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Contents

What's New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Publication 560

Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Retirement

Plans

for Small

Business

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

(SEP, SIMPLE, and

Qualified Plans)

For use in preparing

2025 Returns

Chapter 1. Definitions You Need To Know . . . . . . . 6

Chapter 2. Simplified Employee

Pensions (SEPs) . . . . . . . . . . . . . . . . . . . . . . . . 8

Setting up a SEP . . . . . . . . . . . . . . . . . . . . . . . . 9

How Much Can I Contribute? . . . . . . . . . . . . . . . 10

Deducting Contributions . . . . . . . . . . . . . . . . . . 10

Salary Reduction Simplified Employee

Pensions (SARSEPs) . . . . . . . . . . . . . . . . . . 11

Distributions (Withdrawals) . . . . . . . . . . . . . . . . 13

Additional Taxes . . . . . . . . . . . . . . . . . . . . . . . . 13

Reporting and Disclosure Requirements . . . . . . . 13

Chapter 3. SIMPLE Plans . . . . . . . . . . . . . . . . . . 14

SIMPLE IRA Plan . . . . . . . . . . . . . . . . . . . . . . . 14

SIMPLE 401(k) Plan . . . . . . . . . . . . . . . . . . . . . 18

Chapter 4. Qualified Plans . . . . . . . . . . . . . . . . . 18

Kinds of Plans . . . . . . . . . . . . . . . . . . . . . . . . . 19

Qualification Rules . . . . . . . . . . . . . . . . . . . . . . 20

Setting up a Qualified Plan . . . . . . . . . . . . . . . . 22

Minimum Funding Requirement . . . . . . . . . . . . . 23

Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Employer Deduction . . . . . . . . . . . . . . . . . . . . . 24

Elective Deferrals (401(k) Plans) . . . . . . . . . . . . 25

Qualified Roth Contribution Program . . . . . . . . . 29

Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Prohibited Transactions . . . . . . . . . . . . . . . . . . . 35

Reporting Requirements . . . . . . . . . . . . . . . . . . 37

Chapter 5. Table and Worksheets for the

Self-Employed . . . . . . . . . . . . . . . . . . . . . . . . 38

Chapter 6. How To Get Tax Help . . . . . . . . . . . . . 43

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Future Developments

For the latest information about developments related to

Pub. 560, such as legislation enacted after it was

published, go to IRS.gov/Pub560.

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Feb 18, 2026

Automatic enrollment. Section 101 of the SECURE 2.0

Act of 2022 provides that, subject to certain exceptions,

employers with 401(k) plans and 403(b) plans established

on or after December 29, 2022, must automatically enroll

employees who are eligible to participate in such plans,

effective for plan years beginning after 2024.

Publication 560 (2025) Catalog Number 46574N

Department of the Treasury Internal Revenue Service www.irs.gov

Compensation limits for 2025 and 2026. For 2025, the

maximum compensation used for figuring contributions

and benefits is $350,000. This limit increases to $360,000

for 2026.

Elective deferral limits for 2025 and 2026. The limit on

elective deferrals, other than catch-up contributions, is

$23,500 for 2025 and $24,500 for 2026. These limits apply for participants in SARSEPs, 401(k) plans (excluding

SIMPLE plans), section 403(b) plans, and section 457(b)

plans.

Defined contribution limits for 2025 and 2026. The

limit on contributions, other than catch-up contributions,

for a participant in a defined contribution plan is $70,000

for 2025 and increases to $72,000 for 2026.

Defined benefit limits for 2025 and 2026. The limit on

annual benefits for a participant in a defined benefit plan is

$280,000 for 2025 and increases to $290,000 for 2026.

SIMPLE plan salary reduction contribution limits for

2025 and 2026. The limit on salary reduction contributions, other than catch-up contributions, is $16,500 for

2025 and increases to $17,000 for 2026. Pursuant to section 117 of the SECURE 2.0 Act of 2022, a higher limit

($18,100 for 2025) may apply to participants in certain

SIMPLE plans, effective for tax years beginning after

2023.

Catch-up contribution limits for 2025 and 2026. A

plan can permit participants who are age 50 or over at the

end of the calendar year to make catch-up contributions in

addition to elective deferrals and SIMPLE plan salary reduction contributions. The catch-up contribution limit for

defined contribution plans other than SIMPLE plans is

$7,500 for 2025 and $8,000 for 2026. The catch-up contribution limit for SIMPLE plans is generally $3,500 for 2025

and $4,000 for 2026. Pursuant to section 117(b) of the

SECURE 2.0 Act, a higher catch-up limit ($3,850 for 2025

and 2026) may apply to participants in certain SIMPLE

plans, effective for tax years beginning after 2023.

A participant's catch-up contributions for a year can't

exceed the lesser of the following amounts.

• The catch-up contribution limit.

• The excess of the participant's compensation over the

elective deferrals that aren’t catch-up contributions.

See Catch-up contributions under Contribution Limits and

Limit on Elective Deferrals in chapters 3 and 4, respectively, for more information.

Higher catch-up contribution limit for ages 60 to 63.

Beginning in 2025, section 109 of the SECURE 2.0 Act of

2022 permits a deferred compensation plan (including

most 401(k) and 403(b) plans) to allow participants to

make a higher amount of catch-up contributions in a tax

year in which they attain age 60, 61, 62, or 63. For 2025

and 2026, the higher limit on catch-up contributions for

such participants is $11,250 ($5,250 for SIMPLE plans).

Distributions from Roth accounts. Life-time required

minimum distributions to a participant are no longer required from a designated Roth account in a qualified plan.

Required minimum distributions are required from a designated Roth account in a qualified plan following a

participant’s death. For this purpose, a qualified plan includes qualified retirement plans, tax-sheltered annuities

and custodial accounts, retirement income accounts, and

eligible deferred compensation plans under section

457(b).

Reminders

Small employer automatic enrollment credit. The Further Consolidated Appropriations Act, 2020, P.L. 116-94,

added section 45T. An eligible employer may claim a tax

credit if it includes an eligible automatic contribution arrangement under a qualified employer plan. The credit

equals $500 per year over a 3-year period beginning with

the first tax year in which it includes the automatic contribution arrangement.

Increase in credit limitation for small employer plan

startup costs. The Further Consolidated Appropriations

Act, 2020, P.L. 116-94, amended section 45E. For tax

years beginning after 2019, eligible employers can claim a

tax credit for the first credit year and each of the 2 tax

years immediately following. The credit equals 50% of

qualified startup costs, up to the greater of the limit of (a)

$500; or (b) the lesser of (i) $250 for each employee who

is not a “highly compensated employee” eligible to participate in the employer plan, or (ii) $5,000.

Note: The SECURE 2.0 Act further amended section

45E to increase the credit for tax years beginning after

2022. See What’s New, earlier.

See the instructions for Form 3800 and Form 8881 for

more information on the small employer automatic enrollment credit and the small employer startup cost credit.

Restriction on conditions of participation. Effective

for plan years beginning after 2020, a 401(k) plan can’t require, as a condition of participation, that an employee

complete a period of service that extends beyond the

close of the earlier of (a) 1 year of service, or (b) the first

period of 3 consecutive 12-month periods (excluding

12-month periods beginning before 2021) during each of

which the employee has completed at least 500 hours of

service. Effective for plan years beginning after 2024, 3

consecutive 12-month periods are reduced to 2 consecutive 12-month periods.

Retirement savings contributions credit. Retirement

plan participants (including self-employed individuals)

who make contributions to their plans may qualify for the

retirement savings contributions credit. The maximum

contribution eligible for the credit is $2,000. To take the

credit, use Form 8880, Credit for Qualified Retirement

Savings Contributions. For more information on who is eligible for the credit, retirement plan contributions eligible

for the credit, and how to figure the credit, see Form 8880

and its instructions or go to IRS.gov/Retirement-Plans/

Plan-Participant-Employee/Retirement-SavingsContributions-Savers-Credit.

Photographs of missing children. The IRS is a proud

partner with the National Center for Missing & Exploited

Children® (NCMEC). Photographs of missing children

Publication 560 (2025)

selected by the Center may appear in this publication on

pages that would otherwise be blank. You can help bring

these children home by looking at the photographs and

calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Plans established after the end of tax year. For 2023

and later years, a sole proprietor with no employees can

adopt a section 401(k) plan after the end of the tax year,

provided the plan is adopted by the tax filing deadline

(without regard to extensions).

Increased small employer pension plan startup cost

credit. The SECURE 2.0 Act of Division T of the Consolidated Appropriations Act, 2023, P.L. 117-328 (SECURE

2.0 Act), provides that eligible employers with 1–50 employees are eligible for an increased small employer pension plan startup cost credit under section 45E of 100% of

qualified startup costs, subject to the limit described in the

next paragraph. The credit for eligible employers with 51–

100 employees remains at 50% of qualified startup costs,

subject to the same limit. See the instructions for Form

3800 and Form 8881 for more information on the startup

cost credit.

Increase in credit limitation for small employer plan

startup costs. The Further Consolidated Appropriations

Act, 2020, P.L. 116-94, amended section 45E. For tax

years beginning 2019, eligible employers can claim a tax

credit for the first credit year and each of the 2 tax years

immediately following. The credit equals 50% of qualified

startup costs, up to the greater of the limit of (a) $500; or

(b) the lesser of (i) $250 for each employee who is not a

“highly compensated employee” eligible to participate in

the employer plan, or (ii) $5,000.

Employer contributions credit. The SECURE 2.0 Act

added an additional startup cost credit under section 45E

available to certain eligible employers, in an amount equal

to an applicable percentage of the employer’s contributions (not including an elective deferral, as defined in section 402(g)(3)) to an eligible employer plan (other than a

defined benefit plan (as described in section 414(j)), subject to limitation. See the instructions for Form 3800 and

Form 8881 for more information on the employer contributions credit.

Small employer military spouse participation credit.

The SECURE 2.0 Act added a new military spouse participation credit under section 45AA available to eligible small

employers who maintain defined contribution plans with

specific features that benefit military spouses. See the instructions for Form 3800 and Form 8881 for more information on the military spouse participation credit.

Designated Roth nonelective contributions and designated Roth matching contributions. The SECURE

2.0 Act of 2022 permits certain nonelective contributions

and matching contributions that are made after 2022, to

be designated as Roth contributions.

Matching contributions on account of qualified student loan payments. Section 110 of the SECURE 2.0

Act of 2022 allows employers to include an optional feature that would enable them to make matching contributions on account of employees' qualified student loan

payments under certain defined contribution retirement

Publication 560 (2025)

plans, including a SIMPLE IRA plan and a SIMPLE 401(k)

plan. Section 110 of the SECURE 2.0 Act of 2022 applies

to contributions made for plan years beginning after 2023.

Starter 401(k) deferral-only arrangement. Section

121(a) of the SECURE 2.0 Act of 2022 permits certain eligible employers to have a starter 401(k) deferral-only arrangement for plan years beginning after 2023.

Additional nonelective contributions under a SIMPLE

IRA plan. Section 116 of the SECURE 2.0 Act of 2022 allows employers to make additional nonelective contributions under a SIMPLE IRA plan, effective for tax years beginning after 2023.

Midyear replacement of SIMPLE IRA plan with safe

harbor 401(k) plan. Section 332 of the SECURE 2.0 Act

of 2022 allows an employer to replace its SIMPLE IRA

plan with a safe harbor 401(k) plan during a year, effective

for plan years beginning after 2023.

Roth IRAs under a SEP arrangement and Roth SIMPLE IRAs under a SIMPLE IRA plan. Section 601 of the

SECURE 2.0 Act of 2022 permits contributions under a

SEP arrangement or a SIMPLE IRA plan to be made to a

Roth IRA, effective for tax years beginning after 2022.

Pension-Linked Emergency Savings Accounts (PLESAs). Section 127 of the SECURE 2.0 Act of 2022 allows

employers to add an optional feature to provide short-term

savings accounts established and maintained in connection with a defined contribution retirement plan, and those

savings accounts are treated as a type of designated Roth

account. Section 127 of the SECURE 2.0 Act of 2022 provides for the creation of PLESAs effective for plan years

beginning after 2023.

Introduction

This publication discusses retirement plans you can set

up and maintain for yourself and your employees. In this

publication, “you” refers to the employer. See chapter 1 for

the definition of the term “employer” and the definitions of

other terms used in this publication. This publication covers the following types of retirement plans.

• SEP (simplified employee pension) plans.

• SIMPLE (savings incentive match plan for employees)

plans.

• Qualified plans (also called H.R. 10 plans or Keogh

plans when covering self-employed individuals), including 401(k) plans.

SEP, SIMPLE, and qualified plans offer you and your

employees a tax-favored way to save for retirement. You

can deduct contributions you make to the plan for your

employees. If you are a sole proprietor, you can deduct

contributions you make to the plan for yourself. You can

also deduct trustees' fees if contributions to the plan don't

cover them. Earnings on the contributions are generally

tax free until you or your employees receive distributions

from the plan.

Under a 401(k) plan, employees can have you contribute limited amounts of their before-tax (after-tax, in the

case of a qualified Roth contribution program) pay to the

plan. These amounts (and the earnings on them) are generally tax free until your employees receive distributions

from the plan or, in the case of a qualified distribution from

a designated Roth account, completely tax free.

What this publication covers. This publication contains

the information you need to understand the following topics.

• What type of plan to set up.

• How to set up a plan.

• How much you can contribute to a plan.

• How much of your contribution is deductible.

• How to treat certain distributions.

• How to report information about the plan to the IRS

and your employees.

• Basic features of SEP, SIMPLE, and qualified plans.

The key rules for SEP, SIMPLE, and qualified plans

are outlined in Table 1.

SEP plans. SEP plans provide a simplified method for

you to make contributions to a retirement plan for yourself

and your employees. Instead of setting up a profit-sharing

or money purchase pension plan with a trust, you can

adopt a SEP agreement and make contributions directly to

a traditional SEP IRA. For tax years beginning after 2022,

section 601 of the SECURE 2.0 Act of 2022 provides that

an employer's SEP plan may allow an employee to designate a Roth IRA as the IRA to which contributions under

the SEP plan are made (a Roth SEP IRA).

