting up a SIMPLE IRA plan.You can establish a SIMPLE IRA plan effec-tive on any date between January 1 and Oc-tober 1 of a year, provided that you did notpreviously maintain a SIMPLE IRA plan. Ifyou previously maintained a SIMPLE IRAplan, you can establish a SIMPLE IRA planeffective only on January 1 of a year. Thisrequirement does not apply if you are a newemployer that comes into existence after Oc-tober 1 of the year the SIMPLE IRA plan isestablished and you establish a SIMPLE IRAplan as soon as administratively feasible afteryou come into existence. A SIMPLE IRA plancannot have an effective date that is beforethe date you actually adopt the plan.

Setting up a SIMPLE IRA. SIMPLE IRAsare the individual retirement accounts or an-nuities into which the contributions are de-posited. A SIMPLE IRA must be set up foreach eligible employee. Forms 5305–S and5305–SA are model trust and custodial ac-count documents that the participant and thetrustee (or custodian) can use for this pur-pose.

A SIMPLE IRA cannot be designated asa Roth IRA. Contributions to a SIMPLE IRAwill not affect the amount that an individualcan contribute to a Roth IRA.

Deadline for setting up a SIMPLE IRA.A SIMPLE IRA must be set up for an em-ployee before the first date by which a con-tribution is required to be deposited into theemployee's IRA.

Notification RequirementsIf you adopt a SIMPLE IRA plan, you mustnotify each employee before the beginningof the employee's 60-day election period ofthe following:

1) The employee's opportunity to make orchange a salary reduction election undera SIMPLE IRA plan,

2) Your election to make either reducedmatching contributions or nonelectivecontributions (discussed later), and

3) A summary description and the locationof the plan. The financial institutionshould provide you with this information.

If you use a designated financial institu-tion, each employee must be notified in writ-ing that his or her balance can be transferredwithout cost or penalty.

60-day employee election period. The60-day election period is generally the 60-dayperiod immediately preceding January 1 of acalendar year (November 2 to December 31of the preceding calendar year). However, thedates of this period are modified if you es-tablish a SIMPLE IRA plan in mid-year (forexample, on July 1) or if the 60-day periodfalls before the first day an employee be-comes eligible to participate in the SIMPLEIRA plan. A SIMPLE IRA plan can providelonger periods for permitting employees toenter into salary reduction agreements or tomodify prior agreements. For example, aSIMPLE IRA plan can provide a 90-dayelection period instead of the 60-day period.Similarly, in addition to the 60-day period, aSIMPLE IRA plan can provide quarterlyelection periods during the 30 days beforeeach calendar quarter, other than the firstquarter of each year.

Contribution LimitsContributions are made up of salary reductioncontributions and employer contributions. Youare required to make either matching contri-butions or nonelective contributions. No othercontributions can be made to the SIMPLE IRAplan. These contributions, which you candeduct, must be made timely. See Time limitsfor contributing funds, later.

Salary reduction contributions. Theamount that the employee elects to have youcontribute to a SIMPLE IRA on his or herbehalf can not be more than $6,000 for 1998.These contributions must be expressed as apercentage of the employee's compensationunless you permit the employee to expressthem as a specific dollar amount. You cannotplace restrictions on the contributions amount(such as limiting the contributions percent-age), except to comply with the $6,000 limit.

If an employee is a participant in any otheremployer plan during the year and has elec-tive salary reductions or deferred compen-sation under those plans, the salary reductioncontributions under the SIMPLE IRA plan alsoare included in the $10,000 annual limit onexclusion of salary reductions and otherelective deferrals.

If the other plan is a deferred compen-sation plan of a state or local government ora tax-exempt organization, the limit on elec-tive deferrals is $8,000.

Employer matching contributions. You aregenerally required to match each employee'ssalary reduction contributions on a dollar-for-dollar basis in an amount not more than 3%of the employee's compensation. This re-quirement does not apply if you make none-lective contributions as discussed later.

Example. In 1998, your employee, JohnRose, earned $25,000 and elected to defer5% of his salary. You make a 3% matchingcontribution. The total contribution you canmake for John is $2,000, figured as follows.

Page 9

Lower percentage elected. If you electa matching contribution that is less than 3%,the percentage must not be less than 1%.You must notify the employees of the lowermatch within a reasonable period of time be-fore the employee's 60-day election period(discussed earlier) for the calendar year. Youcannot elect a percentage less than 3% formore than 2 years during the 5-year periodthat ends with (and includes) the year forwhich the election is effective.

2% nonelective contributions. Instead ofmatching contributions, you can elect to makenonelective contributions of 2% of compen-sation on behalf of each eligible employeewho has at least $5,000 of compensationfrom you for the year. Only $160,000 of theemployee's compensation can be taken intoaccount to figure the contribution limit.

If you elect this 2% contribution formula,you must notify the employees within a rea-sonable period of time before the employee's60-day election period (discussed earlier) forthe calendar year.

Example 1. In 1998, your employee,Jane Wood, earned $36,000 and elected tohave you contribute 10% of her salary. Youmake a 2% nonelective contribution. The totalcontributions you can make for her are$4,320, figured as follows.

Example 2. Using the same facts as inExample 1, above, the maximum contributionyou can make for Jane if she earned $75,000is $7,500, figured as follows.

Time limits for contributing funds. Youmust make the salary reduction contributionsto the SIMPLE IRA within 30 days after theend of the month in which the amounts wouldotherwise have been payable to the employeein cash. You must make matching contribu-tions or nonelective contributions by the duedate (including extensions) for filing your fed-eral income tax return for the year.

When to deduct contributions. You candeduct contributions under a SIMPLE IRAplan in the tax year with or within which thecalendar year for which contributions weremade ends. Contributions will be treated asmade for a particular tax year if they are madefor that tax year and are made by the duedate (including extensions) of your federalincome tax return for that year.

Example. Your tax year is the fiscal yearending June 30. Contributions under theSIMPLE IRA plan for the calendar year 1998(including contributions made in 1998 beforeJune 30, 1998) are deductible in the tax yearending June 30, 1999.

Salary reduction contributions($25,000 × .05) ............................................ $1,250

Tax treatment of contributions. You candeduct your contributions and your employ-ees can exclude these contributions from theirgross income. SIMPLE IRA contributions arenot subject to federal income tax withholding.However, salary reduction contributions aresubject to social security, Medicare, and fed-eral unemployment (FUTA) taxes. Matchingand nonelective contributions are not subjectto these taxes.

Reporting on Form W–2. Do not includeSIMPLE IRA contributions in the “Wages, tips,and other compensation box” of Form W–2.However, salary reduction contributions mustbe included in the boxes for social securityand Medicare wages. Also include the propercode in Box 13. For more information, seethe Instructions for Form W–2.

Distributions (Withdrawals)Distributions from a SIMPLE IRA are subjectto IRA rules and generally are includible inincome for the year received. Tax-freerollovers can be made from one SIMPLE IRAinto another SIMPLE IRA. Early withdrawalsgenerally are subject to a 10% (or 25%) ad-ditional tax.

A rollover from a SIMPLE IRA to anotherIRA can be made tax free only after a 2-yearparticipation in the SIMPLE IRA plan. A 25%additional tax for early withdrawals applies iffunds are withdrawn within 2 years of begin-ning participation.

More information. See Publication 590 forinformation about IRA rules, including thoseon the tax treatment of distributions, rollovers,required distributions, and income tax with-holding.

More Informationon SIMPLE IRA PlansIf you need additional guidance to establishand maintain SIMPLE IRA plans, see the fol-lowing IRS notice and revenue procedure.

Notice 98–4. This notice (printed on page25 of Internal Revenue Bulletin 1998–2) con-tains questions and answers relating to theimplementation and operation of SIMPLE IRAplans, including the election and notice re-quirements regarding these plans.

Revenue Procedure 97–29. This revenueprocedure (printed on page 698 of CumulativeBulletin 1997–1) provides guidance on ob-taining opinion letters to drafters of prototypeSIMPLE IRAs.

SIMPLE 401(k) PlanYou can adopt a SIMPLE plan as part of a401(k) plan if you meet the 100-employeelimit as discussed earlier under SIMPLE IRAplans. A SIMPLE 401(k) plan generally mustsatisfy the rules that apply to a 401(k) plan,as discussed in Keogh Plan QualificationRules under Keogh Plans, later. However,contributions and benefits under a SIMPLEplan will be considered not to discriminate infavor of highly compensated employees pro-vided the plan meets the conditions listedbelow.

1) Under the plan, an employee can electto have you make salary reduction con-tributions for the year to a trust in anamount expressed as a percentage ofthe employee's compensation, but not toexceed $6,000 for 1998.

2) You are required to make either:

a) A matching contribution not morethan 3% of compensation for theyear, or

b) Nonelective contributions of 2% ofcompensation on behalf of each el-igible employee who has at least$5,000 of compensation from youfor the year.

3) No other contributions can be made tothe trust.

4) No contributions are made, and no ben-efits accrue, for services during the yearunder any other qualified retirement planof the employer on behalf of any em-ployee eligible to participate in theSIMPLE 401(k) plan.

5) The employee's rights to any contribu-tions are nonforfeitable.

No more than $160,000 of the employee'scompensation can be taken into account infiguring salary reduction contributions,matching contributions, and nonelective con-tributions.

Top-heavy plan exception. A SIMPLE401(k) plan that allows only contributionsmeeting the conditions listed above will notbe treated as a top-heavy plan. Top-heavyKeogh plans are discussed in Top-heavy planrequirements under Keogh Plans, later.

Employee notification. The notificationrules that apply to SIMPLE IRA plans alsoapply to SIMPLE 401(k) plans. See Notifica-tion Requirements, earlier.

More Information onSIMPLE 401(k) PlansIf you need additional guidance to establishand maintain SIMPLE 401(k) plans, seeRevenue Procedure 97–9, printed on page624 of Cumulative Bulletin 1997–1. This rev-enue procedure provides a model amend-ment that you can use to adopt a plan withSIMPLE 401(k) provisions. This modelamendment provides guidance to plan spon-sors for incorporating 401(k) SIMPLE pro-visions in plans containing cash or deferredarrangements.