SIMPLE plans. Generally, if you had 100 or fewer employees who received at least $5,000 in compensation last

year, you can set up a SIMPLE IRA plan. Under a SIMPLE

plan, employees can choose to make salary reduction

contributions rather than receiving these amounts as part

of their regular pay. In addition, you will contribute matching or nonelective contributions. You may also make additional nonelective contributions. Contributions under an

employer's SIMPLE IRA plan are made to an employee's

traditional SIMPLE IRA. For tax years beginning after

2022, section 601 of the SECURE 2.0 Act of 2022 provides that an employer's SIMPLE IRA plan may allow an

employee to designate that contributions be made to the

employee's Roth SIMPLE IRA. Traditional SIMPLE IRAs

are generally subject to the rules for traditional IRAs and

Roth SIMPLE IRAs are generally subject to the rules for

Roth IRAs; however, both types of SIMPLE IRAs are subject to a number of additional restrictions that do not apply

to traditional IRAs or Roth IRAs. The two types of SIMPLE

plans are the SIMPLE IRA plan and the SIMPLE 401(k)

plan.

Note: See Q&A K-1 through K-8 of Notice 2024-2,

2024-2 I.R.B. 316, at IRS.gov/irb/2024-02, for additional

guidance on Roth SEP IRAs and Roth SIMPLE IRAs.

Qualified plans. The qualified plan rules are more

complex than the SEP plan and SIMPLE plan rules. However, there are advantages to qualified plans, such as

increased flexibility in designing plans and increased contribution and deduction limits in some cases.

Publication 560 (2025)

Table 1. Key Retirement Plan Rules for 2025

Type

plan

Last date for contribution

Maximum contribution

Maximum deduction

When to set up plan

Smaller of $70,000 or 25%

of participant's

compensation.2

25% of all participants'

compensation.2

Any time up to the due date of

employer's return (including

extensions).

Same as maximum

contribution.

Any time between January 1

and October 1 of the calendar

year.

SEP

Due date of employer's return

(including extensions).

SIMPLE

IRA

and

SIMPLE

401(k)

Salary reduction contributions: 30

Employee contribution:

days after the end of the month for

Salary reduction contribution

which the contributions are to be made. up to $16,500; $20,000 if

age 50 or over (but not

Matching or nonelective

attaining age 60, 61, 62, or

contributions: Due date of employer's 63).

return (including extensions).

Special salary reduction

contribution limits apply for

certain employers and are

subject to a cost-of-living

adjustment.

For a new employer coming

into existence after October 1,

as soon as administratively

feasible.

Employer contribution:

Either dollar-for-dollar

matching contributions, up to

3% of employee's

compensation,3 or fixed

nonelective contributions of

2% of compensation.2

Higher matching and fixed

nonelective contributions

apply for certain employers

who elect to allow higher

salary reduction

contributions.

Additional nonelective

contributions of a uniform

percentage (up to 10% but

not exceeding $5,100 for

2025) may also be made.

Qualified

Elective deferral: Due date of

Plan:

employer's return (including

Defined

extensions).4

Contribution

Plan

Employer contribution:

Profit-sharing plan: Due date of

employer's return (including

extensions). Money purchase pension

plan: 81/2 months after the end of the

plan year.

Employee contribution:

Elective deferral up to

$23,500; $31,000 if age 50

or over (but not attaining age

60, 61, 62, or 63).

25%1 of all participants'

compensation,2 plus

amount of elective

deferrals made.

By the employer’s tax-filing

due date, including

extensions, for the tax year.

Based on actuarial

assumptions and

computations.

By the employer’s tax filing

due date (although it’s not best

to set up after the minimum

funding due date).

Employer contribution:

Money purchase pension

plan: Smaller of $70,000 or

100%1 of participant's

compensation.2

Profit-sharing plan: Smaller

of $70,000 or 100%1 of

participant's compensation.2

Qualified

Plan:

Defined

Benefit Plan

Contributions must generally be paid in

quarterly installments, due 15 days

after the end of each quarter, with a

final contribution due 81/2 months after

the end of the plan year. See Minimum

Funding Requirement in chapter 4.

Amount needed to provide

an annual benefit no larger

than the smaller of $280,000

or 100% of the participant's

average compensation for

the highest 3 consecutive

calendar years.

Net earnings from self-employment must take the contribution into account. See Deduction Limit for Self-Employed Individuals in chapters 2 and 4.

Compensation is generally limited to $350,000 in 2025.

Under a SIMPLE 401(k) plan, compensation is generally limited to $350,000 in 2025.

Certain plans subject to Department of Labor (DOL) rules may have an earlier due date for salary reduction contributions and elective deferrals, such as 401(k)

plans. See the “elective deferral” definition under Definitions You Need To Know, later. Solo/self-employed 401(k) plans are non-ERISA plans and don’t fall under

DOL rules.

What this publication doesn’t cover. Although the purpose of this publication is to provide general information

about retirement plans you can set up for your employees,

it doesn't contain all the rules and exceptions that apply to

these plans. You may need professional help and guidance.

Also, this publication doesn't cover all the rules that

may be of interest to employees. For example, it doesn't

cover the following topics.

• The comprehensive IRA rules an employee needs to

Contributions to Individual Retirement Arrangements

(IRAs); and Pub. 590-B, Distributions from Individual

Retirement Arrangements (IRAs).

• The comprehensive rules that apply to distributions

from retirement plans. These rules are covered in Pub.

575, Pension and Annuity Income.

• The comprehensive rules that apply to section 403(b)

plans. These rules are covered in Pub. 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of

know. These rules are covered in Pub. 590-A,

Publication 560 (2025)

Public Schools and Certain Tax-Exempt Organizations.

tribute and under which no rollover contributions are

made.

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

You can send us comments through IRS.gov/

FormComments. Or you can write to the Internal Revenue

Service, Tax Forms and Publications, 1111 Constitution

Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each comment received, we do appreciate your feedback and will

consider your comments and suggestions as we revise

our tax forms, instructions, and publications. Don’t send

tax questions, tax returns, or payments to the above address.

Business. A business is an activity in which a profit motive is present and economic activity is involved. Service

as a newspaper carrier under age 18 or as a public official

isn’t a business.

Getting answers to your tax questions. If you have

a tax question not answered by this publication or the How

To Get Tax Help section at the end of this publication, go

to the IRS Interactive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the search

feature or viewing the categories listed.

Getting tax forms, instructions, and publications.

Go to IRS.gov/Forms to download current and prior-year

forms, instructions, and publications.

Ordering forms and publications. Go to IRS.gov/

OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order prior-year forms and

instructions. The IRS will process your order for forms and

publications as soon as possible. Don’t resubmit requests

you’ve already sent us. You can get forms and publications faster online.

Tax questions. If you have a tax question not answered by this publication, check IRS.gov and How To Get

Tax Help at the end of this publication.

Definitions You Need To

Know

Certain terms used in this publication are defined below.

The same term used in another publication may have a

slightly different meaning.

Annual additions. Annual additions are the total of all

your contributions in a year, employee contributions (not

including rollovers), and forfeitures allocated to a participant's account.

Annual benefits. Annual benefits are the benefits to be

paid yearly in the form of a straight life annuity (with no extra benefits) under a plan to which employees don't con6

Chapter 1

Common-law employee. A common-law employee is

any individual who, under common law, would have the

status of an employee. A leased employee can also be a

common-law employee.

A common-law employee is a person who performs

services for an employer who has the right to control and

direct the results of the work and the way in which it is

done. For example, the employer:

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

• Can fire the employee.

Common-law employees aren't self-employed and can't

set up retirement plans for income from their work, even if

that income is self-employment income for social security

tax purposes. For example, common-law employees who

are ministers, members of religious orders, full-time insurance salespeople, and U.S. citizens employed in the United States by foreign governments can't set up retirement

plans for their earnings from those employments, even

though their earnings are treated as self-employment income.

However, an individual may be a common-law employee and a self-employed person as well. For example,

an attorney can be a corporate common-law employee

during regular working hours and also practice law in the

evening as a self-employed person. In another example, a

minister employed by a congregation for a salary is a common-law employee even though the salary is treated as

self-employment income for social security tax purposes.

However, fees reported on Schedule C (Form 1040), Profit

or Loss From Business, for performing marriages, baptisms, and other personal services are self-employment

earnings for qualified plan purposes.

Compensation. Compensation for plan allocations is the

pay a participant received from you for personal services

for a year. You can generally define compensation as including all the following payments.

1. Wages and salaries.

2. Fees for professional services.

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

a. Commissions and tips.

b. Fringe benefits.

c. Bonuses.

For a self-employed individual, “compensation” means

the earned income, discussed later, of that individual.

Definitions You Need To Know

Publication 560 (2025)

Compensation generally includes amounts deferred at

the employee's election in the following employee benefit

plans.

• Section 401(k) plans.

• Section 403(b) plans.

• SIMPLE IRA plans.

• SARSEPs.

• Section 457 deferred compensation plans.

• Section 125 cafeteria plans.

Elective deferral. An elective deferral is the contribution

made by employees to a qualified retirement plan.

• Non-owner employees: The employee salary reduc-

tion/elective deferral contributions must be elected/

made by the end of the tax year and deposited into the

employee’s plan account within 7 business days (safe

harbor) and no later than 15 days.

However, an employer can choose to exclude elective

deferrals under the above plans from the definition of compensation. The limit on elective deferrals is discussed in

chapter 2 under Salary Reduction Simplified Employee

Pension (SARSEP) and in chapter 4.

Other options. In figuring the compensation of a participant, you can treat any of the following amounts as the

employee's compensation.

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

• The employee's wages you report in box 1 of Form

W-2, Wage and Tax Statement.

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

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

• Nontaxable reimbursements or other expense allowances.

• Deferred compensation (other than elective deferrals).

SIMPLE plans. A special definition of compensation

applies for SIMPLE plans. See chapter 3.

Contribution. A contribution is an amount you pay into a

plan for all those participating in the plan, including

self-employed individuals. Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant.

Deduction. A deduction is the plan contribution you can

subtract from gross income on your federal income tax return. Limits apply to the amount deductible.

Earned income. Earned income is net earnings from

self-employment, discussed later, from a business in

which your services materially helped to produce the income.

You can also have earned income from property your

personal efforts helped create, such as royalties from your

books or inventions. Earned income includes net earnings

from selling or otherwise disposing of the property, but it

doesn't include capital gains. It includes income from licensing the use of property other than goodwill.

Earned income includes amounts received for services

by self-employed members of recognized religious sects

opposed to social security benefits who are exempt from

self-employment tax.

Publication 560 (2025)

Chapter 1

If you have more than one business, but only one has a

retirement plan, only the earned income from that business is considered for that plan.

• Owner/employees: The employee deferrals must be

elected by the end of the tax year and can then be

made by the tax return filing deadline, including extensions.

Employer. An employer is generally any person for whom

an individual performs or did perform any service, of whatever nature, as an employee. A sole proprietor is treated

as its own employer for retirement plan purposes. However, a partner isn't an employer for retirement plan purposes. Instead, the partnership is treated as the employer of

each partner.

Highly compensated employee. A highly compensated

employee is an individual who:

• Owned more than 5% of the interest in your business

at any time during the year or the preceding year, regardless of how much compensation that person

earned or received; or

• For the preceding year, received compensation from

you of more than $155,000 (if the preceding year is

2024, and increased to $160,000 for 2025 and 2026),

and, if you so choose, was in the top 20% of employees when ranked by compensation.

Leased employee. A leased employee who isn't your

common-law employee must generally be treated as your

employee for retirement plan purposes if they do all the

following.

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

• Has performed services for you (or for you and related

persons) substantially full time for at least 1 year.

• Performs services under your primary direction or control.

Exception. A leased employee isn't treated as your

employee if all the following conditions are met.

1. Leased employees aren't more than 20% of your

non-highly compensated workforce.

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

3. The leasing organization's plan is a money purchase

pension plan that has all the following provisions.

a. Immediate participation. (This requirement doesn't

apply to any individual whose compensation from

the leasing organization in each plan year during

Definitions You Need To Know

the 4-year period ending with the plan year is less

than $1,000.)

b. Full and immediate vesting.

c. A nonintegrated employer contribution rate of at

least 10% of compensation for each participant.

However, if the leased employee is your common-law employee, that employee will be your employee for all purposes, regardless of any pension plan of the leasing organization.

Net earnings from self-employment. For SEP and

qualified plans, net earnings from self-employment are

your gross income from your trade or business (provided

your personal services are a material income-producing

factor) minus allowable business deductions. Allowable

deductions include contributions to SEP and qualified

plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax.

Net earnings from self-employment don’t include items

excluded from gross income (or their related deductions)

other than foreign earned income and foreign housing

cost amounts.

For the deduction limits, earned income is net earnings

for personal services actually rendered to the business.

You take into account the income tax deduction for the deductible part of self-employment tax and the deduction for

contributions to the plan made on your behalf when figuring net earnings.

Net earnings include a partner's distributive share of

partnership income or loss (other than separately stated

items, such as capital gains and losses). They don’t include income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net

earnings from self-employment if they are paid for services to or for the partnership. Distributions of other income

or loss to limited partners aren't net earnings from self-employment.

For SIMPLE plans, net earnings from self-employment

are the amount on line 4 of Schedule SE (Form 1040),

Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for yourself.

Qualified plan. A qualified plan is a retirement plan that

offers a tax-favored way to save for retirement. You can

deduct contributions made to the plan for your employees.

Earnings on these contributions are generally tax free until

distributed at retirement. Profit-sharing, money purchase

pension, and defined benefit plans are qualified plans. A

401(k) plan is also a qualified plan.

Participant. A participant is an eligible employee who is

covered by your retirement plan. See the discussions,

later, of the different types of plans for the definition of an

employee eligible to participate in each type of plan.

Partner. A partner is an individual who shares ownership

of an unincorporated trade or business with one or more

persons. For retirement plans, a partner is treated as an

employee of the partnership.

Self-employed individual. An individual in business for

himself or herself, and whose business isn't incorporated,

is self-employed. Sole proprietors and partners are

self-employed. Self-employment can include part-time

work.

Not everyone who has net earnings from self-employment for social security tax purposes is self-employed for

qualified plan purposes. See Common-law employee and

Net earnings from self-employment, earlier.

In addition, certain fishermen may be considered

self-employed for setting up a qualified plan. See Pub.

595, Capital Construction Fund for Commercial Fishermen, for the special rules used to determine whether fishermen are self-employed.

Sole proprietor. A sole proprietor is an individual who

owns an unincorporated business alone, including a single-member limited liability company that is treated as a

disregarded entity for tax purposes. For retirement plans,

a sole proprietor is treated as both an employer and an

employee.

Simplified Employee

Pensions (SEPs)

Topics

This chapter discusses:

• Setting up a SEP

• How much can I contribute

• Deducting contributions

• Salary reduction simplified employee pensions (SARSEPs)

• Distributions (withdrawals)

• Additional taxes

• Reporting and disclosure requirements

Useful Items

You may want to see:

Publications

590-A Contributions to Individual Retirement

Arrangements (IRAs)

590-A

590-B Distributions from Individual Retirement

Arrangements (IRAs)

590-B

3998 Choosing a Retirement Solution for Your Small

Business

3998

4285 SEP Checklist

4285

Chapter 2

Simplified Employee Pensions (SEPs)

Publication 560 (2025)

4286 SARSEP Checklist

4286

4333 SEP Retirement Plans for Small Businesses

4333

4336 SARSEP for Small Businesses

4336

4407 SARSEP—Key Issues and Assistance

4407

Forms (and Instructions)

W-2 Wage and Tax Statement

Setting up a SEP

There are three basic steps in setting up a SEP.

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

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

W-2

1040 U.S. Individual Income Tax Return

1040

1040-SR U.S. Tax Return for Seniors

1040-SR

5305-SEP Simplified Employee Pension—Individual

Retirement Accounts Contribution Agreement

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

5305-SEP

5305A-SEP Salary Reduction Simplified Employee

Pension—Individual Retirement Accounts

Contribution Agreement

5305A-SEP

8880 Credit for Qualified Retirement Savings

Contributions

8880

8881 Credit for Small Employer Pension Plan

Startup Costs

8881

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

Under a SEP, you make contributions to an individual retirement arrangement (called a SEP IRA) set up by or for

each eligible employee. A SEP IRA may either be a traditional IRA (a traditional SEP IRA) or a Roth IRA (a Roth

SEP IRA). A SEP IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP IRA is maintained.

Tip: Many financial institutions will help you set up a SEP.

Formal written agreement. You must execute a formal

written agreement to provide benefits to all eligible employees under a SEP. You can satisfy the written agreement requirement by adopting an IRS model SEP using

Form 5305-SEP. However, see When not to use Form

5305-SEP, later.

If you adopt an IRS model SEP using Form 5305-SEP,

no prior IRS approval or determination letter is required.

Keep the original form. Don't file it with the IRS. Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and

the DOL. See the Form 5305-SEP instructions for details.

If you choose not to use Form 5305-SEP, you should seek

professional advice in adopting a SEP.

When not to use Form 5305-SEP. You can't use

Form 5305-SEP if any of the following apply.

1. You currently maintain any other qualified retirement

plan other than another SEP.

SEP IRAs are set up for, at a minimum, each eligible employee (defined below). A SEP IRA may have to be set up

for a leased employee (defined in chapter 1), but doesn't

need to be set up for excludable employees (defined

later).

2. You have any eligible employees for whom IRAs

haven’t been set up.

Eligible employee. An eligible employee is an individual

who meets all the following requirements.

4. You are a member of any of the following unless all eligible employees of all the members of these groups,

trades, or businesses participate under the SEP.

• Has reached age 21.

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

• Has received at least $750 in compensation from you

in 2025. The amount is $800 for 2026.

Tip: You can use less restrictive participation requirements than those listed, but not more restrictive ones.

Excludable employees. The following employees can

be excluded from coverage under a SEP.

• Employees covered by a union agreement and whose

retirement benefits were bargained for in good faith by

the employees' union and you.

• Nonresident alien employees who have received no

U.S. source wages, salaries, or other personal services compensation from you. For more information

about nonresident aliens, see Pub. 519, U.S. Tax

Guide for Aliens.

Publication 560 (2025)

Chapter 2

3. You use the services of leased employees, who aren't

your common-law employees (as described in chapter 1).

a. An affiliated service group described in section

414(m).

b. A controlled group of corporations described in

section 414(b).

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

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

Information you must give to employees. You must

give each eligible employee a copy of Form 5305-SEP, its

instructions, and the other information listed in the Form

5305-SEP instructions. An IRS model SEP isn't considered adopted until you give each employee this information.

Setting up the employee's SEP IRA. A SEP IRA must

be set up by or for each eligible employee (the SEP IRA

Simplified Employee Pensions (SEPs)

may either be a traditional SEP IRA or a Roth SEP IRA).

SEP IRAs can be set up with banks, insurance companies, or other qualified financial institutions. You send SEP

contributions to the financial institution where the SEP IRA

is maintained.

Deadline for setting up a SEP. You can set up a SEP for

any year as late as the due date (including extensions) of

your income tax return for that year.

How Much Can I Contribute?

The SEP rules permit you to contribute a limited amount of

money each year to each employee's SEP IRA. If you are

self-employed, you can contribute to your own SEP IRA.

Contributions must be in the form of money (cash, check,

or money order). You can't contribute property. However,

participants may be able to transfer or roll over certain

property from one retirement plan to another. See Pubs.

590-A and 590-B for more information about rollovers.

You don't have to make contributions every year. But if

you make contributions, they must be based on a written

allocation formula and must not discriminate in favor of

highly compensated employees (defined in chapter 1).

When you contribute, you must contribute to the SEP IRAs

of all participants who actually performed personal services during the year for which the contributions are made,

including employees who die or terminate employment

before the contributions are made.

Contributions are deductible within limits, as discussed

later, and generally aren't taxable to the plan participants.

Employer contributions to a SEP IRA won’t affect the

amount an individual can contribute to a Roth or traditional

IRA.

Unlike regular contributions to a traditional IRA before

2020, contributions under a SEP can be made to participants over age 701/2. If you are self-employed, you can

also make contributions under the SEP for yourself even if

you are over age 701/2. Participants age 73 or over must

take required minimum distributions (RMDs).

Time limit for making contributions. To deduct contributions for a year, you must make the contributions by the

due date (including extensions) of your tax return for the

year.

Contribution Limits

Contributions you make for 2025 to a common-law employee's SEP IRA can't exceed the lesser of 25% of the

employee's compensation or $70,000. Compensation

generally doesn't include your contributions to the SEP.

The SEP plan document will specify how the employer

contribution is determined and how it will be allocated to

participants.

Example. Your employee has earned $21,000 for

2025. The maximum contribution you can make to your

employee’s SEP IRA is $5,250 (25% (0.25) x $21,000).

Chapter 2

Contributions for yourself. The annual limits on your

contributions to a common-law employee's SEP IRA also

apply to contributions you make to your own SEP IRA.

However, special rules apply when figuring your maximum

deductible contribution. See Deduction Limit for Self-Employed Individuals, later.

Annual compensation limit. You can't consider the part

of an employee's compensation over $350,000 when figuring your contribution limit for that employee. However,

$70,000 is the maximum contribution for an eligible employee. These limits increase to $360,000 and $72,000,

respectively, in 2026.

Example. Your employee has earned $260,000 for

2025. Because of the maximum contribution limit for 2025,

you can only contribute $70,000 to your employee’s SEP

IRA.

More than one plan. If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an

account are limited to the lesser of $70,000 or 100% of the

participant's compensation. When you figure this limit, you

must add your contributions to all defined contribution

plans maintained by you. Because a SEP is considered a

defined contribution plan for this limit, your contributions to

a SEP must be added to your contributions to other defined contribution plans you maintain.

Tax treatment of excess contributions. Excess contributions are your contributions to an employee's SEP IRA

(or to your own SEP IRA) for 2025 that exceed the lesser

of the following amounts.

• 25% of the employee's compensation (or, for you,

20% of your net earnings from self-employment).

• $70,000.

Excess contributions are included in the employee's income for the year and are treated as contributions by the

employee to their SEP IRA. For more information on employee tax treatment of excess contributions, see Pub.

590-A.

Reporting. For contributions to a traditional SEP IRA,

don’t include SEP contributions on your employee's Form

W-2 unless contributions were made under a salary reduction arrangement (discussed later).

For contributions to a Roth SEP IRA, contributions

made under a salary reduction arrangement should be reported on Form W-2 (discussed later), while employer

matching and nonelective contributions should be reported in boxes 1 and 2a of Form 1099-R using code 2 or 7 in

box 7 and check the IRA/SEP/SIMPLE checkbox.

Deducting Contributions

Generally, you can deduct the contributions you make

each year to each employee's SEP IRA. If you are

self-employed, you can deduct the contributions you make

each year to your own SEP IRA.

Simplified Employee Pensions (SEPs)

Publication 560 (2025)

Deduction Limit for Contributions for

Participants

The most you can deduct for your contributions to your or

your employee's SEP IRA is the lesser of the following

amounts.

1. Your contributions (including any excess contributions

carryover).

2. 25% of the compensation (limited to $350,000 per

participant) paid to the participants during 2025, from

the business that has the plan, not to exceed $70,000

per participant.

In 2026, the amounts in (2) above increase to $360,000

and $72,000, respectively.

Deduction Limit for Self-Employed

Individuals

If you contribute to your own SEP IRA, you must make a

special computation to figure your maximum deduction for

these contributions. When figuring the deduction for contributions made to your own SEP IRA, compensation is

your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions.

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

• The deduction for contributions to your own SEP IRA.

The deduction for contributions to your own SEP IRA

and your net earnings depend on each other. For this reason, you determine the deduction for contributions to your

own SEP IRA indirectly by reducing the contribution rate

called for in your plan. To do this, use the Rate Table for

Self-Employed or the Rate Worksheet for Self-Employed,

whichever is appropriate for your plan's contribution rate,

in chapter 5. Then, figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

Carryover of Excess SEP

Contributions

If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry

over and deduct the difference in later years. However, the

carryover, when combined with the contribution for the

later year, is subject to the deduction limit for that year. If

you also contributed to a defined benefit plan or defined

contribution plan, see Carryover of Excess Contributions

under Employer Deduction in chapter 4 for the carryover

limit.

Excise tax. If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax.

For information about the excise tax, see Excise Tax for

Nondeductible (Excess) Contributions under Employer

Deduction in chapter 4.

Publication 560 (2025)

Chapter 2

When To Deduct Contributions

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

• If the SEP is maintained on a calendar-year basis, you

deduct the yearly contributions on your tax return for

the year within which the calendar year ends.

• If you file your tax return and maintain the SEP using a

fiscal year or short tax year, you deduct contributions

made for a year on your tax return for that year.

Example. You are a fiscal-year taxpayer whose tax

year ends June 30. You maintain a SEP on a calendar-year basis. You deduct SEP contributions made for

calendar year 2025 on your tax return for your tax year

ending June 30, 2026.

Where To Deduct Contributions

Deduct the contributions you make for your common-law

employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U.S. Return of

Partnership Income; and corporations deduct them on

Form 1120, U.S. Corporation Income Tax Return, or Form

1120-S, U.S. Income Tax Return for an S Corporation.

Sole proprietors and partners deduct contributions for

themselves on line 16 of Schedule 1 (Form 1040). (If you

are a partner, contributions for yourself are shown on the

Schedule K-1 (Form 1065), Partner's Share of Income,

Deductions, Credits, etc., you receive from the partnership.)

Caution: Remember that sole proprietors and partners

can't deduct as a business expense contributions made to

a SEP for themselves, only those made for their common-law employees.

Salary Reduction Simplified

Employee Pensions

(SARSEPs)

A SARSEP is a SEP set up before 1997 that includes a

salary reduction arrangement. (See the Caution next.) Under a SARSEP, your employees can choose to have you

contribute part of their pay to their SEP IRAs rather than

receive it in cash. This contribution is called an elective

deferral because employees choose (elect) to set aside

the money, and they defer the tax on the money until it is

distributed to them.

Caution: You aren't allowed to set up a SARSEP after

1996. However, participants (including employees hired

after 1996) in a SARSEP set up before 1997 can continue

to have you contribute part of their pay to the plan. If you

Simplified Employee Pensions (SEPs)

are interested in setting up a retirement plan that includes

a salary reduction arrangement, see chapter 3.

Who can have a SARSEP? A SARSEP set up before

1997 is available to you and your eligible employees only if

all the following requirements are met.

• At least 50% of your employees eligible to participate

choose to make elective deferrals.

• You have 25 or fewer employees who were eligible to

participate in the SEP at any time during the preceding

year.

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

SARSEP ADP test. Under the SARSEP ADP test, the

amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral

percentage) can't be more than 125% of the ADP of all

non-highly compensated employees eligible to participate.

A highly compensated employee is defined in chapter 1.

Deferral percentage. The deferral percentage for an

employee for a year is figured as follows.

Beginning in 2005, section 1.09

The elective employer contributions

(excluding certain catch-up contributions)

paid to the SEP for the employee for the year

The employee's compensation

(limited to $350,000 in 2025)

Tip: The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the

SARSEP ADP test.

Employee compensation. For figuring the deferral

percentage, compensation is generally the amount you

pay to the employee for the year. Compensation includes

the elective deferral and other amounts deferred in certain

employee benefit plans. See Compensation in chapter 1.

Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they

aren't included in the income of your employees for income tax purposes.

Compensation of self-employed individuals. If you

are self-employed, compensation is your net earnings

from self-employment as defined in chapter 1.

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

Choice not to treat deferrals as compensation. You

can choose not to treat elective deferrals (and other

amounts deferred in certain employee benefit plans) for a

year as compensation under your SARSEP.

Limit on Elective Deferrals

The most a participant can choose to defer for calendar

year 2025 is the lesser of the following amounts.

1. 25% of the participant's compensation (limited to

$350,000 of the participant's compensation).

2. $23,500.

The $23,500 limit applies to the total elective deferrals

the employee makes for the year to a SEP and any of the

following.