Keogh PlansA qualified employer plan set up by a self-employed individual is sometimes called aKeogh or HR–10 plan. A sole proprietor or apartnership can establish a Keogh plan. Acommon-law employee or a partner cannotestablish a Keogh plan. The plans describedhere can also be established and maintainedby employers that are corporations, and allthe rules discussed here apply to corpo-rations, except where specifically limited tothe self-employed.

The plan must be for the exclusive benefitof employees or their beneficiaries. A Keoghplan includes coverage for a self-employedindividual. For Keogh plan purposes, a self-employed individual is both an employer andan employee.

As an employer, you can usually deduct,subject to limits, contributions you make to aKeogh plan, including those made for yourown retirement. The contributions (and

Employer matching contribution($25,000 × .03) ............................................ 750Total contributions ....................................... $2,000

Salary reduction contributions($36,000 × .10) ............................................ $3,6002% nonelective contributions($36,000 × .02) ............................................ 720Total contributions ....................................... $4,320

Salary reduction contributions(maximum amount) ...................................... $6,0002% nonelective contributions($75,000 × .02) ............................................ 1,500Total contributions ....................................... $7,500

Page 10

earnings and gains on them) are generally taxfree until distributed by the plan.

Kinds of PlansThere are two basic kinds of Keogh plans—defined contribution plans and definedbenefit plans —and different rules apply toeach. You can have more than one Keoghplan, but your contributions to all the plansmust not total more than the overall limitsdiscussed under Contributions and EmployerDeduction, later.

Defined Contribution PlanA defined contribution plan provides an indi-vidual account for each participant in the plan.It provides benefits to a participant largelybased on the amount contributed to that par-ticipant's account. Benefits are also affectedby any income, expenses, gains, losses, andany forfeitures of other accounts that may beallocated to an account. A defined contribu-tion plan can be either a profit-sharing or amoney purchase pension plan.

Profit-sharing plan. A profit-sharing plan isa plan for sharing your business profits withyour employees. However, you do not haveto make contributions out of net profits tohave a profit-sharing plan.

The plan does not need to provide a defi-nite formula for figuring the profits to beshared. But, if there is no formula, there mustbe systematic and substantial contributions.

The plan must provide a definite formulafor allocating the contribution among the par-ticipants, and for distributing the accumulatedfunds to the employees after they reach acertain age, after a fixed number of years, orupon certain other occurrences.

In general, you can be more flexible inmaking contributions to a profit-sharing planthan to a money purchase pension plan (dis-cussed next) or a defined benefit plan (dis-cussed later). But the maximum deductiblecontribution may be less under a profit-sharing plan (see Limits on Contributions andBenefits, later).

Forfeitures under a profit-sharing plan canbe allocated to the accounts of remainingparticipants in a nondiscriminatory way, orthey can be used to reduce your contribu-tions.

Money purchase pension plan. Contribu-tions to a money purchase pension plan arefixed and are not based on your businessprofits. For example, if the plan requires thatcontributions be 10% of the participants'compensation without regard to whether youhave profits (or the self-employed person hasearned income), the plan is a money pur-chase pension plan. This applies even thoughthe compensation of a self-employed individ-ual as a participant is based on earned in-come derived from business profits.

Defined Benefit PlanA defined benefit plan is any plan that is nota defined contribution plan. Contributions toa defined benefit plan are based on a com-putation of what contributions are needed toprovide definitely determinable benefits toplan participants. Actuarial assumptions andcomputations are required to figure thesecontributions. Generally, you will need con-

tinuing professional help to have a definedbenefit plan.

Forfeitures under a defined benefit plancannot be used to increase the benefits anyemployee would otherwise receive under theplan. Forfeitures must be used instead to re-duce employer contributions.

Setting Up a Keogh PlanThere are two basic steps in setting up aKeogh plan. First you adopt a written plan.Then you invest the plan assets.

You, the employer, are responsible forestablishing and maintaining the plan.

TIPIf you are self-employed, it is notnecessary to have employees be-sides yourself to sponsor and set up

a Keogh plan. If you have employees, seeEligible Employees, later.

Set-up deadline. To take a deduction forcontributions for a tax year, your plan mustbe set up (adopted) by the last day of thatyear (December 31 for calendar-year em-ployers).

Adopting a Written PlanYou must adopt a written plan. The plan canbe an IRS-approved prototype or master planoffered by a sponsoring organization. Or itcan be an individually designed plan.

Written plan requirement. To qualify, theplan you establish must be in writing and mustbe communicated to your employees. Theplan's provisions must be stated in the plan.It is not sufficient for the plan to merely referto a requirement of the Internal RevenueCode.

Master or prototype plans. Most Keoghplans follow a standard form of plan (a masteror prototype plan) approved by the IRS.Master and prototype plans are plans that aremade available by plan providers for adoptionby employers (including self-employed indi-viduals). Under a master plan, a single trustor custodial account is established, as partof the plan, for the joint use of all adoptingemployers. Under a prototype plan, a sepa-rate trust or custodial account is establishedfor each employer.

Plan providers. The following organiza-tions generally can provide IRS-approvedmaster or prototype plans.

• Banks (including some savings and loanassociations and federally insured creditunions).

• Trade or professional organizations.

• Insurance companies.

• Mutual funds.

Individually designed plans. If you prefer,you can set up an individually designed planto meet specific needs. Although advanceIRS approval is not required, you can applyfor approval by paying a fee and requestinga determination letter. You may need profes-sional assistance for this. Revenue Procedure99–4, printed on page 115 of Internal Reve-nue Bulletin 1999–1, may help you decidewhether to apply for approval of your plan. Itis available at most IRS offices and at somelibraries.

Investing Plan AssetsIn setting up a Keogh plan, you arrange howthe plan's funds will be used to build its as-sets.

• You can establish a trust or custodialaccount to invest the funds.

• You, the trust, or the custodial accountcan buy an annuity contract from an in-surance company. Life insurance can beincluded only if it is incidental to the re-tirement benefits.

• You, the trust, or the custodial accountcan buy face-amount certificates from aninsurance company. These certificatesare treated like annuity contracts.

You establish a trust by a legal instrument(written document). You may need profes-sional assistance to do this.

You can establish a custodial account witha bank, savings and loan association, creditunion, or other person who can act as theplan trustee.

You do not need a trust or custodial ac-count, although you can have one, to investthe plan's funds in annuity contracts or face-amount certificates. If anyone other than atrustee holds them, however, the contractsor certificates must state that they are nottransferable.

Eligible EmployeesAn employee must be allowed to participatein your plan if he or she:

• Has reached age 21, and

• Has at least 1 year of service (2 years ifthe plan is not a 401(k) plan and providesthat after not more than 2 years of servicethe employee has a nonforfeitable rightto all of his or her accrued benefit).

CAUTION!

A plan cannot exclude an employeebecause he or she has reached aspecified age.

Other plan requirements. For informationon other important plan requirements, seeKeogh Plan Qualification Rules, later.

Minimum FundingRequirementsIn general, if your Keogh plan is a moneypurchase pension plan or a defined benefitplan, you must actually pay enough into theplan to satisfy the minimum funding standardfor each year. Determining the amountneeded to satisfy the minimum fundingstandard is complicated. The determination isbased on what should be contributed underthe plan formula using actuarial assumptionsand formulas. For information on this fundingrequirement, see section 412 and its regu-lations.

Quarterly installments of required contri-butions. If your Keogh plan is a definedbenefit plan subject to the minimum fundingrequirements, you must make quarterly in-stallment payments of the required contribu-tions. If you do not pay the full installmentstimely, you may have to pay interest on anyunderpayment for the period of the under-payment.

Due dates. The due dates for the install-ments are 15 days after the end of eachquarter. For a calendar-year plan, the install-

Page 11

ments are due April 15, July 15, October 15,and January 15 (of the following year).

Installment percentage. Each quarterlyinstallment must be 25% of the required an-nual payment.

Extended period for making contribu-tions. Additional contributions required tosatisfy the minimum funding requirement fora plan year will be considered timely if madeby 81 / 2 months after the end of that year.

ContributionsA Keogh plan is generally funded by yourcontributions. However, employees partic-ipating in the plan may be permitted to makecontributions.

Contribution deadline. You can makedeductible contributions for a tax year up tothe due date of your return (plus extensions)for that year.

Self-employed individual. You can makecontributions on behalf of yourself only if youhave net earnings (compensation) from self-employment in the trade or business for whichthe plan was established. Your net earningsmust be from your personal services, not fromyour investments. If you have a net loss fromself-employment, you cannot make contribu-tions for yourself for the year, even if you cancontribute for common-law employees basedon their compensation.

When ContributionsAre Considered MadeYou generally apply your Keogh plan contri-butions to the year in which you make them.But you can apply them to the previous yearif all of the following requirements are met.

1) You make them by the due date of yourtax return for the previous year (plusextensions).

2) The plan was established by the end ofthe previous year.

3) The plan treats the contributions asthough it had received them on the lastday of the previous year.

4) You do either of the following:

a) You specify in writing to the planadministrator or trustee that thecontributions apply to the previousyear, or

b) You deduct the contributions onyour tax return for the previousyear. (A partnership shows contri-butions for partners on Schedule K(Form 1065)).

Employer's promissory note. Yourpromissory note made out to the plan is nota payment for the Keogh deduction. Also, is-suing this note is a prohibited transactionsubject to tax. See Prohibited Transactions,later.

Employer ContributionsThere are certain limits on the contributionsand other annual additions you can makeeach year for plan participants. There arealso limits on the amount you can deduct. SeeDeduction Limits, later.

Limits onContributions and BenefitsYour plan must provide that contributions orbenefits cannot exceed certain limits. Thelimits differ depending on whether your Keoghplan is a defined contribution plan or a definedbenefit plan.

Defined benefit plan. For 1998, the annualbenefit for a participant under a defined ben-efit plan cannot be more than the smaller of:

1) $130,000, or

2) 100% of the participant's average com-pensation for his or her highest 3 con-secutive calendar years.

Defined contribution plan. For 1998, a de-fined contribution plan's annual contributionsand other additions (excluding earnings) tothe account of a participant cannot exceedthe smaller of:

1) $30,000, or

2) 25% of the compensation actually paidto the participant.