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

• Salary reduction arrangement under a tax-sheltered

annuity plan (section 403(b) plan).

• SIMPLE IRA plan.

In 2026, the $350,000 limit increases to $360,000, and

the $23,500 limit increases to $24,500.

Catch-up contributions. A SARSEP can permit participants who are age 50 or over at the end of the calendar

year to also make catch-up contributions. The catch-up

contribution limit is $7,500 for 2025 and $8,000 for 2026.

Elective deferrals aren't treated as catch-up contributions

for 2025 until they exceed the elective deferral limit (the

lesser of 25% of compensation, or $23,500), the SARSEP

ADP test limit discussed earlier, or the plan limit (if any).

However, the catch-up contribution a participant can make

for a year can't exceed the lesser of the following amounts.

• The catch-up contribution limit.

• The excess of the participant's compensation over the

elective deferrals that aren't catch-up contributions.

Catch-up contributions aren't subject to the elective deferral limit (the lesser of 25% of compensation, or $23,500

in 2025 and $24,500 in 2026).

Beginning in 2025, section 109 of the SECURE 2.0 Act

of 2022 permits a SARSEP to allow participants to make a

higher amount of catch-up contributions in a tax year in

which they attain age 60, 61, 62, or 63. For 2025 and

2026, the higher limit on catch-up contributions to a SARSEP for such participants is $11,250.

Overall limit on SEP contributions. If you also make

nonelective contributions to a SEP IRA, the total of the

nonelective and elective contributions to that SEP IRA

can't exceed the lesser of 25% of the employee's compensation, or $70,000 for 2025 ($72,000 for 2026). The same

rule applies to contributions you make to your own SEP

IRA. See Contribution Limits, earlier.

Figuring the elective deferral. For figuring the 25% limit

on elective deferrals, compensation doesn't include SEP

contributions, including elective deferrals or other

amounts deferred in certain employee benefit plans.

Tax Treatment of Deferrals

Elective deferrals to a traditional SEP IRA that aren't more

than the limits discussed earlier under Limit on Elective

Chapter 2

Simplified Employee Pensions (SEPs)

Publication 560 (2025)

Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. However,

these deferrals are included in wages for social security,

Medicare, and federal unemployment (FUTA) taxes. Elective deferrals to a Roth SEP IRA are subject to federal income tax withholding, social security, Medicare, railroad

retirement, and FUTA taxes.

Excess deferrals. For 2025, excess deferrals are the

elective deferrals for the year that are more than the

$23,500 limit discussed earlier. For a participant who is eligible to make catch-up contributions (but is not eligible for

the higher catch-up contribution limit under section 109 of

the SECURE 2.0 Act for individuals attaining age 60, 61,

62, or 63), excess deferrals are the elective deferrals that

are more than $31,000. The treatment of excess deferrals

made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. See Treatment of Excess Deferrals under Elective Deferrals (401(k)

Plans) in chapter 4.

Excess SEP contributions. Excess SEP contributions

are elective deferrals of highly compensated employees

that are more than the amount permitted under the SARSEP ADP test. You must notify your highly compensated

employees within 21/2 months after the end of the plan

year of their excess SEP contributions. If you don't notify

them within this time period, you must pay a 10% tax on

the excess. For an explanation of the notification requirements, see Revenue Procedure 91-44, 1991-2 C.B. 733. If

you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for

that form.

Reporting on Form W-2. Don’t include elective deferrals

to a traditional SEP IRA in the “Wages, tips, other compensation” box of Form W-2. You must, however, include

them in the “Social security wages” and “Medicare wages

and tips” boxes. You must also include them in box 12.

Check the “Retirement plan” checkbox in box 13. Include

elective deferrals to a Roth SEP IRA in the boxes 1, 3, and

5 (or box 14 for railroad retirement taxes) and report them

in box 12 using code F. For more information, see the

Form W-2 instructions.

Additional Taxes

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

• Making excess contributions.

• Making early withdrawals.

• Not making required withdrawals.

For information about these taxes, see Pubs. 590-A

and 590-B. Also, a SEP IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next.

Prohibited transaction. If an employee improperly uses

their SEP IRA, such as by borrowing money from it, the

employee has engaged in a prohibited transaction. In that

case, the SEP IRA will no longer qualify as an IRA. For a

list of prohibited transactions, see Prohibited Transactions

in chapter 4.

Effects on employee. If a SEP IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction

occurred. The employee must include in income the fair

market value of the assets (on the first day of the year)

that is more than any cost basis in the account. Also, the

employee may have to pay the additional tax for making

early withdrawals.

Reporting and Disclosure

Requirements

Distributions (Withdrawals)

If you set up a SEP using Form 5305-SEP, you must give

your eligible employees certain information about the SEP

when you set it up. See Setting Up a SEP, earlier. Also,

you must give your eligible employees a statement each

year showing any contributions to their SEP IRAs. You

must also give them notice of any excess contributions.

For details about other information you must give them,

see the instructions for Form 5305-SEP or Form

5305A-SEP (for a salary SARSEP).

As an employer, you can't prohibit distributions from a

SEP IRA. Also, you can't make your contributions on the

condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts.

Even if you didn't use Form 5305-SEP or Form

5305A-SEP to set up your SEP, you must give your employees information similar to that described above. For

more information, see the instructions for either Form

5305-SEP or Form 5305A-SEP.

Distributions are subject to IRA rules. Generally, you or

your employee must begin to receive distributions from a

traditional SEP IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 73.

For more information about IRA rules, including the tax

treatment of distributions, rollovers, required distributions,

and income tax withholding, see Pubs. 590-A and 590-B.

Publication 560 (2025)

Chapter 2

Simplified Employee Pensions (SEPs)

SIMPLE IRA Plan

A SIMPLE IRA plan is a retirement plan that uses a SIMPLE IRA for each eligible employee. Under a SIMPLE IRA

plan, a SIMPLE IRA must be set up for each eligible employee (the SIMPLE IRA may either be a traditional SIMPLE IRA or a Roth SIMPLE IRA). For the definition of an

eligible employee, see Who Can Participate in a SIMPLE

IRA Plan, later.

SIMPLE Plans

Topics

This chapter discusses:

• SIMPLE IRA plans

• SIMPLE 401(k) plans

Who Can Set up a SIMPLE IRA Plan?

Useful Items

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

following requirements.

Publications

• You meet the employee limit.

• You don't maintain another qualified plan unless the

You may want to see:

590-A Contributions to Individual Retirement

Arrangements (IRAs)

590-A

590-B Distributions from Individual Retirement

Arrangements (IRAs)

590-B

3998 Choosing a Retirement Solution for Your Small

Business

3998

4284 SIMPLE IRA Plan Checklist

4284

4334 SIMPLE IRA Plans for Small Businesses

4334

Forms (and Instructions)

W-2 Wage and Tax Statement

W-2

5304-SIMPLE Savings Incentive Match Plan for

Employees of Small Employers (SIMPLE)—Not

for Use With a Designated Financial Institution

5304-SIMPLE

5305-SIMPLE Savings Incentive Match Plan for

Employees of Small Employers (SIMPLE)—for

Use With a Designated Financial Institution

5305-SIMPLE

8880 Credit for Qualified Retirement Savings

Contributions

8880

8881 Credit for Small Employer Pension Plan

Startup Costs and Auto Enrollment

8881

A SIMPLE plan is a written arrangement that provides you

and your employees with a simplified way to make contributions to provide retirement income. Under a SIMPLE

plan, employees can choose to make salary reduction

contributions to the plan rather than receiving these

amounts as part of their regular pay. In addition, you will

contribute matching or nonelective contributions.

SIMPLE plans can only be maintained on a calendar-year

basis.

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

ways.

• Using SIMPLE IRAs (SIMPLE IRA plan).

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

Tip: Many financial institutions will help you set up a SIMPLE plan.

Chapter 3

other plan is for collective bargaining employees.

Employee limit. You can set up a SIMPLE IRA plan only

if you had 100 or fewer employees who received $5,000 or

more in compensation from you for the preceding year.

Under this rule, you must take into account all employees

employed at any time during the calendar year regardless

of whether they are eligible to participate. Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1).

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

Grace period for employers who cease to meet the

100-employee limit. If you maintain the SIMPLE IRA

plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it

for the 2 calendar years immediately following the calendar year for which you last met it.

A different rule applies if you don't meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Under this rule, the SIMPLE IRA plan will

be treated as meeting the 100-employee limit for the year

of the transaction and the 2 following years if both the following conditions are satisfied.

• Coverage under the plan hasn’t significantly changed

during the grace period.

• The SIMPLE IRA plan would have continued to qualify

after the transaction if you had remained a separate

employer.

Caution: The grace period for acquisitions, dispositions,

and similar transactions also applies if, because of these

types of transactions, you don't meet the rules explained

under Other qualified plan or Who Can Participate in a

SIMPLE IRA Plan, later.

Other qualified plan. The SIMPLE IRA plan must generally be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any

year beginning with the year the SIMPLE IRA plan becomes effective.

SIMPLE Plans

Publication 560 (2025)

Exception. If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a

SIMPLE IRA plan for other employees.

Who Can Participate in a SIMPLE IRA

Plan?

Eligible employee. Any employee who received at least

$5,000 in compensation during any 2 years preceding the

current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is

eligible to participate. The term “employee” includes a

self-employed individual who received earned income.

You can use less restrictive eligibility requirements (but

not more restrictive ones) by eliminating or reducing the

prior-year compensation requirements, the current-year

compensation requirements, or both. For example, you

can allow participation for employees who received at

least $3,000 in compensation during any preceding calendar year. However, you can't impose any other conditions

for participating in a SIMPLE IRA plan.

Excludable employees. The following employees don't

need to be covered under a SIMPLE IRA plan.

• Employees who are covered by a union agreement

and whose retirement benefits were bargained for in

good faith by the employees' union and you.

• Nonresident alien employees who have received no

U.S. source wages, salaries, or other personal services compensation from you.

Compensation. Compensation for employees is the total

wages, tips, and other compensation from the employer

subject to federal income tax withholding and the amounts

paid for domestic service in a private home, local college

club, or local chapter of a college fraternity or sorority.

Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable,

elective deferrals under a section 401(k) plan, a SARSEP,

or a section 403(b) annuity contract and compensation

deferred under a section 457 plan required to be reported

by the employer on Form W-2. If you are self-employed,

compensation is your net earnings from self-employment

(line 4 of Schedule SE (Form 1040)) before subtracting

any contributions made to the SIMPLE IRA plan for yourself.

How To Set up a SIMPLE IRA Plan

You can use Form 5304-SIMPLE or Form 5305-SIMPLE to

set up a SIMPLE IRA plan. Each form is a model SIMPLE

plan document. Which form you use depends on whether

you select a financial institution or your employees select

the institution that will receive the contributions.

Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving their

SIMPLE IRA plan contributions. Use Form 5305-SIMPLE

if you require that all contributions under the SIMPLE IRA

plan be deposited initially at a designated financial institution.

Publication 560 (2025)

Chapter 3

The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and

you (and the designated financial institution, if any) have

signed it. Keep the original form. Don’t file it with the IRS.

Other uses of the forms. If you set up a SIMPLE IRA

plan using Form 5304-SIMPLE or Form 5305-SIMPLE,

you can use the form to satisfy other requirements, including the following.

• Meeting employer notification requirements for the

SIMPLE IRA plan. Form 5304-SIMPLE and Form

5305-SIMPLE contain a Model Notification to Eligible

Employees that provides the necessary information to

the employee.

• Maintaining the SIMPLE IRA plan records and proving

you set up a SIMPLE IRA plan for employees.

Deadline for setting up a SIMPLE IRA plan. You can

set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you didn't

previously maintain a SIMPLE IRA plan. This requirement

doesn't apply if you are a new employer that comes into

existence after October 1 of the year the SIMPLE IRA plan

is set up and you set up a SIMPLE IRA plan as soon as

administratively feasible after your business comes into

existence. If you previously maintained a SIMPLE IRA

plan, you can set up a SIMPLE IRA plan effective only on

January 1 of a year. A SIMPLE IRA plan can't have an effective date that is before the date you actually adopt the

plan.

Setting up a SIMPLE IRA. SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. A SIMPLE IRA must be set up for

each eligible employee. Pursuant to section 601 of the

SECURE 2.0 Act of 2022, a SIMPLE IRA may either be a

traditional IRA (traditional SIMPLE IRA) or a Roth IRA

(Roth SIMPLE IRA). Forms 5305-S, SIMPLE Individual

Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and

custodial account documents the participant and the

trustee (or custodian) can use for this purpose for a traditional SIMPLE IRA (there are not currently model documents for a Roth SIMPLE IRA).

Contributions to a SIMPLE IRA won't affect the amount

an individual can contribute to a Roth or traditional IRA.

Deadline for setting up a SIMPLE IRA. A SIMPLE

IRA must be set up for an employee before the first date

by which a contribution is required to be deposited into the

employee's IRA. See Time limits for contributing funds,

later, under Contribution Limits.

Notification Requirement

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

the election period.

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

SIMPLE Plans

2. Your decision to make either matching contributions

or nonelective contributions (discussed later).

3. A summary description provided by the financial institution.

4. Written notice that their balance can be transferred

without cost or penalty if they use a designated financial institution.

Election period. The election period is generally the

60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding

calendar year). However, the dates of this period are

modified if you set up a SIMPLE IRA plan mid-year (for example, on July 1) or if the 60-day period falls before the

first day an employee becomes eligible to participate in

the SIMPLE IRA plan.

A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. For example, a SIMPLE IRA plan can provide a 90-day election period

instead of the 60-day period. Similarly, in addition to the

60-day period, a SIMPLE IRA plan can provide quarterly

election periods during the 30 days before each calendar

quarter, other than the first quarter of each year.

Contribution Limits

Contributions are made up of salary reduction contributions and employer contributions. You, as the employer,

must make either matching contributions or nonelective

contributions, defined later. No other contributions can be

made to the SIMPLE IRA plan. These contributions, which

you can deduct, must be made timely. See Time limits for

contributing funds, later.

Salary reduction contributions. The amount the employee chooses to have you contribute to a SIMPLE IRA

on their behalf generally can't be more than $16,500 for

2025 and increases to $17,000 for 2026. Pursuant to section 117 of the SECURE 2.0 Act of 2022, a higher limit of

$17,600 may apply to participants in SIMPLE IRA plans

for certain employers for 2025. These contributions must

be expressed as a percentage of the employee's compensation unless you permit the employee to express them as

a specific dollar amount. You can't place restrictions on

the contribution amount (such as limiting the contribution

percentage), except to comply with the $16,500 limit for

2025 ($17,000 for 2026).

If you or an employee participates in any other qualified

plan during the year and you or your employee has salary

reduction contributions (elective deferrals) under those

plans, the salary reduction contributions under a SIMPLE

IRA plan also count toward the overall annual limit

($23,500 for 2025; $24,500 for 2026) on exclusion of salary reduction contributions and other elective deferrals.

Catch-up contributions. A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the

calendar year to also make catch-up contributions. The

catch-up contribution limit for SIMPLE IRA plans is generally $3,500 for 2025 and $4,000 for 2026. Pursuant to

Chapter 3

section 117(b) of the SECURE 2.0 Act of 2022, a higher

catch-up limit of $3,850 may apply to participants in SIMPLE IRA plans of certain employers for 2025. Salary reduction contributions aren't treated as catch-up contributions until they exceed $16,500 for 2025 ($17,000 for

2026). However, the catch-up contribution a participant

can make for a year can't exceed the lesser of the following amounts.

• The catch-up contribution limit.

• The excess of the participant's compensation over the

salary reduction contributions that aren't catch-up

contributions.

Beginning in 2025, section 109 of the SECURE 2.0 Act

of 2022 permits SIMPLE plans (including SIMPLE 401(k)

and SIMPLE IRA plans) to allow participants to make a

higher amount of catch-up contributions in a tax year in

which they attain age 60, 61, 62, or 63. For 2025 and

2026, the higher limit on catch-up contributions to SIMPLE

plans for such participants is $5,250.

Employer matching contributions. You are generally

required to match each employee's salary reduction contribution(s) on a dollar-for-dollar basis up to 3% of the employee's compensation, where only employees who have

elected to make contributions will receive an employer

matching contribution. Pursuant to section 117 of the SECURE 2.0 Act of 2022, higher matching contributions apply for certain employers who elect to allow higher salary

reduction contributions. This requirement doesn't apply if

you make nonelective contributions, as discussed later.

Example. In 2025, your employee earned $25,000 and

chose to defer 5% of their salary. The net earnings from

self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make

3% matching contributions. The total contribution made

for the employee is $2,000, figured as follows.

Salary reduction contributions

($25,000 × 5% (0.05)) . . . . . . . . . . . . . . . . . . . . . .

Employer matching contribution

($25,000 × 3% (0.03)) . . . . . . . . . . . . . . . . . . . . . .

Total contributions . . . . . . . . . . . . . . . . . . . . . .

$1,250

750

$2,000

The total contribution you make for yourself is $5,200,

figured as follows.

Salary reduction contributions

($40,000 × 10% (0.10)) . . . . . . . . . . . . . . . . . . . . .

Employer matching contribution

($40,000 × 3% (0.03)) . . . . . . . . . . . . . . . . . . . . . .

Total contributions . . . . . . . . . . . . . . . . . . . . . .

$4,000

1,200

$5,200

Lower percentage. If you choose a matching contribution less than 3%, the percentage must be at least 1%.

You must notify the employees of the lower match within a

reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. You can't

choose a percentage less than 3% for more than 2 years

during the 5-year period that ends with (and includes) the

year for which the choice is effective.

SIMPLE Plans

Publication 560 (2025)

Nonelective contributions. Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible

employee who has at least $5,000 (or some lower amount

you select) of compensation from you for the year. Pursuant to section 117 of the SECURE 2.0 Act of 2022,

higher nonelective contributions apply for certain employers who elect to allow higher salary reduction contributions. If you make this choice, you must make nonelective

contributions whether or not the employee chooses to

make salary reduction contributions. Only $350,000 of the

employee's compensation can be taken into account to

figure the contribution limit in 2025 ($360,000 in 2026).

If you choose this 2% contribution formula, you must

notify the employees within a reasonable period of time

before the 60-day election period (discussed earlier) for

the calendar year.

Example 1. In 2025, your employee, Jane Wood,

earned $36,000 and chose to have you contribute 10% of

her salary. Your net earnings from self-employment are

$50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make a 2% nonelective

contribution. Both of you are under age 50. The total contribution you make for Jane is $4,320, figured as follows.

Salary reduction contributions

($36,000 × 10% (0.10)) . . . . . . . . . . . . . . . . . . . . .

2% nonelective contributions

($36,000 × 2% (0.02)) . . . . . . . . . . . . . . . . . . . . . .

Total contributions . . . . . . . . . . . . . . . . . . . . . .

$3,600

720

$4,320

The total contribution you make for yourself is $6,000,

figured as follows.

Salary reduction contributions

($50,000 × 10% (0.10)) . . . . . . . . . . . . . . . . . . . . .

2% nonelective contributions

($50,000 × 2% (0.02)) . . . . . . . . . . . . . . . . . . . . . .

Total contributions . . . . . . . . . . . . . . . . . . . . . .

The due date for making contributions for 2025 for most

plans is Monday, April 15, 2026.

Example 1. Your tax year is the fiscal year ending

June 30. Contributions under a SIMPLE IRA plan for calendar year 2024 (including contributions made by the due

date for the return for the tax year that ends on June 30,

2026) are deductible in the tax year ending June 30, 2026.

Example 2. You are a sole proprietor whose tax year is

the calendar year. Contributions under a SIMPLE IRA plan

for calendar year 2025 (including contributions made by

the due date for the return for the 2025 tax year) are deductible in the 2025 tax year.

Where To Deduct Contributions

Deduct the contributions you make for your common-law

employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), partnerships deduct them on Form

1065, and corporations deduct them on Form 1120 or

1120-S.

$5,000

1,000

$6,000

Tax Treatment of Contributions

$12,500

1,500

$14,000

Time limits for contributing funds. You must make the

salary reduction contributions to the SIMPLE IRA within

30 days after the end of the month in which the amounts

would otherwise have been payable to the employee in

cash. You must make matching contributions or nonelective contributions by the due date (including extensions)

for filing your federal income tax return for the year. Certain plans subject to DOL rules may have an earlier due

date for salary reduction contributions.

Publication 560 (2025)

You can deduct SIMPLE IRA contributions in the tax year

within which the calendar year for which contributions

were made ends. You can deduct contributions for a particular tax year if they are made for that tax year and are

made by the due date (including extensions) of your federal income tax return for that year.

Sole proprietors and partners deduct contributions for

themselves on line 16 of Schedule 1 (Form 1040). (If you

are a partner, contributions for yourself are shown on the

Schedule K-1 (Form 1065) you receive from the partnership.)

Example 2. Using the same facts as in Example 1

above, the maximum contribution you make for Jane or for

yourself if you each earned $75,000 is $14,000, figured as

follows.

Salary reduction contributions

(maximum amount allowed) . . . . . . . . . . . . . . . . . .

2% nonelective contributions

($75,000 × 2% (0.02)) . . . . . . . . . . . . . . . . . . . . . .

Total contributions . . . . . . . . . . . . . . . . . . . . . .

When To Deduct Contributions

Chapter 3

You can deduct your contributions as an employer. Your

employees can exclude contributions to a traditional SIMPLE IRA from their gross income. SIMPLE IRA plan contributions to a traditional SIMPLE IRA aren't subject to federal income tax withholding. However, salary reduction

contributions to a traditional SIMPLE IRA are subject to

social security, Medicare, and FUTA taxes. Matching and

nonelective contributions to a traditional SIMPLE IRA

aren't subject to these taxes. Salary reduction contributions to a Roth SIMPLE IRA are includible in gross income

and subject to federal income tax withholding, social security, Medicare, railroad retirement, and FUTA taxes. Employer matching and nonelective contributions to a Roth

SIMPLE IRA aren't subject to these taxes.

Reporting. For contributions made to a traditional SIMPLE IRA, don’t include contributions made under a salary

reduction arrangement in the “Wages, tips, other compensation” box of Form W-2. You must, however, include them

in the “Social security wages” and “Medicare wages and

tips” boxes. You must also include them in box 12. Check

the “Retirement plan” checkbox in box 13.

SIMPLE Plans

For contributions to a Roth SIMPLE IRA, contributions

made under a salary reduction arrangement should be reported on Form W-2 in boxes 1, 3, and 5 (or box 14 for

railroad retirement taxes) and in box 12 using code S. Employer matching and nonelective contributions to a Roth

SIMPLE IRA should be reported in boxes 1 and 2a of

Form 1099-R using code 2 or 7 in box 7 and check the

IRA/SEP/SIMPLE checkbox.

For more information, see the Form W-2 instructions.

See Catch-up contributions, earlier, under Contribution Limits. Pursuant to section 117 of the SECURE

2.0 Act of 2022, special salary reduction and catch-up

contribution limits apply for certain employers.

2. You must make either:

a. Matching contributions up to 3% of compensation

for the year, or

b. Nonelective contributions of 2% of compensation

on behalf of each eligible employee who has at

least $5,000 of compensation from you for the

year.

Pursuant to section 117 of the SECURE 2.0 Act

of 2022, higher matching and nonelective contributions apply for certain employers who elect to

allow higher salary reduction contributions.

Distributions (Withdrawals)

Distributions from a SIMPLE IRA are subject to IRA rules

and are generally includible in income for the year received. Tax-free rollovers can be made from one SIMPLE

IRA into another SIMPLE IRA. However, a rollover from a

SIMPLE IRA to a non-SIMPLE IRA can be made tax free

only after a 2-year participation in the SIMPLE IRA plan.

Generally, you or your employee must begin to receive

distributions from a traditional SIMPLE IRA by April 1 of

the first year after the calendar year in which you or your

employee reaches age 73.

Early withdrawals are generally subject to a 10% additional tax. However, the additional tax is increased to 25%

if funds are withdrawn within 2 years of beginning participation.

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

income tax withholding.

More Information on SIMPLE IRA

Plans

If you need help to set up or maintain a SIMPLE IRA plan,

go to IRS.gov/SIMPLE.

SIMPLE 401(k) Plan

You can adopt a SIMPLE plan as part of a 401(k) plan if

you meet the 100-employee limit, as discussed earlier under SIMPLE IRA Plan. A SIMPLE 401(k) plan is a qualified

retirement plan and must generally satisfy the rules discussed under Qualification Rules in chapter 4, including

the required distribution rules. However, a SIMPLE 401(k)

plan isn't subject to the nondiscrimination and top-heavy

rules discussed in chapter 4 if the plan meets the conditions listed below.

1. Under the plan, an employee can choose to have you

make salary reduction contributions for the year to a

trust in an amount expressed as a percentage of the

employee's compensation, but not more than $16,500

for 2025 ($17,000 for 2026). If permitted under the

plan, an employee who is age 50 or over can also

make a catch-up contribution of up to $3,500 for 2025

and $4,000 for 2026 (or a higher amount in a tax year

in which the employee attains age 60, 61, 62, or 63) .

Chapter 4

3. No other contributions can be made to the trust.

4. No contributions are made, and no benefits accrue,

for services during the year under any other qualified

retirement plan sponsored by you on behalf of any

employee eligible to participate in the SIMPLE 401(k)

plan.

5. The employee's rights to any contributions are nonforfeitable.

No more than $350,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2025 ($360,000

in 2026). Compensation is defined earlier in this chapter.

Employee notification. The notification requirement that

applies to SIMPLE IRA plans also applies to SIMPLE

401(k) plans. See Notification Requirement, earlier in this

chapter.

Note on forms. Please note that Forms 5304-SIMPLE

and 5305-SIMPLE can’t be used to establish a SIMPLE

401(k) plan. To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4.

Qualified Plans

Topics

This chapter discusses:

• Kinds of plans

• Qualification rules

• Setting up a qualified plan

• Minimum funding requirement

• Contributions

Qualified Plans

Publication 560 (2025)

• Employer deduction

• Elective deferrals (401(k) plans)

• Qualified Roth contribution program

• Distributions

• Prohibited transactions

• Reporting requirements

5500 Annual Return/Report of Employee Benefit

Plan

5500

5500-EZ Annual Return of A One-Participant

(Owners/Partners and Their Spouses)

Retirement Plan or A Foreign Plan

5500-EZ

5500-SF Short Form Annual Return/Report of Small

Employee Benefit Plan

5500-SF

8717 User Fee for Employee Plan Determination

Letter Request

Useful Items

8717

You may want to see:

8880 Credit for Qualified Retirement Savings

Contributions

8880

Publications

575 Pension and Annuity Income

8881 Credit for Small Employer Pension Plan

Startup Costs

8881

575

590-A Contributions to Individual Retirement

Arrangements (IRAs)

590-A

590-B Distributions from Individual Retirement

Arrangements (IRAs)

590-B

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

Retirement Plans

3066

3998 Choosing a Retirement Solution for Your Small

Business

3998

4222 401(k) Plans for Small Businesses

4222

4530 Designated Roth Accounts under a 401(k),

403(b) or governmental 457(b) plan

4530

4531 401(k) Plan Checklist

4531

4674 Automatic Enrollment 401(k) Plans for Small

Businesses

4674

4806 Profit Sharing Plans for Small Businesses

4806

Forms (and Instructions)

8955-SSA Annual Registration Statement Identifying

Separated Participants With Deferred Vested

Benefits

8955-SSA

These qualified retirement plans set up by self-employed

individuals are sometimes called Keogh or H.R. 10 plans.

A sole proprietor or a partnership can set up one of these

plans. A common-law employee or a partner can't set up

one of these plans. The plans described here can also be

set up and maintained by employers that are corporations.

All of the rules discussed here apply to corporations except where specifically limited to the self-employed.

The plan must be for the exclusive benefit of employees or

their beneficiaries. These qualified plans can include coverage for a self-employed individual.