The maximum compensation that can betaken into account for this limit is generally$160,000.

Excess annual additions. Excess annualadditions are the amounts contributed thatexceed the limits discussed previously. A plancan correct excess annual additions becauseof:

• A reasonable error in estimating a par-ticipant's compensation,

• A reasonable error in determining theamount of elective deferrals permitted(discussed later), or

• Forfeitures allocated to participants' ac-counts.

Correcting excess annual additions. Aplan can provide for the correction of excesscontributions in the following ways:

1) Allocate and reallocate the excess toother participants in the plan to the ex-tent of their unused limits for the year,or

2) If these limits are exceeded:

a) Hold the excess in a separate ac-count and allocate (and reallocate)it to participants' accounts in thefollowing year (or years) beforemaking any contributions for thatyear (see also Carryover of ExcessContributions, later), or

b) Return employee after-tax contri-butions or elective deferrals (seeEmployee Contributions and Elec-tive Deferrals (401(k) Plans), later).

Tax treatment of returned contributionsor distributed elective deferrals. The returnof employee after-tax contributions or thedistribution of elective deferrals to correct ex-cess annual additions is considered a cor-rective payment rather than a distribution ofaccrued benefits. The penalties for premature(early) distributions and excess distributionsdo not apply.

These disbursements are not wages re-portable on Form W–2. You must report themon a separate Form 1099–R as follows.

• Report the total amount of the distribu-tion, including employee contributions, inbox 1. If the distribution includes any gainfrom the contribution, report the gain inbox 2a. Report the return of employeecontributions in box 5. Enter Code E inbox 7.

• Report a distribution of an elective defer-ral in boxes 1 and 2a. Include any gainfrom the contribution. Leave box 5 blankand enter Code E in box 7.

Participants must report these amountson the line for Total pensions and annuitieson Form 1040 or Form 1040A.

Employee ContributionsParticipants may be permitted to make non-deductible contributions to a plan in additionto your contributions. Even though these em-ployee contributions are not deductible, theearnings on them are tax free until distributedin later years. Also, these contributions mustsatisfy the nondiscrimination test of section401(m). See Notice 98–1, printed on page 42of Internal Revenue Bulletin 1998–3, for fur-ther guidance and transition relief relating torecent statutory amendments to the nondis-crimination rules under sections 401(k) and401(m).

Employer DeductionYou can usually deduct, subject to limits,contributions you make to a Keogh plan, in-cluding those made for your own retirement.The contributions (and earnings and gains onthem) are generally tax free until distributedby the plan.

Deduction LimitsThe deduction limit for your contributions toa Keogh plan depends on the kind of plan youhave.

Defined contribution plans. The deductionlimit for a defined contribution plan dependson whether it is a profit-sharing plan or amoney purchase pension plan.

Profit-sharing plan. Your deduction forcontributions to a profit-sharing plan cannotbe more than 15% of the compensation paid(or accrued) during the year to your eligibleemployees participating in the plan. You mustreduce this 15% limit in figuring the deductionfor contributions you make for your own ac-count. See Deduction Limit for Self-Employed Individuals, later.

Money purchase pension plan. Yourdeduction for contributions to a money pur-chase pension plan is generally limited to25% of the compensation paid (or accrued)during the year to your eligible employees.You must reduce this 25% limit in figuring thededuction for contributions you make foryourself, as discussed later.

Defined benefit plans. The deduction forcontributions to a defined benefit plan isbased on actuarial assumptions and compu-tations. Consequently, an actuary must figureyour deduction limit.

CAUTION!

In figuring the deduction for contribu-tions, you cannot take into accountany contributions or benefits that ex-

ceed the limits discussed earlier under Limitson Contributions and Benefits.

Page 12

Deduction limit for multiple plans. If youcontribute to both a defined contribution planand a defined benefit plan, and at least oneemployee is covered by both plans, your de-duction for those contributions is limited. Yourdeduction cannot exceed the greater of thefollowing amounts.

• 25% of the compensation paid (or ac-crued) during the year to your eligibleemployees participating in the plan. Youmust reduce this 25% limit in figuring thededuction for contributions you make foryour own account.

• Your contributions to the defined benefitplans, but not more than the amountneeded to meet the year's minimumfunding standard for any of these plans.

CAUTION!

For this rule, a Simplified EmployeePension (SEP) plan is treated as aseparate profit-sharing (defined con-

tribution) plan.

Deduction Limit forSelf-Employed IndividualsIf you make contributions for yourself, youneed to make a special computation to figureyour maximum deduction for these contribu-tions. Compensation is your net earnings fromself-employment, defined earlier under Defi-nitions You Need To Know, which takes intoaccount:

1) One-half of your self-employment tax,and

2) The deduction for contributions on behalfof yourself to the plan.

The deduction for your own contributionsand your net earnings depend on each other.For this reason, you determine the deductionfor your own contributions indirectly by re-ducing the contribution rate called for in yourplan. To do this, use either the Rate Table forSelf-Employed or the Rate Worksheet forSelf-Employed in Appendix A. Then figureyour maximum deduction by using the De-duction Worksheet for Self-Employed in Ap-pendix A.

Multiple plans. The deduction limit for mul-tiple plans (discussed earlier) also applies tocontributions you make as an employer onyour own behalf.

Where To Deduct ContributionsDeduct the contributions you make for

your common-law employees on Schedule C(Form 1040), on Schedule F (Form 1040), oron Form 1065, whichever applies to you.

You take the deduction for contributionsfor yourself on line 29 of Form 1040.

If you are a partner, the partnershippasses its deduction to you for the contribu-tions it made for you. The partnership will re-port these contributions on Schedule K–1(Form 1065). You deduct them on line 29 ofForm 1040.

Carryover ofExcess ContributionsIf you contribute more to the plans than youcan deduct for the year, you can carry overand deduct the excess in later years, com-bined with your deduction for those years.Your combined deduction in a later year is

limited to 25% of the participating employees'compensation for that year. The limit is 15%if you have only profit-sharing plans (includingSEPs). Remember that these percentagelimits must be reduced to figure your maxi-mum deduction for contributions you make foryourself. See Deduction Limit for Self-Employed Individuals, earlier. The excessyou carry over and deduct may be subject tothe excise tax discussed next.

Table 2 illustrates the carryover of excesscontributions to a profit-sharing plan.

Excise Tax for Nondeductible(Excess) ContributionsIf you contribute more than your deductionlimit to a retirement plan, you have madenondeductible contributions and you may beliable for an excise tax. In general, a 10%excise tax applies to nondeductible contribu-tions made to qualified pension, profit-sharing, stock bonus, or annuity plans, andto simplified employee pension plans (SEPs).

Special rule for self-employed individuals.The 10% excise tax does not apply to anycontribution to meet the minimum funding re-quirements in a money purchase pensionplan or a defined benefit plan. Even if thatcontribution is more than your earned incomefrom the trade or business for which the planis set up, the excess is treated as a deductiblecontribution that is not subject to this excisetax. See Minimum Funding Requirementsearlier in this section.

Exception. The 10% excise tax does notapply to contributions to one or more definedcontribution plans that are not deductible onlybecause they exceed the combined plan de-duction limit, and then only to the extent theexcess is not more than the greater of:

• 6% of the participants' compensation forthe year, or

• The sum of employer matching contribu-tions and the elective deferrals to a401(k) plan.

Reporting the tax. You must report the taxon your nondeductible contributions on Form5330. Form 5330 includes a computation ofthe tax. See the separate instructions forcompleting the form.

Elective Deferrals(401(k) Plans)Your Keogh plan can include a cash or de-ferred arrangement (401(k) plan) under whichparticipants can elect to have you contributepart of their before-tax compensation to theplan rather than receive the compensation incash. (As a participant in the plan, you cancontribute part of your before-tax net earningsfrom the business.) This contribution, calledan elective deferral (and any earnings on it),remains tax free until it is distributed by theplan.

In general, a Keogh plan can include a401(k) plan only if the Keogh is:

• A profit-sharing plan, or

• A money purchase pension plan in exist-ence on June 27, 1974, that included asalary reduction arrangement on thatdate.

Partnership. A partnership can have a401(k) plan.

Restriction on conditions of participation.The plan may not require, as a condition ofparticipation, that an employee completemore than 1 year of service.

Matching contributions. If your plan per-mits, you can make additional (matching)contributions for an employee on account ofthe contributions on behalf of the employeeunder the deferral election just discussed. Forexample, the plan might provide that you willcontribute 50 cents for each dollar your par-ticipating employees elect to defer under your401(k) plan.

Nonelective contributions. You can, undera qualified 401(k) plan, also make contribu-tions (other than matching contributions) foryour participating employees without givingthem the choice to take cash instead.

Employee compensation limit. No morethan $160,000 of the employee's compen-sation can be taken into account when figur-ing contributions.

Limit on Elective DeferralsThere is a limit on the amount that an em-ployee can defer each year under theseplans. This limit applies without regard tocommunity property laws. Your plan mustprovide that your employees cannot defermore than the limit that applies for a particularyear. For 1998, the basic limit on electivedeferrals is $10,000. This limit is subject toannual increases to reflect inflation (asmeasured by the Consumer Price Index). If,in conjunction with other plans, the deferrallimit is exceeded, the excess is included in theemployee's gross income.

Self-employed individual's matchingcontributions. Beginning in 1998, matchingcontributions to a 401(k) plan on behalf of aself-employed individual are no longer treatedas elective contributions subject to the limiton elective deferrals. Therefore, the matchingcontributions for partners and other self-employed individuals receive the same treat-ment as the matching contributions for otheremployees.

Treatment of contributions. Your contribu-tions to a 401(k) plan are generally deductibleby you and tax free to participating employeesuntil distributed from the plan. Participatingemployees have a nonforfeitable right to theaccrued benefit resulting from these contri-butions. Deferrals are included in wages forsocial security, Medicare, and federal unem-ployment (FUTA) tax.

Reporting on Form W–2. You must reportthe total amount deferred in boxes 3, 5, and13 of your employee's Form W–2. See theForm W–2 instructions.