As an employer, you can usually deduct, subject to limits,

contributions you make to a qualified plan, including those

made for your own retirement. The contributions (and

earnings and gains on them) are generally tax free until

distributed by the plan.

W-2 Wage and Tax Statement

W-2

Schedule K-1 (Form 1065) Partner's Share of

Income, Deductions, Credits, etc.

Kinds of Plans

1099-R Distributions From Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRAs,

Insurance Contracts, etc.

1040-SR U.S. Tax Return for Seniors

There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different

rules apply to each. You can have more than one qualified

plan, but your contributions to all the plans must not total

more than the overall limits discussed under Contributions

and Employer Deduction, later.

Schedule C (Form 1040) Profit or Loss From

Business

Defined Contribution Plan

Schedule F (Form 1040) Profit or Loss From

Farming

A defined contribution plan provides an individual account

for each participant in the plan. It provides benefits to a

participant largely based on the amount contributed to that

participant's account. Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. A defined

contribution plan can be either a profit-sharing plan or a

money purchase pension plan.

Schedule K-1 (Form 1065)

1099-R

1040 U.S. Individual Income Tax Return

1040

1040-SR

Schedule C (Form 1040)

Schedule F (Form 1040)

5300 Application for Determination for Employee

Benefit Plan

5300

5310 Application for Determination for Terminating

Plan

5310

5329 Additional Taxes on Qualified Plans (Including

IRAs) and Other Tax-Favored Accounts

5329

5330 Return of Excise Taxes Related to Employee

Benefit Plans

5330

Publication 560 (2025)

Chapter 4

Profit-sharing plan. Although it is called a profit-sharing

plan, you don’t actually have to make a business profit for

the year in order to make a contribution (except for

Qualified Plans

yourself if you are self-employed, as discussed under

Self-employed individual, later). A profit-sharing plan can

be set up to allow for discretionary employer contributions,

meaning the amount contributed each year to the plan

isn't fixed. An employer may even make no contribution to

the plan for a given year.

The plan must provide a definite formula for allocating

the contribution among the participants and for distributing

the accumulated funds to the employees after they reach

a certain age, after a fixed number of years, or upon certain other occurrences.

In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase

pension plan (discussed next) or a defined benefit plan

(discussed later).

Money purchase pension plan. Contributions to a

money purchase pension plan are fixed and aren't based

on your business profits. For example, a money purchase

pension plan may require that contributions be 10% of the

participants' compensation without regard to whether you

have profits (or the self-employed person has earned income).

Defined Benefit Plan

A defined benefit plan is any plan that isn't a defined contribution plan. Contributions to a defined benefit plan are

based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions

and computations are required to figure these contributions. Generally, you will need continuing professional help

to have a defined benefit plan.

Qualification Rules

To qualify for the tax benefits available to qualified plans, a

plan must meet certain requirements (qualification rules)

of the tax law. Generally, unless you write your own plan,

the financial institution that provided your plan will take the

continuing responsibility for meeting qualification rules

that are later changed. The following is a brief overview of

important qualification rules that generally haven't yet

been discussed. It isn't intended to be all-inclusive. See

Setting Up a Qualified Plan, later.

Tip: Generally, the following qualification rules also apply

to a SIMPLE 401(k) retirement plan. A SIMPLE 401(k)

plan is, however, not subject to the top-heavy plan rules

and nondiscrimination rules if the plan satisfies the provisions discussed in chapter 3 under SIMPLE 401(k) Plan.

Plan assets must not be diverted. Your plan must

make it impossible for its assets to be used for, or diverted

to, purposes other than the exclusive benefit of employees

and their beneficiaries. As a general rule, the assets can't

be diverted to the employer.

Chapter 4

Minimum coverage requirement must be met. To be a

qualified plan, a defined benefit plan must benefit at least

the lesser of the following.

1. 50 employees.

2. The greater of:

a. 40% of all employees, or

b. Two employees.

If there is only one employee, the plan must benefit that

employee.

Contributions or benefits must not discriminate. Under the plan, contributions or benefits to be provided must

not discriminate in favor of highly compensated employees.

Contributions and benefits must not be more than

certain limits. Your plan must not provide for contributions or benefits that are more than certain limits. The limits apply to the annual contributions and other additions to

the account of a participant in a defined contribution plan

and to the annual benefit payable to a participant in a defined benefit plan. These limits are discussed later in this

chapter under Contributions.

Minimum vesting standard must be met. Your plan

must satisfy certain requirements regarding when benefits

vest. A benefit is vested (you have a fixed right to it) when

it becomes nonforfeitable. A benefit is nonforfeitable if it

can't be lost upon the happening, or failure to happen, of

any event. Special rules apply to forfeited benefit

amounts. In defined contribution plans, forfeitures can be

allocated to the accounts of remaining participants in a

nondiscriminatory way, or they can be used to reduce your

contributions.

Forfeitures under a defined benefit plan can't be used

to increase the benefits any employee would otherwise receive under the plan. Forfeitures must be used instead to

reduce employer contributions.

Participation. In general, an employee must be allowed

to participate in your plan if they meet both the following

requirements.

• Has reached age 21.

• Has at least 1 year of service (2 years if the plan isn't a

401(k) plan and provides that after not more than 2

years of service the employee has a nonforfeitable

right to all their accrued benefit).

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

401(k) plan.

Caution: A plan can't exclude an employee because the

employee has reached a specified age.

Qualified Plans

Publication 560 (2025)

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

areas.

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

conditions are met.

• Nondiscrimination in coverage, contributions, and

• The plan pays the full vested account balance to the

benefits.

a life annuity.

participant's surviving spouse (or other beneficiary if

the surviving spouse consents or if there is no surviving spouse) if the participant dies.

• Minimum age and service requirements.

• Vesting.

• Limits on contributions and benefits.

• Top-heavy plan requirements.

• The plan isn't a direct or indirect transferee of a plan

that must provide automatic survivor benefits.

Contributions or benefits provided by the leasing organization for services performed for you are treated as provided

by you.

Benefit payment must begin when required. Your plan

must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin

within 60 days after the close of the latest of the following

periods.

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

the plan.

• The plan year in which the 10th anniversary of the

year in which the participant began participating in the

plan occurs.

• The plan year in which the participant separates from

service.

Early retirement. Your plan can provide for payment

of retirement benefits before the normal retirement age. If

your plan offers an early retirement benefit, a participant

who separates from service before satisfying the early retirement age requirement is entitled to that benefit if the

participant meets both the following requirements.

• Satisfies the service requirement for the early retirement benefit.

• Separates from service with a nonforfeitable right to

an accrued benefit. The benefit, which may be actuarially reduced, is payable when the early retirement age

requirement is met.

Required minimum distributions (RMDs). Special

rules require minimum annual distributions from qualified

plans, generally beginning after age 73. See Required

Distributions under Distributions, later.

Survivor benefits. Defined benefit and money purchase

pension plans must provide automatic survivor benefits in

both the following forms.

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

date.

• A qualified pre-retirement survivor annuity for a vested

participant who dies before the annuity starting date

and who has a surviving spouse.

Publication 560 (2025)

• The participant doesn't choose benefits in the form of

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Loan secured by benefits. If automatic survivor benefits are required for a spouse under a plan, they must

consent to a loan that uses as security the accrued benefits in the plan.

Waiver of survivor benefits. Each plan participant

may be permitted to waive the joint and survivor annuity or

the pre-retirement survivor annuity (or both), but only if the

participant has the written consent of the spouse. The

plan must also allow the participant to withdraw the

waiver. The spouse's consent must be witnessed by a

plan representative or notary public.

Involuntary cash-out of benefits not more than dollar limit. A plan may provide for the immediate distribution of the participant's benefit under the plan if the

present value of the benefit isn't greater than $7,000.

However, the distribution can't be made after the annuity starting date unless the participant and the spouse or

surviving spouse of a participant who died (if automatic

survivor benefits are required for a spouse under the plan)

consent in writing to the distribution. If the present value is

greater than $7,000, the plan must have the written consent of the participant and the spouse or surviving spouse

(if automatic survivor benefits are required for a spouse

under the plan) for any immediate distribution of the benefit.

Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present

value of these benefits.

A plan must provide for the automatic rollover of any

cash-out distribution of more than $1,000 to an individual

retirement account or annuity, unless the participant chooses otherwise. A section 402(f) notice must be sent prior

to an involuntary cash-out of an eligible rollover distribution. See Section 402(f) notice under Distributions, later,

for more details.

Consolidation, merger, or transfer of assets or liabilities. Your plan must provide that, in the case of any

merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan

then terminated) receive a benefit equal to or more than

the benefit they would have been entitled to just before the

merger, etc. (if the plan had then terminated).

Benefits must not be assigned or alienated. Your plan

must provide that a participant's or beneficiary's benefits

under the plan can't be taken away by any legal or equitable proceeding except as provided below or pursuant to

Qualified Plans

certain judgments or settlements against the participant

for violations of plan rules.

Exception for certain loans. A loan from the plan

(not from a third party) to a participant or beneficiary isn't

treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit

and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. A disqualified person is

defined later in this chapter under Prohibited Transactions.

Exception for a qualified domestic relations order

(QDRO). Compliance with a QDRO doesn't result in a

prohibited assignment or alienation of benefits.

Payments to an alternate payee under a QDRO before

the participant reaches age 591/2 aren't subject to the 10%

additional tax that would otherwise apply under certain circumstances. Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity.

No benefit reduction for social security increases.

Your plan must not permit a benefit reduction for a

post-separation increase in the social security benefit level

or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from

service and has nonforfeitable rights to benefits. This rule

also applies to plans supplementing the benefits provided

by other federal or state laws.

Elective deferrals must be limited. If your plan provides for elective deferrals, it must limit those deferrals to

the amount in effect for that particular year. See Limit on

Elective Deferrals, later in this chapter.

Top-heavy plan requirements. A top-heavy plan is one

that mainly favors partners, sole proprietors, and other key

employees.

A plan is top-heavy for a plan year if, for the preceding

plan year, the total value of accrued benefits or account

balances of key employees is more than 60% of the total

value of accrued benefits or account balances of all employees. Additional requirements apply to a top-heavy

plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan.

Most qualified plans, whether or not top-heavy, must

contain provisions that meet the top-heavy requirements

and will take effect in plan years in which the plans are

top-heavy. These qualification requirements for top-heavy

plans are explained in section 416 and its regulations.

SIMPLE and safe harbor 401(k) plan exception.

The top-heavy plan requirements don't apply to SIMPLE

401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. Qualified automatic contribution arrangements (QACAs) (discussed

later) also aren't subject to top-heavy requirements.

Setting up a Qualified Plan

There are two basic steps in setting up a qualified plan.

First, you adopt a written plan. Then, you invest the plan

assets.

You, the employer, are responsible for setting up and

maintaining the plan.

Tip: If you are self-employed, it isn't necessary to have

employees besides yourself to sponsor and set up a qualified plan. If you have employees, see Participation under

Qualification Rules, earlier.

Set-up deadline. To take a deduction for contributions

for a tax year, your plan must be set up (adopted) by the

last day of that year. If you are a sole proprietor with a new

section 401(k) plan that you adopted after the end of the

tax year that ends after or with the first plan year, and you

are the only participant, your elective deferrals must be

paid to the plan before the time for filing your return for that

tax year (determined without regard to any extensions) in

order for the elective deferrals to be treated as having

been made by the end of the first plan year.

Adopting a Written Plan

You must adopt a written plan. The plan can be an IRS

pre-approved plan offered by a sponsoring organization.

Or it can be an individually designed plan.

Written plan requirement. To qualify, the plan you set

up must be in writing and must be communicated to your

employees. The plan's provisions must be stated in the

plan. It isn't sufficient for the plan to merely refer to a requirement of the Internal Revenue Code.

IRS pre-approved plans. Most qualified plans follow a

standard form of plan approved by the IRS. An IRS

pre-approved plan is a plan, including a plan covering

self-employed individuals, that is made available by a provider for adoption by employers. Under the prior IRS

pre-approved plan program, a plan could be a master

plan, a prototype plan, or a volume submitter plan. Under

the restructured program, the three plan types were combined into one type called a pre-approved plan. IRS

pre-approved plans include both standardized plans and

nonstandardized plans. An IRS pre-approved plan may

use a single funding medium, for example, a trust or custodial account document, for the joint use of all adopting

employers or separate funding mediums established for

each adopting employer. An IRS pre-approved plan may

consist of an adoption agreement plan or a single document plan. For more information about IRS pre-approved

plans, see Revenue Procedure 2017-41, 2017-29 I.R.B.

92, available at IRS.gov/irb/2017-29_IRB#RP-2017-41.

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

• Banks (including some savings and loan associations

and federally insured credit unions).

Chapter 4

Qualified Plans

Publication 560 (2025)

• Trade or professional organizations.

• Insurance companies.

• Mutual funds.

• Law firms.

• Third-party administrators.

Minimum Funding

Requirement

Individually designed plan. If you prefer, you can set up

an individually designed plan to meet specific needs. Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. You may need professional help for this. See

Revenue Procedure 2024-4, 2024-1 I.R.B. 160, available

at IRS.gov/irb/2024-4_IRB, as annually updated, that may

help you decide whether to apply for approval.

User fee. The fee mentioned earlier for requesting a

determination letter doesn't apply to employers who have

100 or fewer employees who received at least $5,000 of

compensation from the employer for the preceding year.

At least one of them must be a non-highly compensated

employee participating in the plan. The fee doesn't apply

to requests made by the later of the following dates.

In general, if your plan is a money purchase pension plan

or a defined benefit plan, you must actually pay enough

into the plan to satisfy the minimum funding standard for

each year. Determining the amount needed to satisfy the

minimum funding standard for a defined benefit plan is

complicated, and you should seek professional help in order to meet these contribution requirements. For information on this funding requirement, see section 430 and its

regulations.

Quarterly installments of required contributions. If

your plan is a defined benefit plan subject to the minimum

funding requirements, you must generally make quarterly

installment payments of the required contributions. If you

don't pay the full installments timely, you may have to pay

interest on any underpayment for the period of the underpayment.