Treatment of Excess DeferralsIf the total of an employee's deferrals exceedsthe limit for 1998, the employee can have theexcess deferral paid out of any of the plansthat permit these distributions. He or shemust notify the plan by March 1, 1999, of theamount to be paid from each plan. The planmust then pay the employee that amount byApril 15, 1999.

Page 13

Table 2. Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000’s omitted)

YearParticipants’compensation

Participants’share ofrequiredcontribution(10 percent ofannual profit) Contribution

Excesscontributioncarryoverused*

Totaldeductibleincludingcarryovers

Excesscontributioncarryoveravailable atend of year

1995199619971998

$1,000400500600

$100125

50100

$150607590

$100125

50100

$ 00

250

$100607590

$ 0654050

Deductiblelimit for currentyear (15percent ofcompensation)

* There were no carryovers from years before 1995.

Excess withdrawn by April 15. If the em-ployee takes out the excess deferral by April15, 1999, it is not reported again by includingit in the employee's gross income for 1999.However, any income earned on the excessdeferral taken out is taxable in the tax year inwhich it is taken out. The distribution is notsubject to the additional 10% tax on prema-ture (early) distributions.

If the employee takes out part of the ex-cess deferral and the income on it, the distri-bution is treated as made proportionately fromthe excess deferral and the income.

Excess not withdrawn by April 15. If theemployee does not take out the excessdeferral by April 15, the excess, though taxa-ble in 1998, is not included in the employee'scost basis in figuring the taxable amount ofany eventual benefits or distributions underthe plan. In effect, an excess deferral left inthe plan is taxed twice, once when contrib-uted and again when distributed. Also, if theentire deferral is allowed to stay in the plan,the plan may not be a qualified plan.

Even if the employee takes out the excessdeferral by April 15, the amount is consideredcontributed for satisfying (or not satisfying)the nondiscrimination requirements of theplan. See Contributions or benefits must notdiscriminate later, under Keogh Plan Quali-fication Rules.

Reporting corrective distributions onForm 1099–R. Report corrective distributionsof excess deferrals (including any earnings)on Form 1099–R. If you need specific infor-mation about reporting corrective distribu-tions, see the 1998 Instructions for Forms1099, 1098, 5498, and W–2G.

Tax on certain excess deferrals. The lawprovides tests to detect discrimination in aplan. If tests, such as the actual deferralpercentage test (ADP test) (see section401(k)(3) or 408(k)(6)(A) in the case ofSARSEPs) and the actual contribution per-centage test (ACP test) (see section401(m)(2)) show that contributions for highlycompensated employees exceed the testlimits for these contributions, the employermay have to pay a 10% excise tax. Reportthe tax on Form 5330.

The tax for the year is equal to 10% of theexcess contributions for the plan year endingin your tax year. Excess contributions areelective deferrals, employee contributions, oremployer matching or nonelective contribu-tions that exceed the amount permitted underthe ADP or ACP test.

See Notice 98–1, printed on page 42 ofInternal Revenue Bulletin 1998–3, for furtherguidance and transition relief relating to re-cent statutory amendments to the nondis-

crimination rules under sections 401(k) and401(m).

CAUTION!

The rule discussed earlier underSelf-employed individual's matchingcontributions does not apply to the

ADP test.

DistributionsAmounts paid to plan participants from aKeogh plan are called distributions. Distribu-tions may be nonperiodic, such as lump-sumdistributions, or periodic, such as annuitypayments. Also, certain loans may be treatedas distributions. See Loans Treated as Dis-tributions in Publication 575.

Required DistributionsA Keogh plan must provide that each partic-ipant will either:

1) Receive his or her entire interest (bene-fits) in the plan by the required begin-ning date (defined later), or

2) Begin receiving regular periodic distribu-tions by the required beginning date inannual amounts calculated to distributethe participant's entire interest (benefits)over his or her life expectancy or overthe joint life expectancy of the participantand the designated beneficiary.

These distribution rules apply individuallyto each Keogh plan. You cannot satisfy therequirement for one plan by taking a distribu-tion from another. These rules may be incor-porated in the plan by reference. The planmust provide that these rules override anyinconsistent distribution options previouslyoffered.

Minimum distribution. If the account bal-ance of a Keogh plan participant is to be dis-tributed (other than as an annuity), the planadministrator must figure the minimumamount required to be distributed each distri-bution calendar year. This amount is figuredby dividing the account balance by the appli-cable life expectancy. For details on figuringthe minimum distribution, see Tax on ExcessAccumulation in Publication 575.

Minimum distribution incidental benefitrequirement. Minimum distributions mustalso meet the minimum distribution incidentalbenefit requirement. This requirement is toensure that the plan is used primarily to pro-vide retirement benefits to the employee. Af-ter the employee's death, only “incidental”benefits are expected to remain for distribu-tion to the employee's beneficiary (or benefi-ciaries). For more information about this and

other distribution requirements, see Publica-tion 575.

Required beginning date. Generally, eachparticipant must receive his or her entirebenefits in the plan or begin to receive peri-odic distributions of benefits from the plan bythe required beginning date.

A participant must begin to receive distri-butions from his or her qualified retirementplan by April 1 of the year that follows thelater of the:

1) Calendar year in which he or shereaches age 701/2, or

2) Calendar year in which he or she retires.

Before 1997, the law did not take into ac-count whether or not the participant had re-tired. A participant was required to begin re-ceiving distributions by April 1 of the yearfollowing the calendar year in which the par-ticipant reached age 701/2. This rule still ap-plies if the participant is a 5% owner or thedistribution is from an IRA. For more infor-mation, see Tax on Excess Accumulation inPublication 575.

Exception. A 5% owner must still beginto receive distributions on April 1 of the yearfollowing the calendar year in which he or shereaches age 701/2, regardless of when he orshe retires.

Distributions after the starting year.The distribution required to be made by April1 is treated as a distribution for the startingyear. (The starting year is the year in whichthe participant meets (1) or (2) above,whichever applies). After the starting year, theparticipant must receive the required distri-bution for each year by December 31 of thatyear. If no distribution is made in the startingyear, required distributions for 2 years mustbe made in the next year (one by April 1 andone by December 31).

Distributions after participant's death.See Publication 575 for the special rulescovering distributions made after the deathof a participant.

Distributions From 401(k) PlansGenerally, a distribution may not be madeuntil the employee:

• Retires,

• Dies,

• Becomes disabled, or

• Otherwise separates from service.

Also, a distribution may be made if the planends and no other defined contribution planis established or continued. In the case of a401(k) plan that is part of a profit-sharing plan,a distribution may be made if the employee

Page 14

reaches age 591/2 or suffers financial hard-ship.

CAUTION!

Some of the above distributions maybe subject to the tax on prematuredistributions discussed later.

Hardship distribution. For the rules onhardship distributions, including the limits onthem, see Treasury Regulation 1.401(k)–1(d)(2).

Qualified domestic relations order(QDRO). These distribution restrictions donot apply if the distribution is to an alternatepayee under the terms of a QDRO. QDRO isdefined in Publication 575.

Tax Treatment of DistributionsDistributions from a Keogh plan minus a pro-rated part of any cost basis are subject to in-come tax in the year they are distributed.Since most recipients have no cost basis, adistribution is generally fully taxable. An ex-ception is a distribution that is properly rolledover as discussed next under Rollover.

The tax treatment of distributions dependson whether they are made periodically overseveral years or life (periodic payments), orare nonperiodic distributions. See Taxationof Periodic Payments or Taxation of Nonpe-riodic Payments in Publication 575 for a de-tailed description of how distributions aretaxed, including the 5- or 10-year tax optionor capital gain treatment of a lump-sum dis-tribution.

Rollover. The recipient of an eligiblerollover distribution from a Keogh plan candefer the tax on it by rolling it over into an IRAor another eligible retirement plan. However,it may be subject to withholding as discussedunder Withholding requirements, later.

Eligible rollover distribution. This is adistribution of all (such as a lump-sum distri-bution) or any part of an employee's balancein a qualified retirement plan (such as aKeogh plan) that is not:

• A required minimum distribution. SeeRequired Distributions, earlier.

• An annual (or more frequent) paymentunder a long-term (10 years or more)annuity contract or as part of a similarlong-term series of substantially equalperiodic distributions.

• The portion of a distribution that repre-sents the return of an employee's non-deductible contributions to the plan. SeeEmployee Contributions, earlier.

• A corrective distribution of excess contri-butions or deferrals under a 401(k) planand any income allocable to the excess,or of excess annual additions and anyallocable gains. See Correcting excessannual additions, earlier, under Limits onContributions and Benefits.

CAUTION!

Hardship distributions from a 401(k)plan that occur after 1998 cannot berolled over into an IRA or other eligible

retirement plan. They are subject to the 10%additional tax on premature distributions.However, they are not subject to the 20%withholding tax that generally apply to eligiblerollover distributions that are not transferreddirectly to another retirement plan or IRA.

The IRS has made application of this newrule optional for 1999. For more information,

see Notice 99–5, printed on page 10 ofInternal Revenue Bulletin 1999–3.

More information. For more informationabout rollovers, see Rollovers in Publications575 and 590.

Withholding requirements. If, during ayear, a Keogh plan pays to a participant oneor more eligible rollover distributions (definedearlier) that are reasonably expected to totalmore than $200, the payor must withhold 20%of each distribution for federal income tax.

Exceptions. If, instead of having thedistribution paid to him or her, the participantchooses to have the plan pay it directly to anIRA or another eligible retirement plan (a di-rect rollover), no withholding is required.

Or, if the distribution is not eligible forrollover treatment (see the list under Eligiblerollover distribution, earlier), the 20% with-holding requirement does not apply. Otherwithholding rules apply to these excludeddistributions, such as long-term periodic dis-tributions and required distributions (periodicor nonperiodic). However, the participant canstill choose not to have tax withheld fromthese distributions. If the participant does notmake this choice, the following withholdingrules apply:

• For periodic distributions, withholding isbased on their treatment as wages, and

• For nonperiodic distributions, 10% of thetaxable part is withheld.

Estimated tax payments. If no incometax is withheld or not enough tax is withheld,the recipient of a distribution may have tomake estimated tax payments. For more in-formation, see Withholding Tax and Esti-mated Tax in Publication 575.

Tax on Premature(Early) DistributionsIf a distribution is made to an employee underthe plan before he or she reaches age 591/2,the employee may have to pay a 10% addi-tional tax on the distribution. This tax appliesto the amount received that the employeemust include in income.

Exceptions. The 10% tax will not apply ifdistributions before age 591/2 are:

• Made to a beneficiary (or to the estateof the employee) on or after the deathof the employee.

• Due to the employee having a qualifyingdisability.

• Part of a series of substantially equalperiodic payments beginning after sep-aration from service and made at leastannually for the life or life expectancy ofthe employee or the joint lives or life ex-pectancies of the employee and his orher designated beneficiary. (The pay-ments under this exception, except in thecase of death or disability, must continuefor at least 5 years or until the employeereaches age 591/2, whichever is the longerperiod.)

• Made to an employee after separationfrom service if the separation occurredduring or after the calendar year in whichthe employee reached age 55.

• Made to an alternate payee under aqualified domestic relations order(QDRO).

• Made to an employee for medical careup to the amount allowable as a medicalexpense deduction (determined withoutregard to whether the employee itemizesdeductions).

• Timely made to reduce excess contri-butions under a 401(k) plan.

• Timely made to reduce excess employeeor matching employer contributions (ex-cess aggregate contributions).

• Timely made to reduce excess electivedeferrals.

Reporting the tax. To report this tax on earlydistributions, file Form 5329. See the forminstructions for additional information aboutthis tax.

Tax on Excess BenefitsIf you are or have been a 5% owner of thebusiness maintaining the plan, amounts youreceive at any age that are more than thebenefits provided for you under the plan for-mula are subject to an additional tax. This taxalso applies to amounts received by yoursuccessor. The tax is 10% of the excessbenefit that is includible in income.

Lump-sum distributions. The amount sub-ject to the additional tax is not eligible for theoptional methods of figuring income tax on alump-sum distribution. The optional methodsare discussed under Lump-Sum Distributionsin Publication 575.

5% owner. For this tax, you are a 5% ownerif you meet either of the following conditions.

• You own more than 5% of the capital orprofits interest in the employer.

• You own or are considered to own morethan 5% of the outstanding stock (or morethan 5% of the total voting power of allstock) of the employer.

You are also a 5% owner if you were a5% owner at any time during the 5 plan yearsimmediately before the plan year that endswithin the tax year in which you receive thedistribution.

Reporting the tax. Include on Form 1040,line 56, any tax you owe for an excess ben-efit. On the dotted line next to the total, write“Section 72(m)(5)” and write in the amount.

Excise Tax onReversion of Plan AssetsA 20% or 50% excise tax generally is im-posed on any direct or indirect reversion ofqualified plan assets to an employer. If youowe this tax, report it in Part XIII of Form5330. See Form 5330 instructions for moreinformation.

Prohibited TransactionsProhibited transactions are transactions be-tween the plan and a disqualified personthat are prohibited by law. (However, seeExemptions, later.) If you are a disqualifiedperson who takes part in a prohibited trans-action, you must pay a tax (discussed later).

Prohibited transactions generally includethe following transactions.

Page 15

1) A transfer of plan income or assets to,or use of them by or for the benefit of, adisqualified person.

2) Any act by a fiduciary whereby he or shedeals with plan income or assets in hisor her own interest.

3) The receipt of consideration by afiduciary for his or her own account fromany party dealing with the plan in atransaction that involves plan income orassets.

4) Any of the following acts between theplan and a disqualified person.

a) Selling, exchanging, or leasingproperty.

b) Lending money or extending credit.

c) Furnishing goods, services, or fa-cilities.

Exemptions. Some transactions are exemptfrom being treated as prohibited transactions.For example, a prohibited transaction doesnot take place if you are a disqualified personand receive any benefit to which you are en-titled as a plan participant or beneficiary.However, the benefit must be figured andpaid under the same terms as for all otherparticipants and beneficiaries. For othertransactions that are exempt, see section4975 and its regulations.

Disqualified person. You are a disqualifiedperson if you are any of the following.

1) A fiduciary of the plan.

2) A person providing services to the plan.

3) An employer, any of whose employeesare covered by the plan.

4) An employee organization, any of whosemembers are covered by the plan.

5) Any direct or indirect owner of 50% ormore of any of the following.

a) The combined voting power of allclasses of stock entitled to vote, orthe total value of shares of allclasses of stock of a corporation.

b) The capital interest or the profitsinterest of a partnership.

c) The beneficial interest of a trust orunincorporated enterprise that is anemployer or an employee organ-ization described in (3) or (4).

6) A member of the family of any individualdescribed in (1), (2), (3), or (5) (memberof a family is the spouse, ancestor, linealdescendant, and any spouse of a linealdescendant).

7) A corporation, partnership, trust, or es-tate of which (or in which) any direct orindirect owner holds 50% or more of theinterest described in 5 (a), (b), or (c). For(c), the beneficial interest of the trust orestate is owned directly or indirectly, orheld by persons described in (1) through(5).

8) An officer, director (or an individual hav-ing powers or responsibilities similar tothose of officers or directors), a 10% ormore shareholder or highly compensatedemployee (earning 10% or more of theyearly wages of an employer) of a per-son described in (3), (4), (5), or (7).

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

10) Any disqualified person, as described in(1) through (9) above, who is a disqual-ified person with respect to any plan towhich a section 501(c)(22) trust is per-mitted to make payments under section4223 of ERISA.

Tax on Prohibited TransactionsThe initial tax on a prohibited transaction is15% of the amount involved for each year(or part of a year) in the taxable period. If thetransaction is not corrected within the taxableperiod, an additional tax of 100% of theamount involved is imposed. For informationon correcting the transaction, see Correctingprohibited transactions later.

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

Amount involved. The amount involved ina prohibited transaction is the greater of:

• The money and fair market value of anyproperty given, or

• The money and fair market value of anyproperty received.

If services are performed, the amount in-volved is any excess compensation given orreceived.

Taxable period. The taxable period startson the transaction date and ends on the ear-liest of the following days.

• The day IRS mails a notice of deficiencyfor the tax.

• The day IRS assesses the tax.

• The day the correction of the transactionis completed.

Payment of the 15% tax. Pay the 15% taxwith Form 5330.

Correcting prohibited transactions. If youare a disqualified person who participated ina prohibited transaction, you can avoid the100% tax by correcting the transaction assoon as possible. Correcting the transactionmeans undoing it as much as you can withoutputting the plan in a worse financial positionthan if you had acted under the highestfiduciary standards.

Correction period. If the prohibitedtransaction is not corrected during the taxableperiod, you usually have an additional 90days after the day the IRS mails a notice ofdeficiency for the 100% tax to correct thetransaction. This correction period (the taxa-ble period plus the 90 days) can be extendedif:

• IRS grants a reasonable time needed tocorrect the transaction, or

• You petition the Tax Court.

If you correct the transaction within this pe-riod, IRS will abate, credit, or refund the 100%tax.

Reporting RequirementsYou may have to file an annual return/reportform by the last day of the 7th month after theplan year ends. See the following list of formsto choose the right form for your plan.

Form 5500–EZ. You can use Form 5500–EZif you meet ALL of the following conditions.

1) The plan is a one-participant plan, de-fined below.

2) The plan meets the minimum coveragerequirements of section 410(b) withoutbeing combined with any other plan youmay have that covers other employeesof your business.

3) The plan does not provide benefits foranyone except you, you and yourspouse, or one or more partners andtheir spouses.

4) The plan does not cover a business thatis a member of an affiliated servicegroup, a controlled group of corpo-rations, or a group of businesses undercommon control.

5) The plan does not cover a business thatleases employees.

One-participant plan. Your plan is aone-participant plan if as of the first day of theplan year for which the form is filed, either:

1) The plan covers only you (or you andyour spouse) and you (or you and yourspouse) own the entire business(whether incorporated or unincorpor-ated), or

2) The plan covers only one or more part-ners (or partner(s) and spouse(s)) in abusiness partnership.

Example. You are a sole proprietor andyour plan meets all the conditions for filingForm 5500–EZ. The total plan assets aremore than $100,000. You should file Form5500–EZ.

Form 5500–EZ not required. You do nothave to file Form 5500–EZ (or Form 5500 orForm 5500–C/R) if you meet the conditionsmentioned above, and

1) You have a one-participant plan that hadtotal plan assets of $100,000 or less atthe end of every plan year beginning onor after January 1, 1994, or

2) You have two or more one-participantplans that together had total plan assetsof $100,000 or less at the end of everyplan year beginning on or after January1, 1994.

CAUTION!

All one-participant plans must file aForm 5500–EZ for their final planyear, even if the total plan assets

have always been less than $100,000. Thefinal plan year is the year in which distributionof all plan assets is completed.

Form 5500–C/R. Unless otherwise ex-empted, file Form 5500–C/R if your plan hasfewer than 100 participants at the start of theplan year, or if your one-participant plan doesnot meet the conditions outlined in the in-structions for Form 5500–EZ.

Page 16

Example. You are a sole proprietor with75 employees that participated in your Keoghplan at the start of the plan year. You shouldfile Form 5500–C/R.

Form 5500. If your plan has 100 or moreparticipants at the start of the plan year, youmust file Form 5500, Annual Return/Reportof Employee Benefit Plan (With 100 or moreparticipants).

Example. You are a sole proprietor with100 employees that participated in yourKeogh plan at the start of the plan year. Youshould file Form 5500.

Schedule A (Form 5500). If any plan bene-fits are provided by an insurance company,insurance service, or similar organization,complete and attach Schedule A (Form5500), Insurance Information, to Form 5500or Form 5500–C/R. Schedule A is not neededfor a plan that covers only:

1) An individual or an individual and spousewho wholly own the trade or business,whether incorporated or unincorporated,or

2) Partners in a partnership or the partnersand their spouses.

CAUTION!

Do not file a Schedule A (Form 5500)with a Form 5500–EZ.

Schedule B (Form 5500). For most definedbenefit plans, complete and attach ScheduleB (Form 5500), Actuarial Information, to Form5500, Form 5500–C/R, or Form 5500–EZ.