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

• The end of any remedial amendment period for the

Due dates. The due dates for the installments are 15

days after the end of each quarter. For a calendar-year

plan, the installments are due April 15, July 15, October

15, and January 15 (of the following year).

The request can't be made by the provider of an IRS

pre-approved plan that intends to market to participating

employers.

For more information about whether the user fee applies, see Revenue Procedure 2020-4, 2020-1 I.R.B. 148,

available at IRS.gov/irb/2020-01_IRB, as may be annually

updated; Notice 2017-1, 2017-2 I.R.B. 367, available at

IRS.gov/irb/2017-02_IRB; and Form 8717.

Installment percentage. Each quarterly installment

must be 25% of the required annual payment.

plan that begins within the first 5 plan years.

Extended period for making contributions. Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if

made by 81/2 months after the end of that year.

Contributions

Investing Plan Assets

In setting up a qualified plan, you arrange how the plan's

funds will be used to build its assets.

• You can establish a trust or custodial account to invest

the funds.

• You, the trust, or the custodial account can buy an an-

nuity contract from an insurance company. Life insurance can be included only if it is incidental to the retirement benefits.

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

You can set up a custodial account with a bank, savings

and loan association, credit union, or other person who

can act as the plan trustee.

You don't need a trust or custodial account, although

you can have one, to invest the plan's funds in annuity

contracts or face-amount certificates. If anyone other than

a trustee holds them, however, the contracts or certificates

must state they aren't transferable.

A qualified plan is generally funded by your contributions.

However, employees participating in the plan may be permitted to make contributions, and you may be permitted to

make contributions on your own behalf. See Employee

Contributions and Elective Deferrals, later.

Contributions deadline. You can make deductible contributions for a tax year up to the due date of your return

(plus extensions) for that year.

Self-employed individual. You can make contributions

on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business

for which the plan was set up. Your net earnings must be

from your personal services, not from your investments. If

you have a net loss from self-employment, you can't make

contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation.

Other plan requirements. For information on other important plan requirements, see Qualification Rules, earlier

in this chapter.

Publication 560 (2025)

Chapter 4

Qualified Plans

Employer Contributions

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

Limits on Contributions and Benefits

Your plan must provide that contributions or benefits can't

exceed certain limits. The limits differ depending on

whether your plan is a defined benefit plan or a defined

contribution plan.

Defined benefit plan. For 2025, the annual benefit for a

participant under a defined benefit plan can't exceed the

lesser of the following amounts.

1. 100% of the participant's average compensation for

their highest 3 consecutive calendar years.

2. $280,000 for 2025 ($290,000 for 2026).

Defined contribution plan. For 2025, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant can't exceed the lesser of the following amounts.

1. 100% of the participant's compensation.

2. $70,000 for 2025 ($72,000 for 2026).

Catch-up contributions (discussed later under Limit on

Elective Deferrals) aren't subject to the above limit.

Employee Contributions

Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Even

though these employee contributions aren't deductible,

the earnings on them are tax free until distributed in later

years. Also, these contributions must satisfy the actual

contribution percentage (ACP) test of section 401(m)(2), a

nondiscrimination test that applies to employee contributions and matching contributions. See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k)

and 401(m) respectively.

When Contributions Are Considered

Made

You generally apply your plan contributions to the year in

which you make them. But you can apply them to the previous year if all the following requirements are met.

1. You make them by the due date of your tax return for

the previous year (plus extensions).

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

year.

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

4. You do either of the following.

Chapter 4

a. You specify in writing to the plan administrator or

trustee that the contributions apply to the previous

year.

b. You deduct the contributions on your tax return for

the previous year. A partnership shows contributions for partners on Form 1065.

Employer's promissory note. Your promissory note

made out to the plan isn't a payment that qualifies for the

deduction. Also, issuing this note is a prohibited transaction subject to tax. See Prohibited Transactions, later.

Employer Deduction

You can usually deduct, subject to limits, contributions you

make to a qualified plan, including those made for your

own retirement. The contributions (and earnings and

gains on them) are generally tax free until distributed by

the plan.

Deduction Limits

The deduction limit for your contributions to a qualified

plan depends on the kind of plan you have.

Defined contribution plans. The deduction for contributions to a defined contribution plan (profit-sharing plan or

money purchase pension plan) can't be more than 25% of

the compensation paid (or accrued) during the year to

your eligible employees participating in the plan. If you are

self-employed, you must reduce this limit in figuring the

deduction for contributions you make for your own account. See Deduction Limit for Self-Employed Individuals,

later.

When figuring the deduction limit, the following rules

apply.

• Elective deferrals (discussed later) aren't subject to

the limit.

• Compensation includes elective deferrals.

• The maximum compensation that can be taken into

account for each employee in 2025 is $350,000

($360,000 in 2026).

Defined benefit plans. The deduction for contributions

to a defined benefit plan is based on actuarial assumptions and computations. Consequently, an actuary must

figure your deduction limit.

Caution: In figuring the deduction for contributions, you

can't take into account any contributions or benefits that

are more than the limits discussed earlier under Limits on

Contributions and Benefits.

Deduction Limit for Self-Employed

Individuals

If you make contributions for yourself, you need to make a

special computation to figure your maximum deduction for

Qualified Plans

Publication 560 (2025)

Table 4-1. Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted)

$100

165

100

$250

100

125

150

$100

100

125

140

Excess

contribution

carryover

available at

end of year

Total

deduction

including

carryovers

$1,000

400

500

600

Deductible

limit for current year

(25% of compensation)

2022 . . . . . . . . .

2023 . . . . . . . . .

2024 . . . . . . . . .

2025 . . . . . . . . .

Employer

contribution

Year

Participants'

compensation

Excess

contribution

carryover

used1

There were no carryovers from years before 2022.

these contributions. Compensation is your net earnings

from self-employment, defined in chapter 1. This definition

takes into account both the following items.

Excise Tax for Nondeductible

(Excess) Contributions

• The deduction for the deductible part of your self-em-

If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions

and you may be liable for an excise tax. In general, a 10%

excise tax applies to nondeductible contributions made to

qualified pension and profit-sharing plans and to SEPs.

ployment tax.

• The deduction for contributions on your behalf to the

plan.

The deductions for your own contributions and your net

earnings depend on each other. For this reason, you determine the deduction for your own contributions indirectly

by reducing the contribution rate called for in your plan. To

do this, use either the Rate Table for Self-Employed or the

Rate Worksheet for Self-Employed in chapter 5. Then, figure your maximum deduction by using the Deduction

Worksheet for Self-Employed in chapter 5.

Where To Deduct Contributions

Deduct the contributions you make for your common-law

employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), partnerships deduct them on Form

1065, and corporations deduct them on Form 1120 or

1120-S.

Sole proprietors and partners deduct contributions for

themselves on line 16 of Schedule 1 (Form 1040). (If you

are a partner, contributions for yourself are shown on the

Schedule K-1 (Form 1065) you get from the partnership.)

Carryover of Excess Contributions

If you contribute more to a plan than you can deduct for

the year, you can carry over and deduct the difference in

later years, combined with your contributions for those

years. Your combined deduction in a later year is limited to

25% of the participating employees' compensation for that

year. For purposes of this limit, a SEP is treated as a

profit-sharing (defined contribution) plan. However, this

percentage limit must be reduced to figure your maximum

deduction for contributions you make for yourself. See Deduction Limit for Self-Employed Individuals, earlier. The

amount you carry over and deduct may be subject to the

excise tax discussed next.

Table 4-1. Carryover of Excess Contributions Illustrated

Profit-Sharing Plan illustrates the carryover of excess contributions to a profit-sharing plan.

Publication 560 (2025)

Chapter 4

Special rule for self-employed individuals. The 10%

excise tax doesn't apply to any contribution made to meet

the minimum funding requirements in a money purchase

pension plan or a defined benefit plan. Even if that contribution is more than your earned income from the trade or

business for which the plan is set up, the difference isn't

subject to this excise tax. See Minimum Funding Requirement, earlier.

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

Elective Deferrals (401(k)

Plans)

Your qualified plan can include a cash or deferred arrangement under which participants can choose to have

you contribute part of their before-tax compensation to the

plan rather than receive the compensation in cash. A plan

with this type of arrangement is popularly known as a

401(k) plan. (As a self-employed individual participating in

the plan, you can contribute part of your before-tax net

earnings from the business.) This contribution is called an

elective deferral because participants choose (elect) to

defer receipt of the money.

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

• A profit-sharing plan.

• A money purchase pension plan in existence on June

27, 1974, that included a salary reduction arrangement on that date.

Partnership. A partnership can have a 401(k) plan.

Qualified Plans

Restriction on conditions of participation. Effective

for plan years beginning after 2020, a 401(k) plan can’t require, as a condition of participation, that an employee

complete a period of service that extends beyond the

close of the earlier of (a) 1 year of service, or (b) the first

period of 3 consecutive 12-month periods (excluding

12-month periods beginning before 2021) during each of

which the employee has completed at least 500 hours of

service. Effective for plan years beginning after 2024, 3

consecutive 12-month periods are reduced to 2 consecutive 12-month periods.

Matching contributions. If your plan permits, you can

make matching contributions for an employee who makes

an elective deferral to your 401(k) plan. For example, the

plan might provide that you will contribute 50 cents for

each dollar your participating employees choose to defer

under your 401(k) plan. Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions.

Nonelective contributions. You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take

cash instead. These are called nonelective contributions.

Employee compensation limit. No more than $350,000

of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2025. This limit is $360,000 for 2026.

SIMPLE 401(k) plan. If you had 100 or fewer employees

who earned $5,000 or more in compensation during the

preceding year, you may be able to set up a SIMPLE

401(k) plan. A SIMPLE 401(k) plan isn't subject to the

nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. For details about

SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3.

Distributions. Certain rules apply to distributions from

401(k) plans. See Distributions From 401(k) Plans, later.

Limit on Elective Deferrals

There is a limit on the amount an employee can defer

each year under these plans. This limit applies without regard to community property laws. Your plan must provide

that your employees can't defer more than the limit that

applies for a particular year. The basic limit on elective deferrals is $23,500 for 2025 and increases to $24,500 for

2026. This limit applies to all salary reduction contributions and elective deferrals. If, in conjunction with other

plans, the deferral limit is exceeded, the difference is included in the employee's gross income.

Catch-up contributions. A 401(k) plan can permit participants who are age 50 or over at the end of the calendar

year to also make catch-up contributions. The catch-up

contribution limit is $7,500 for 2025 and $8,000 for 2026.

Elective deferrals aren't treated as catch-up contributions

for 2025 until they exceed the $23,500 limit ($24,500 limit

Chapter 4

for 2026), the ADP test limit of section 401(k)(3), or the

plan limit (if any). However, the catch-up contributions a

participant can make for a year can't exceed the lesser of

the following amounts.

• The catch-up contribution limit.

• The excess of the participant's compensation over the

elective deferrals that aren't catch-up contributions.

Beginning in 2025, section 109 of the SECURE 2.0 Act

of 2022 permits 401(k) plans to allow participants to make

a higher amount of catch-up contributions in a tax year in

which they attain age 60, 61, 62, or 63. For 2025 and

2026, the higher limit on catch-up contributions to 401(k)

plans (excluding SIMPLE plans) for such participants is

$11,250.

Treatment of contributions. Your contributions to your

own 401(k) plan are generally deductible by you for the

year they are contributed to the plan. Matching or nonelective contributions made to the plan are also deductible

by you in the year of contribution.

Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from

the plan. Elective deferrals are included in wages for social security, Medicare, and FUTA taxes.

Forfeiture. Employees have a nonforfeitable right at all

times to their accrued benefit attributable to elective deferrals.

Reporting on Form W-2. Don't include elective deferrals

in the “Wages, tips, other compensation” box of Form

W-2. You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. You

must also include them in box 12. Check the “Retirement

plan” checkbox in box 13. For more information, see the

Form W-2 instructions.

Automatic Enrollment

Your 401(k) plan can have an automatic enrollment feature. Under this feature, you can automatically reduce an

employee's pay by a fixed percentage and contribute that

amount to the 401(k) plan on their behalf unless the employee affirmatively chooses not to have their pay reduced

or chooses to have it reduced by a different percentage.

These contributions are elective deferrals. An automatic

enrollment feature will encourage employees' saving for

retirement and will help your plan pass nondiscrimination

testing (if applicable). For more information, see Pub.

4674.

Caution: If your 401(k) plan is established on or after December 29, 2022, your plan must have an automatic enrollment feature unless an exception applies. See section II.A of Notice 2024-2, 2024-2 I.R.B. 316, at

IRS.gov/irb/2024–02, for additional information.

Eligible automatic contribution arrangement (EACA).

Under an EACA, a participant is treated as having elected

to have the employer make contributions in an amount

equal to a uniform percentage of compensation. This

Qualified Plans

Publication 560 (2025)

automatic election will remain in place until the participant

specifically elects not to have such deferral percentage

made (or elects a different percentage). There is no required deferral percentage.

Withdrawals. Under an EACA, you may allow participants to withdraw their automatic contributions to the plan

if certain conditions are met.

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

year.

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

year.

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

years.

• The participant must elect the withdrawal no later than

Matching or nonelective contributions. Under the

terms of the QACA, you must make either matching or

nonelective contributions according to the following terms.

• The participant must withdraw the entire amount of

1. Matching contributions. You must make matching

contributions on behalf of each non-highly compensated employee in the following amounts.

If the plan allows withdrawals under the EACA, the

amount of the withdrawal other than the amount of any

designated Roth contributions must be included in the

employee's gross income for the tax year in which the distribution is made. The additional 10% tax on early distributions won't apply to the distribution.

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

to 1% of compensation.

90 days after the date of the first elective contributions

under the EACA.

EACA default contributions, including any earnings

thereon.

Notice requirement. Under an EACA, employees

must be given written notice of the terms of the EACA

within a reasonable period of time before each plan year.

The notice must be written in a manner calculated to be

understood by the average employee and be sufficiently

accurate and comprehensive in order to apprise the employee of their rights and obligations under the EACA. The

notice must include an explanation of the employee's right

to elect not to have elective contributions made on their

behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is

made. The notice must also explain how contributions will

be invested in the absence of an investment election by

the employee.