Schedule P (Form 5500), Annual Return ofFiduciary of Employee Benefit Trust, is usedby a fiduciary (trustee or custodian) of a trustdescribed in section 401(a) or a custodialaccount described in section 401(f) to protectit under the statute of limitations provided insection 6501(a). The filing of a completedSchedule P by the fiduciary satisfies the an-nual filing requirement under section 6033(a)for the trust or custodial account created aspart of a Keogh plan. This filing starts therunning of the 3-year limitation period thatapplies to the trust or custodial account. Forthis protection, the trust or custodial accountmust qualify under section 401(a) and be ex-empt from tax under section 501(a). Thefiduciary should file, under section 6033(a), aSchedule P as an attachment to Form 5500,5500–C/R, or Form 5500–EZ for the plan yearin which the trust year ends. The fiduciarycannot file Schedule P separately. See theSchedule P instructions for more information.

Form 5310. If you terminate your plan andare the plan sponsor or plan administrator,you can file Form 5310, Application for De-termination for Terminating Plan. Your appli-cation must be accompanied by the appro-priate user fee and Form 8717, User Fee forEmployee Plan Determination Letter Request.

More information. For more informationabout reporting requirements, see the formsand their instructions.

Keogh PlanQualification RulesTo qualify for the tax benefits available toqualified plans, a Keogh plan must meet cer-tain requirements (qualification rules) of thetax law. Generally, unless you write your own

plan, the financial institution that providedyour plan will take the continuing responsibil-ity for meeting qualification rules that are laterchanged. The following is a brief overview ofimportant qualification rules that generallyhave not yet been discussed. It is not in-tended to be all-inclusive. See Setting Up aKeogh Plan, earlier.

TIPGenerally, the following qualificationrules also apply to a SIMPLE 401(k)retirement plan. A SIMPLE 401(k)

plan is, however, not subject to the top-heavyrules and nondiscrimination rules of qualifiedplans if the plan satisfies the provisions dis-cussed earlier under SIMPLE 401(k) Plan.

Plan assets must not be diverted. Yourplan must make it impossible for its assets tobe used for, or diverted to, purposes otherthan for the benefit of employees and theirbeneficiaries. As a general rule the assetscannot be diverted to the employer.

Minimum coverage requirements must bemet. To be a qualified plan, a defined benefitplan must benefit at least the lesser of:

1) 50 employees, or

2) The greater of:

a) 40% of all employees, or

b) Two employees.

If there is only one employee, the plan mustbenefit that employee.

Contributions or benefits must not dis-criminate. Under the plan, contributions orbenefits to be provided must not discriminatein favor of highly compensated employees.

Contribution and benefit limits must notexceed certain limits. Your plan must notprovide for contributions or benefits that ex-ceed certain limits. The limits apply to theannual contributions and other additions tothe account of a participant in a defined con-tribution plan and to the annual benefit paya-ble to a participant in a defined benefit plan.These limits were discussed earlier underContributions.

Minimum vesting standards must be met.Your plan must satisfy certain requirementsregarding when benefits vest. A benefit isvested (you have a fixed right to it) when itbecomes nonforfeitable. A benefit isnonforfeitable if it cannot be lost upon thehappening, or failure to happen, of any event.

Leased employees. A leased employee,defined earlier under Definitions You NeedTo Know, who performs services for you (re-cipient of the services) is treated as youremployee for certain plan qualification rules.These rules include:

1) Nondiscrimination in coverage, contribu-tions, and benefits,

2) Minimum age and service requirements,

3) Vesting,

4) Limits on contributions and benefits, and

5) Top-heavy plan requirements.

However, contributions or benefits providedby the leasing organization for services per-formed for you are treated as provided byyou.

Benefit payments must begin when re-quired. Your plan must provide that, unlessthe participant chooses otherwise, the pay-ment of benefits to the participant must beginwithin 60 days after the close of the latest of:

1) The plan year in which the participantreaches the earlier of age 65 or thenormal retirement age specified in theplan,

2) The plan year in which the 10th anni-versary of the year in which the partic-ipant came under the plan occurs, or

3) The plan year in which the participantseparated from service.

Early retirement. Your plan can providefor payment of retirement benefits before thenormal retirement age. If your plan offers anearly retirement benefit, a participant whoseparates from service before satisfying theearly retirement age requirement becomesentitled to that benefit if he or she:

• Satisfied the service requirement for theearly retirement benefit, and

• Separated from service with anonforfeitable right to an accrued benefit.The benefit, which may be actuarially re-duced, is payable when the early retire-ment age requirement is met.

Survivor benefits. Defined benefit and cer-tain money purchase pension plans mustprovide automatic survivor benefits in theform of:

1) A qualified joint and survivor annuity fora vested participant who does not diebefore the annuity starting date.

2) A qualified pre-retirement survivor annu-ity for a vested participant who dies be-fore the annuity starting date and whohas a surviving spouse.

The automatic survivor benefit also ap-plies to any participant under a profit-sharingplan unless:

1) The participant does not choose benefitsin the form of a life annuity,

2) The plan pays the full vested accountbalance to the participant's survivingspouse (or other beneficiary if the sur-viving spouse consents or if there is nosurviving spouse) if the participant dies,and

3) The plan is not a direct or indirecttransferee of a plan that must provideautomatic survivor benefits.

Loan secured by benefits. If survivorbenefits are required for a spouse under aplan, he or she must consent to a loan thatuses as security the accrued benefits in theplan.

Waiver of survivor benefits. Each planparticipant may be permitted to waive the jointand survivor annuity or the pre-retirementsurvivor annuity (or both), but only if the par-ticipant has the written consent of the spouse.The plan also must allow the participant towithdraw the waiver. The spouse's consentmust be witnessed by a plan representativeor notary public.

Waiver of 30-day waiting period beforeannuity starting date. For plan years begin-ning after 1996, a plan may permit a partic-ipant to waive (with spousal consent) the

Page 17

30-day minimum waiting period after a writtenexplanation of the terms and conditions of ajoint and survivor annuity is provided to eachparticipant.

The waiver is allowed only if the distribu-tion commences more than 7 days after thewritten explanation is provided.

Involuntary cash-out of benefits notmore than dollar limit. A plan may providefor the immediate distribution of the partic-ipant's benefit under the plan if the value ofthe benefit is not greater than $5,000.

However, the distribution cannot be madeafter the annuity starting date unless the par-ticipant and the spouse (or surviving spouseof a participant who died) consent in writingto the distribution. If the present value isgreater than $5,000, the plan must have thewritten consent of the participant and spouse(or surviving spouse) for any immediate dis-tribution of the benefit.

Consolidation, merger, or transfer of as-sets or liabilities. Your plan must providethat, in the case of any merger or consol-idation with, or transfer of assets or liabilitiesto, any other plan, each participant would (ifthe plan then terminated) receive a benefitequal to or more than the benefit he or shewould have been entitled to just before themerger, etc. (if the plan had then terminated).

Benefits must not be assigned or alien-ated. Your plan must provide that its benefitscannot be assigned or alienated.

Exception for certain loans. A loan fromthe plan (not from a third party) to a partic-ipant or beneficiary is not treated as an as-signment or alienation if the loan is securedby the participant's accrued nonforfeitablebenefit and is exempt from the tax on pro-hibited transactions or would have been ex-empt if the participant were a disqualifiedperson. A disqualified person is defined ear-lier under Prohibited Transactions.

Exception for domestic relations or-ders. Compliance with a judgment, decree,or order relating to child support, alimonypayments, or marital property rights under astate domestic relations law that meets cer-tain requirements (a qualified domestic re-lations order) does not result in a prohibitedassignment or alienation of benefits.

Payments to an alternate payee under aqualified domestic relations order before theparticipant attains age 591/2 are not subject tothe 10% additional tax that would otherwiseapply under certain circumstances. The in-terest of the alternate payee is not taken intoaccount in determining whether a distributionto the participant is a lump-sum distribution.Benefits distributed to an alternate payee un-der a qualified domestic relations order canbe rolled over tax free to an individual retire-ment account or to an individual retirementannuity.

No benefit reduction for social securityincreases. Your plan must not permit abenefit reduction for a post-separation in-

crease in the social security benefit level orwage base for any participant or beneficiarywho is receiving benefits under your plan, orwho is separated from service and hasnonforfeitable rights to benefits. This rule alsoapplies to plans supplementing the benefitsprovided by other federal or state laws.

Elective deferrals must be limited. If yourplan provides for elective deferrals, it mustlimit those deferrals to the amount in effect forthat particular year. See Limit on ElectiveDeferrals, earlier.

Top-heavy plan requirements. A top-heavyplan is one that mainly favors partners, soleproprietors, and other key employees.

A plan is top heavy for any plan year forwhich the total value of accrued benefits oraccount balances of key employees is morethan 60% of the total value of accrued bene-fits or account balances of all employees.Additional requirements apply to a top-heavyplan primarily to provide minimum benefits orcontributions for nonkey employees coveredby the plan.

Most qualified plans, whether or not top-heavy, must contain provisions that meet thetop-heavy requirements and that will take ef-fect in plan years in which the plans are topheavy. These qualification requirements fortop-heavy plans are set forth in section 416and its regulations.

SIMPLE exception. The top-heavy planrequirements do not apply to SIMPLE plans.

Page 18

Appendix A—Rate Table, RateWorksheet, andDeduction Worksheetfor Self-EmployedIndividuals WithKeogh or SEP PlansAs discussed earlier under Simplified Em-ployee Pension (SEP) and Keogh Plans, ifyou are self-employed, you must use the fol-lowing rate table or rate worksheet and de-duction worksheet to figure your deduction forcontributions you made for yourself to aSEP-IRA or Keogh plan.

First use either the rate table or rateworksheet to find your reduced contributionrate. Then complete the deduction worksheetto figure your deduction for contributions.

CAUTION!

The table and the worksheets thatfollow apply only to unincorporatedemployers who have only one defined

contribution plan, such as a profit-sharingplan. A SEP plan is treated as a profit-sharingplan.

Rate table for self-employed. If your plan'scontribution rate for allocating employer con-tributions to employees is a whole number(for example, 12% rather than 121/2%), youcan use the following table to find your re-duced contribution rate. Otherwise, use therate worksheet provided later.

First find your plan contribution rate (thecontributions rate stated in your plan) in Col-umn A of the table. Then read across to therate under Column B. Enter the rate fromColumn B in step 1 of the Deduction Work-sheet for Self-Employed.

Example. You are a sole proprietor andhave employees. If your plan's contributionrate for allocating contributions is 10% of aparticipant's compensation, your rate is0.090909. Enter this rate in step 1 of the De-duction Worksheet for Self-Employed.

Rate worksheet for self-employed. If yourplan's contribution rate is not a whole number(for example, 101/2%), you cannot use theRate Table for Self-Employed. Use the fol-lowing worksheet instead.

Figuring your deduction. Now that youhave your self-employed rate from either therate table or rate worksheet, you can figureyour maximum deduction for contributions foryourself by completing the following work-sheet.

Example. You are a sole proprietor andhave employees. The terms of your planprovide that you contribute 101/2% (.105) ofyour compensation and 101/2% of your partic-ipants' compensation. Your net profit fromline 31, Schedule C (Form 1040) is $200,000.In figuring this amount, you deducted yourcommon-law employees' compensation of$100,000 and contributions for them of$10,500 (101 / 2% x $100,000). Your self-employment tax deduction on line 27 of Form1040 is $6,919. See the reproduction offilled-in portions of both Schedule SE (Form1040) and Form 1040, later.

You figure your self-employed rate andmaximum deduction for employer contribu-tions you made for yourself as follows:

Rate Worksheet for Self-Employed1) Plan contribution rate as a decimal (for

example, 101 / 2% would be 0.105) .......2) Rate in line 1 plus one (for example,

0.105 plus one would be 1.105) ......... Rate Worksheet for Self-Employed3) Self-employed rate as a decimal

rounded to at least 3 decimal places(divide line 1 by line 2) .......................

1) Plan contribution rate as a decimal (forexample, 101 / 2% would be 0.105) ....... 0.105

2) Rate in line 1 plus one (for example,0.105 plus one would be 1.105) ......... 1.105

3) Self-employed rate as a decimalrounded to at least 3 decimal places(divide line 1 by line 2) ....................... 0.095

Deduction Worksheet for Self-EmployedStep 1 Enter your rate from the Rate Table forSelf-Employed or Rate Worksheet forSelf-Employed ..................................... 0.095Deduction Worksheet for Self-EmployedStep 2 Enter the amount from line 3, Sched-ule C–EZ (Form 1040); line 31,Schedule C (Form 1040); line 36,Schedule F (Form 1040); or line 15a,Schedule K–1 (Form 1065) ................ $200,000

Step 1 Enter your rate from the Rate Table forSelf-Employed or Rate Worksheet forSelf-Employed .....................................Step 2 Enter the amount from line 3, Sched-ule C–EZ (Form 1040); line 31,Schedule C (Form 1040); line 36,Schedule F (Form 1040); or line 15a,Schedule K–1 (Form 1065) ................

Step 3 Enter your deduction for self-employment tax from line 27, Form1040 .................................................... 6,919Step 4 Subtract step 3 from step 2 and enterthe result ............................................. 193,081

Step 3 Enter your deduction for self-employment tax from line 27, Form1040 ....................................................

Step 5 Multiply step 4 by step 1 and enter theresult ................................................... 18,343Step 4

Subtract step 3 from step 2 and enterthe result .............................................

Step 6 Multiply $160,000 by your plan contri-bution rate. Enter the result but notmore than $30,000 ($10,000 if you arefiguring the deferral amount under a401(k) plan or a SARSEP) ................. 16,800

Rate Table for Self-EmployedColumn A Column B Step 5

Multiply step 4 by step 1 and enter theresult ...................................................

If the Plan Contribution Then YourAllocation Rate Is: Rate Is:

(shown as a %) (shown as a decimal) Step 6 Multiply $160,000 by your plan contri-bution rate. Enter the result but notmore than $30,000 ($10,000 if you arefiguring the deferral amount under a401(k) plan or a SARSEP) .................

1 ................................... .009901 Step 7 Enter the smaller of step 5 or step 6.This is your maximum deductiblecontribution. Enter your deduction online 29, Form 1040 ............................. $ 16,800

2 ................................... .0196083 ................................... .0291264 ................................... .0384625 ................................... .0476196 ................................... .056604 Step 7

Enter the smaller of step 5 or step 6.This is your maximum deductiblecontribution. Enter your deduction online 29, Form 1040 .............................

7 ................................... .0654218 ................................... .0740749 ................................... .08256910 ................................. .09090911 ................................. .09909912 ................................. .10714313 ................................. .11504414 ................................. .12280715* ................................ .130435*16 ................................. .13793117 ................................. .14529918 ................................. .15254219 ................................. .15966420 ................................. .16666721 ................................. .17355422 ................................. .18032823 ................................. .18699224 ................................. .19354825* ................................ .200000*

*The deduction for annual employer contributions toa SEP plan or a profit-sharing plan cannot be morethan 13.0435% of your net earnings (figured withoutdeducting contributions for yourself) from the busi-ness that has the plan. If the plan is a money pur-chase plan, the deduction is limited to 20% of yournet earnings.

Page 19

Portion of Schedule SE (Form 1040)

Portion of Form 1040

200,000200,000

184,700

13,838

6,919

Section A—Short Schedule SE. Caution: Read above to see if you can use Short Schedule SE.

Net farm profit or (loss) from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form1065), line 15a

11

Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1 (Form 1065),line 15a (other than farming); and Schedule K-1 (Form 1065-B), box 9. Ministers and membersof religious orders, see page SE-1 for amounts to report on this line. See page SE-2 for otherincome to report

2

23Combine lines 1 and 23

Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400,do not file this schedule; you do not owe self-employment tax ©

44

5 Self-employment tax. If the amount on line 4 is:

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule SE (Form 1040) 1998Cat. No. 11358Z

Deduction for one-half of self-employment tax. Multiply line 5 by50% (.5). Enter the result here and on Form 1040, line 27

● $68,400 or less, multiply line 4 by 15.3% (.153). Enter the result here and on Form 1040, line 50.

● More than $68,400, multiply line 4 by 2.9% (.029). Then, add $8,481.60 to theresult. Enter the total here and on Form 1040, line 50.

6

5

6

%

23IRA deduction (see page 25)23

Medical savings account deduction. Attach Form 8853 2525

One-half of self-employment tax. Attach Schedule SE

26

Self-employed health insurance deduction (see page 28)

262727

Keogh and self-employed SEP and SIMPLE plans

2828

Penalty on early withdrawal of savings

2929

Alimony paid b Recipient’s SSN ©

32Add lines 23 through 31a

30

Subtract line 32 from line 22. This is your adjusted gross income ©

31a

AdjustedGrossIncome

33

Cat. No. 11320B Form 1040 (1998)

Moving expenses. Attach Form 3903

24 24

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 51.

If line 33 is under$30,095 (under$10,030 if a childdid not live withyou), see EICinst. on page 36.

32

31a

Student loan interest deduction (see page 27)

30

33

6,919

16,800

23,719

Page 20

How To Get MoreInformation

You can order free publications and forms,ask tax questions, and get more informationfrom the IRS in several ways. By selecting themethod that is best for you, you will havequick and easy access to tax help.

Free tax services. To find out what servicesare available, get Publication 910, Guide toFree Tax Services. It contains a list of free taxpublications and an index of tax topics. It alsodescribes other free tax information services,including tax education and assistance pro-grams and a list of TeleTax topics.

Personal computer. With your per-sonal computer and modem, you canaccess the IRS on the Internet at

www.irs.ustreas.gov. While visiting our WebSite, you can select:

• Frequently Asked Tax Questions to findanswers to questions you may have.

• Fill-in Forms to complete tax forms on-line.

• Forms and Publications to downloadforms and publications or search publi-cations by topic or keyword.

• Comments & Help to e-mail us withcomments about the site or with taxquestions.

• Digital Dispatch and IRS Local News Netto receive our electronic newsletters onhot tax issues and news.

You can also reach us with your computerusing any of the following.

• Telnet at iris.irs.ustreas.gov

• File Transfer Protocol atftp.irs.ustreas.gov

• Direct dial (by modem) 703–321–8020

TaxFax Service. Using the phoneattached to your fax machine, you canreceive forms, instructions, and tax

information by calling 703–368–9694. Followthe directions from the prompts. When youorder forms, enter the catalog number for theform you need. The items you request will befaxed to you.

Phone. Many services are availableby phone.

• Ordering forms, instructions, and publi-cations. Call 1–800–829–3676 to ordercurrent and prior year forms, instructions,and publications.

• Asking tax questions. Call the IRS withyour tax questions at 1–800–829–1040.

• TTY/TDD equipment. If you have accessto TTY/TDD equipment, call 1–800–829–4059 to ask tax questions or to orderforms and publications.

• TeleTax topics. Call 1–800–829–4477 tolisten to pre-recorded messages coveringvarious tax topics.

Evaluating the quality of our telephoneservices. To ensure that IRS representativesgive accurate, courteous, and professionalanswers, we evaluate the quality of our tele-phone services in several ways.

• A second IRS representative sometimesmonitors live telephone calls. That persononly evaluates the IRS assistor and doesnot keep a record of any taxpayer's nameor tax identification number.

• We sometimes record telephone calls toevaluate IRS assistors objectively. Wehold these recordings no longer than oneweek and use them only to measure thequality of assistance.

• We value our customers' opinions.Throughout this year, we will be survey-ing our customers for their opinions onour service.

Walk-in. You can pick up certainforms, instructions, and publicationsat many post offices, libraries, and

IRS offices. Some libraries and IRS officeshave an extensive collection of productsavailable to print from a CD-ROM or photo-copy from reproducible proofs.

Mail. You can send your order forforms, instructions, and publicationsto the Distribution Center nearest to

you and receive a response 7 to 15 workdaysafter your request is received. Find the ad-dress that applies to your part of the country.

• Western part of U.S.:Western Area Distribution CenterRancho Cordova, CA 95743–0001

• Central part of U.S.:Central Area Distribution CenterP.O. Box 8903Bloomington, IL 61702–8903

• Eastern part of U.S. and foreign ad-dresses:Eastern Area Distribution CenterP.O. Box 85074Richmond, VA 23261–5074

CD-ROM. You can order IRS Publi-cation 1796, Federal Tax Products onCD-ROM, and obtain:

• Current tax forms, instructions, and pub-lications.

• Prior-year tax forms, instructions, andpublications.

• Popular tax forms which may be filled-inelectronically, printed out for submission,and saved for recordkeeping.

• Internal Revenue Bulletins.

The CD-ROM can be purchased from Na-tional Technical Information Service (NTIS)for $25.00 by calling 1–877–233–6767 or for$18.00 on the Internet at www.irs.ustreas.gov/cdorders. The first release is availablein mid-December and the final release isavailable in late January.

Page 21

Index

A Annual additions .......................... 4 Annual benefits ............................ 4

Assistance (See More information)

B Business ...................................... 4

C Common-law employee ............... 4 Compensation ......................... 4, 9 Contribution ................................. 4 Contribution limits ........................ 9

D Deduction .................................... 4

Defined benefit plan: Deduction limits .................... 12

Limits on contributions ......... 12Defined contribution plan:

Deduction limits .................... 12Limits on contributions ......... 12Money purchase pension

plan ................................. 11 Profit-sharing plan ................ 11

Disqualified person .................... 15 Distribution (withdrawals) .......... 10

E Earned income ............................ 4 Employer ..................................... 4 Excludable employees ................ 9

F Forms:

1040 ............................... 13, 15 1099–R ................................. 14 5305–SEP .............................. 5 5310 ..................................... 17 5329 ..................................... 15

5330 ......................... 13, 15, 16 5500 ..................................... 17 5500–C/R ............................. 16 5500–EZ ............................... 16 Form W–2 ............................ 10

Schedule K (Form 1065) ...... 13 W–2 ...................................... 13

Free tax services ....................... 21

HHelp (See More information) Highly compensated employees . 4

K Keogh plans:Assignment of benefits ......... 18Benefits starting date ........... 17

Contributions .................. 12, 13 Deduction limits .............. 12, 13

Deduction Worksheet for Self-Employed ........................ 19 Deductions ........................... 12 Deferrals ............................... 13

Defined benefit plan ............. 11Defined contribution plan ..... 11

Distributions .................... 14, 15 Minimum .......................... 14

Required beginning date . 14 Rollover ........................... 15

Tax on excess benefits ... 15Tax on premature ........... 15

Tax treatment .................. 15 Eligible employees ............... 11

Employee nondeductible con-tributions .......................... 12

Investing plan assets ........... 11Kinds of plans ...................... 11

Leased employees ............... 17Minimum coverage require-

ment ................................ 17 Minimum fundingrequirements ................... 11

Minimum vesting requirement 17 Prohibited transactions ... 15, 16 Qualification rules ................. 17

Rate Table for Self-Employed 19Rate Worksheet for Self-

Employed ........................ 19 Reporting requirements ........ 16 Setting up ............................. 11

L Leased employee ........................ 5

M More information ....................... 21

NNet earnings from

self-employment ..................... 5 Notification requirements ............. 9

O Owner-employee ......................... 5

P Participant .................................... 5 Partner ......................................... 5

Publications (See More information)

R Required distributions ................ 14

SSalary reduction arrangement ..... 7

Self-employed individual ............. 5 SEP plans:Deduction Worksheet for Self-

Employed ........................ 19Rate Table for Self-Employed 19Rate Worksheet for Self-

Employed ........................ 19 SEP-IRAs:

Contribution limits ................... 6 Contributions .......................... 6 Deductible contributions ..... 6, 7Carryover of excess contri-

butions ......................... 6 Deduction limits ................. 6

Limits for self-employed .... 6Multiple plan limits ............ 6When to deduct ................. 6Where to deduct ............... 7 Distributions (withdrawals) ..... 8 Eligible employee ................... 5 Excludable employees ........... 5

SIMPLE IRA plan:60-day employee election

period ................................ 9 Compensation ........................ 9 Contribution limits ................... 9

Contributions and deductions 10 Distributions (withdrawals) ... 10

Employer matching contribu-tions ................................... 9 Excludable employees ........... 9 Notification requirements ....... 9

When to deduct contributions 10 SIMPLE plans:

SIMPLE 401(k) ..................... 10SIMPLE IRA plan ................... 8

Simplified Employee Pension(SEP): Salary reduction arrangement 7

Compensation of self-employed individuals .... 7 Employee compensation ... 7

Who can have a SARSEP 7 SEP-IRA contributions ........... 6

Setting up a SEP ................... 5Sixty-day employee election

period ..................................... 9 Sole proprietor ............................. 5

TTax help (See More information)

TTY/TDD information ................ 21�

Page 22

Tax Publications for Business Taxpayers

General Guides

Commonly Used Tax Forms

Spanish Language Publications

Your Rights as a TaxpayerYour Federal Income Tax (ForIndividuals)Farmer’s Tax GuideTax Guide for Small BusinessTax Calendars for 1999Highlights of 1998 Tax Changes

Guide to Free Tax Services

Employer’s Tax Guide (Circular E)Employer’s Supplemental Tax GuideAgricultural Employer’s Tax Guide(Circular A)Federal Tax Guide For Employers inthe U.S. Virgin Islands, Guam,American Samoa, and theCommonwealth of the NorthernMariana Islands (Circular SS)

Household Employer’s Tax Guide

Guía Contributiva Federal ParaPatronos Puertorriqueños(Circular PR)

Travel, Entertainment, Gift, and CarExpensesTax Withholding and Estimated TaxExcise Taxes for 1999Withholding of Tax on NonresidentAliens and Foreign CorporationsSocial Security and OtherInformation for Members of theClergy and Religious WorkersResidential Rental PropertySelf-Employment TaxDepreciating Property Placed inService Before 1987Business ExpensesNet Operating LossesInstallment SalesAccounting Periods and Methods

CorporationsSales and Other Dispositions ofAssetsBasis of AssetsExamination of Returns, AppealRights, and Claims for RefundRetirement Plans for Small Business(SEP, SIMPLE, and Keogh Plans)Determining the Value of DonatedPropertyStarting a Business and KeepingRecords

Understanding the Collection Process

Information on the United States-Canada Income Tax Treaty

Bankruptcy Tax GuideDirect SellersPassive Activity and At-Risk RulesHow To Depreciate Property

Reporting Cash Payments of Over$10,000The Problem Resolution Programof the Internal Revenue Service

Derechos del ContribuyenteCómo Preparar la Declaración deImpuesto Federal

English-Spanish Glossary of Wordsand Phrases Used in PublicationsIssued by the Internal RevenueService

Tax on Unrelated Business Incomeof Exempt Organizations

Wage and Tax Statement

Itemized Deductions & Interest andOrdinary Dividends*

Profit or Loss From Business*Net Profit From Business*

Capital Gains and Losses*Supplemental Income and Loss*Profit or Loss From Farming*

Credit for the Elderly or the Disabled*

Estimated Tax for Individuals*Self-Employment Tax*

Amended U.S. Individual Income Tax Return*

Capital Gains and LossesPartner’s Share of Income,Credits, Deductions, etc.

U.S. Corporation Income Tax Return

U.S. Income Tax Return for an S Corporation

Employee Business Expenses*Unreimbursed Employee BusinessExpenses*

Power of Attorney and Declaration ofRepresentative*

Child and Dependent Care Expenses*

General Business Credit

Application for Automatic Extension of Time ToFile U.S. Individual Income Tax Return*

Moving Expenses*

Additional Taxes Attributable to IRAs, OtherQualified Retirement Plans, Annuities, ModifiedEndowment Contracts, and MSAs*Installment Sale Income*Noncash Charitable Contributions*

Change of Address*Expenses for Business Use of Your Home*

Tax Highlights for CommercialFishermen

910

595553509334225

171

Nondeductible IRAs*Passive Activity Loss Limitations*

1515-A

51

80

179

926

378

463

505510515

517

527533534

535536537

541538

542Partnerships

544

551556

560

561

583

594

597

598

901

911925946947

908

1544

1546

1SP

850

579SP

Comprendiendo el Proceso de Cobro594SP

10134

Sch A & B

Sch CSch C-EZSch DSch ESch FSch H Household Employment Taxes*

Sch RSch SE

1040-ES1040X

Sch DSch K-1

1120

1120S

1065 U.S. Partnership Return of Income

21062106-EZ

24412848

3800

4868

3903

5329

62528283

8582860688228829

Specialized Publications

Fuel Tax Credits and Refunds

Employee’s Withholding Allowance Certificate*W-4Employer’s Annual Federal Unemployment(FUTA) Tax Return*

940

940EZ

U.S. Individual Income Tax Return*1040

Employer’s Annual Federal Unemployment(FUTA) Tax Return*

Business Use of Your Home(Including Use by Day-CareProviders)

587

U.S. Tax Treaties

Practice Before the IRS and Powerof AttorneyInternational Tax Information forBusinesses

Employer’s Guides

Certification for Reduced Tax Ratesin Tax Treaty Countries

686

953

Capital Gains and Losses and Built-In GainsShareholder’s Share of Income, Credits,Deductions, etc.

Sch DSch K-1

Underpayment of Estimated Tax byIndividuals, Estates, and Trusts*

2210

Report of Cash Payments Over $10,000Received in a Trade or Business*

8300

Depreciation and Amortization*4562Sales of Business Property*4797

Informe de Pagos en Efectivo enExceso de $10,000 (Recibidos enuna Ocupación o Negocio)

1544SP

U.S. Corporation Short-FormIncome Tax Return

1120-A

See How To Get More Information for a variety of ways to get publications,including by computer, phone, and mail.

See How To Get More Information for a variety of ways to get forms, including by computer, fax,phone, and mail. Items with an asterisk are available by fax. For these orders only, use the catalognumbers when ordering.

Form Number and TitleCatalogNumber

W-21022011234

10983

170011132011330

113341437411338113441134612187

113581134011360

Employer’s Quarterly Federal Tax Return941

11359Sch J Farm Income Averaging* 25513

11510

CatalogNumber

20604

11744

1186211980

1239212490129061308613141

13329

1360162299

639661208113232

63704

62133113901139311394

1145011456

11700

1152011516

Form Number and Title

Page 23