Qualified automatic contribution arrangement

(QACA). A QACA is a type of safe harbor plan. It contains

an automatic enrollment feature, and mandatory employer

contributions are required. If your plan includes a QACA, it

won't be subject to the ADP test (discussed later) or the

top-heavy requirements (discussed earlier). Additionally,

your plan won't be subject to the ACP test if certain additional requirements are met. Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral

contributions equal to a certain default percentage of compensation. In order to not have default elective deferrals

made, an employee must make an affirmative election

specifying a deferral percentage (including zero, if desired). If an employee doesn't make an affirmative election, the default deferral percentage must meet the following conditions.

1. It must be applied uniformly.

2. It must not exceed 10%. (After 2019, the maximum

default deferral percentage increases to 15%.)

b. An amount equal to 50% of elective deferrals, from

1% up to 6% of compensation.

Other formulas may be used as long as they are at

least as favorable to non-highly compensated employees. The rate of matching contributions for highly

compensated employees, including yourself, must not

exceed the rates for non-highly compensated employees.

2. Nonelective contributions. You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan,

regardless of whether they elected to participate, in

an amount equal to at least 3% of their compensation.

Vesting requirements. All accrued benefits attributed

to matching or nonelective contributions under the QACA

must be 100% vested for all employees who complete 2

years of service. These contributions are subject to special withdrawal restrictions, discussed later.

Notice requirements. Each employee eligible to participate in the QACA must receive written notice of their

rights and obligations under the QACA within a reasonable period before each plan year. The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and

comprehensive. The notice must explain their right to elect

not to have elective contributions made on their behalf, or

to have contributions made at a different percentage than

the default percentage. Additionally, the notice must explain how contributions will be invested in the absence of

any investment election by the employee. The employee

must have a reasonable period of time after receiving the

notice to make such contribution and investment elections

prior to the first contributions under the QACA.

If you make nonelective contributions under the QACA

and you either don't make any matching contributions or

you make matching contributions that are intended to satisfy the ACP test, then this QACA notice requirement

doesn’t apply. However, this exception doesn’t apply to the

EACA notice requirement, discussed earlier.

3. It must be at least 3% in the first plan year it applies to

an employee and through the end of the following

year.

Publication 560 (2025)

Chapter 4

Qualified Plans

Treatment of Excess Deferrals

If the total of an employee's deferrals is more than the limit

for 2025, the employee can have the difference (called an

excess deferral) paid out of any of the plans that permit

these distributions. The employee must notify the plan by

April 15, 2026 (or an earlier date specified in the plan), of

the amount to be paid from each plan. The plan must then

pay the employee that amount, plus earnings on the

amount through the end of 2025, by April 15, 2026.

Excess withdrawn by April 15. If the employee takes

out the excess deferral by April 15, 2026, it isn't reported

again by including it in the employee's gross income for

2026. However, any income earned in 2025 on the excess

deferral taken out is taxable in the tax year in which it is

taken out. The distribution isn't subject to the additional

10% tax on early distributions.

If the employee takes out part of the excess deferral

and the income on it, the distribution is treated as made

proportionately from the excess deferral and the income.

Even if the employee takes out the excess deferral by

April 15, the amount will be considered for purposes of

nondiscrimination testing requirements of the plan, unless

the distributed amount is for a non-highly compensated

employee who participates in only one employer's 401(k)

plan or plans.

Excess not withdrawn by April 15. If the employee

doesn't take out the excess deferral by April 15, 2026, the

excess, though taxable in 2025, isn't included in the employee's cost basis in figuring the taxable amount of any

eventual distributions under the plan. In effect, an excess

deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the employee's

excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan

can be disqualified.

Reporting corrective distributions on Form 1099-R.

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

Tax on excess contributions of highly compensated

employees. The law provides tests to detect discrimination in a plan. If tests, such as the ADP test (see section

401(k)(3)) and the ACP test (see section 401(m)(2)), show

that contributions for highly compensated employees are

more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Report the tax

on Form 5330. The ADP test doesn't apply to a safe harbor 401(k) plan (discussed next) or to a QACA. Also, the

ACP test doesn't apply to these plans if certain additional

requirements are met.

The tax for the year is 10% of the excess contributions

for the plan year ending in your tax year. Excess contributions are elective deferrals, employee contributions, or

employer matching or nonelective contributions that are

more than the amount permitted under the ADP test or the

ACP test.

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See Regulations sections 1.401(k)-2 and 1.401(m)-2

for further guidance relating to the nondiscrimination rules

under sections 401(k) and 401(m) respectively.

Caution: If the plan fails the ADP or ACP testing, and the

failure isn't corrected by the end of the next plan year, the

plan can be disqualified.

Safe Harbor 401(k) Plan

If you meet the requirements for a safe harbor 401(k) plan,

you don't have to satisfy the ADP test or the ACP test if

certain additional requirements are met. For your plan to

be a safe harbor plan, you must meet the following conditions.

1. Matching or nonelective contributions. You must

make matching or nonelective contributions according

to one of the following formulas.

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

i. You must contribute an amount equal to 100%

of each non-highly compensated employee's

elective deferrals, up to 3% of compensation.

ii. You must contribute an amount equal to 50%

of each non-highly compensated employee's

elective deferrals, from 3% up to 5% of compensation.

iii. The rate of matching contributions for highly

compensated employees, including yourself,

must not exceed the rates for non-highly compensated employees.

b. Nonelective contributions. You must make nonelective contributions, without regard to whether

the employee made elective deferrals, on behalf of

all non-highly compensated employees eligible to

participate in the plan, equal to at least 3% of the

employee's compensation.

These mandatory matching and nonelective contributions must be immediately 100% vested and are

subject to special withdrawal restrictions.

2. Notice requirement. You must give eligible employees written notice of their rights and obligations with

regard to contributions under the plan within a reasonable period before the plan year.

If you make nonelective contributions and you either

don't make any matching contributions or you make

matching contributions that are intended to satisfy the

ACP test, then this notice requirement doesn’t apply. However, this exception doesn’t apply to the EACA notice requirement, discussed earlier.

The other requirements for a 401(k) plan, including

withdrawal and vesting rules, must also be met for your

plan to qualify as a safe harbor 401(k) plan.

Qualified Plans

Publication 560 (2025)

Qualified Roth Contribution

Program

An employee's nonexclusion period for a plan is the

5-tax-year period beginning with the earlier of the following tax years.

• The first tax year in which a contribution was made to

their Roth account in the plan.

Under this program, an eligible employee can designate

all or a portion of their elective deferrals as after-tax Roth

contributions. These contributions, which are made in lieu

of elective deferrals, are designated Roth contributions.

Unlike other elective deferrals, designated Roth contributions aren't excluded from an employee's gross income.

• If a rollover contribution was made to the employee's

In addition, an eligible employee may be permitted to

designate certain nonelective contributions or matching

contributions as Roth contributions. These contributions

are also includible in an employee's gross income.

Rollover. A rollover from another account can be made to

a designated Roth account in the same plan. For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I.R.B. 872, available at IRS.gov/irb/

2010-51_IRB/ar11.html; and Notice 2013-74, 2013-52

I.R.B. 819, available at IRS.gov/pub/irs-irbs/irb13-52_IRB.

A distribution from a designated Roth account can only be

rolled over to another designated Roth account or a Roth

IRA. Rollover amounts don't apply toward the annual deferral limit.

Designated Roth contributions, designated Roth nonelective contributions, and designated Roth matching contributions must be maintained in a separate Roth account.

However, qualified distributions from a Roth account are

excluded from an employee's gross income.

Elective Deferrals

Reporting Requirements

Under a qualified Roth contribution program, the amount

of elective deferrals that an employee may designate as a

Roth contribution is limited to the maximum amount of

elective deferrals excludable from gross income for the

year (for 2025, $23,500 if under age 50 and $31,000 if age

50 or over (but not attaining age 60, 61, 62, or 63);

amounts increase in 2026 to $24,500 and $32,500, respectively) less the total amount of the employee's elective deferrals not designated as Roth contributions.

Designated Roth contributions are treated the same as

pre-tax elective deferrals for most purposes, including:

• The annual individual elective deferral limit (total of all

designated Roth contributions and traditional, pre-tax

elective deferrals) of $23,500 for 2025 ($24,500 for

2026), with an additional $7,500 if age 50 or over (but

not attaining age 60, 61, 62, or 63) ($8,000 for 2026).

• Determining the maximum employee and employer

annual contributions of the lesser of 100% of compensation or $70,000 for 2025 ($72,000 for 2026);

• Nondiscrimination testing;

• Required distributions; and

• Elective deferrals not taken into account for purposes

of deduction limits.

You must report a designated Roth contribution on Form

W-2. See the Form W-2 instructions for detailed information.

You must report a designated Roth nonelective contribution or a designated Roth matching contribution on

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

for detailed information.

Distributions

Amounts paid to plan participants from a qualified plan are

called distributions. Distributions may be nonperiodic,

such as lump-sum distributions, or periodic, such as annuity payments. Also, certain loans may be treated as distributions. See Loans Treated as Distributions in Pub. 575.

Required Distributions

A qualified plan must provide that each participant will either:

• Receive their entire interest (benefits) in the plan by

the required beginning date (defined later), or

Qualified Distributions

• Begin receiving regular periodic distributions by the

A qualified distribution is a distribution that is made after

the employee's nonexclusion period and:

• On or after the employee reaches age 591/2,

• On account of the employee's being disabled, or

• On or after the employee's death.

Publication 560 (2025)

designated Roth account from a designated Roth account previously established for the employee under

another plan, then the first tax year in which a contribution was made to the previously established designated Roth account.

Chapter 4

required beginning date in annual amounts figured to

distribute the participant's entire interest (benefits)

over their life expectancy or over the joint life expectancies of the participant and the designated beneficiary (or over a shorter period).

These distribution rules apply individually to each qualified plan. You can't satisfy the requirement for one plan by

Qualified Plans

taking a distribution from another. The plan must provide

that these rules override any inconsistent distribution options previously offered.

Minimum distribution. If the account balance of a qualified plan participant is to be distributed (other than as an

annuity), the plan administrator must figure the minimum

amount required to be distributed each distribution calendar year. This minimum is figured by dividing the account

balance by the applicable life expectancy. The plan administrator can use the life expectancy tables in Pub.

590-B for this purpose. For more information on figuring

the minimum distribution, see Tax on Excess Accumulation in Pub. 575.

Required beginning date. Generally, each participant

must receive their entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the

required beginning date.

A participant must begin to receive distributions from

their qualified retirement plan by April 1 of the first year after the later of the following years.

1. The calendar year in which the participant reaches

age 73.

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

However, the plan may require the participant to begin receiving distributions by April 1 of the year after the participant reaches age 73 even if the participant has not retired.

If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in

which the participant reaches age 73. For more information, see Tax on Excess Accumulation in Pub. 575 about

distributions prior to 2020.

Distributions after the starting year. The distribution

required to be made by April 1 is treated as a distribution

for the starting year. (The starting year is the year in which

the participant meets (1) or (2) under Required beginning

date, earlier, whichever applies.) After the starting year,

the participant must receive the required distribution for

each year by December 31 of that year. If no distribution is

made in the starting year, required distributions for 2 years

must be made in the next year (one by April 1 and one by

December 31).

Distributions after participant's death. See Pub.

575 for the special rules covering distributions made after

the death of a participant.

Designated Roth account exception. The lifetime

required distribution rules described in this section do not

apply to amounts in a designated Roth account in a qualified plan. Required distributions from a designated Roth

account are only required following a participant’s death.

For this purpose, a qualified plan includes qualified retirement plans, tax-sheltered annuities and custodial accounts, retirement income accounts, and eligible deferred

compensation plans under section 457(b). Therefore, the

reference to a participant’s “entire interest” or “entire

Chapter 4

benefits” in this section do not include amounts in a designated Roth account.

Distributions From 401(k) Plans

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

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

• The plan ends and no other defined contribution plan

is established or continued.

• In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 591/2 or suffers financial hardship. For the rules on hardship distributions, including the limits on them, see Regulations

section 1.401(k)-1(d).

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

Caution: Certain distributions listed above may be subject to the tax on early distributions discussed later.

Qualified reservist distributions. A qualified reservist

distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has

been called to active duty for at least 180 days or for an

indefinite period. All or part of a qualified reservist distribution can be repaid to an IRA. The additional 10% tax on

early distributions doesn't apply to a qualified reservist

distribution.

Tax Treatment of Distributions

Distributions from a qualified plan minus a prorated part of

any cost basis are subject to income tax in the year they

are distributed. Because most recipients have no cost basis, a distribution is generally fully taxable. An exception is

a distribution that is properly rolled over as discussed under Rollover next.

The tax treatment of distributions depends on whether

they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. See

Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Pub. 575 for a detailed description of

how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution.

Note: A recipient of a distribution from a designated

Roth account will have a cost basis because designated

Roth contributions are made on an after-tax basis. Also, a

distribution from a designated Roth account is entirely tax

free if certain conditions are met. See Qualified distributions under Qualified Roth Contribution Program, earlier.

Rollover. The recipient of an eligible rollover distribution

from a qualified plan can defer the tax on it by rolling it

over into a traditional IRA or another eligible retirement

plan. However, it may be subject to withholding, as

discussed under Withholding requirement, later. A rollover

Qualified Plans

Publication 560 (2025)

can also be made to a Roth IRA, in which case any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account.

Eligible rollover distribution. This is a distribution of

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

1. An RMD. See Required Distributions, earlier.

2. Any of a series of substantially equal payments made

at least once a year over any of the following periods.

a. The employee's life or life expectancy.

b. The joint lives or life expectancies of the employee

and beneficiary.

c. A period of 10 years or longer.

• For periodic distributions, withholding is based on their

treatment as wages.

• For nonperiodic distributions, 10% of the taxable part

3. A hardship distribution.

is withheld.

4. Loans treated as distributions.

5. Dividends on employer securities.

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

7. Similar items designated by the IRS in published guidance. See, for example, the Instructions for Forms

1099-R and 5498.

Rollover of nontaxable amounts. You may be able to

roll over the nontaxable part of a distribution to another

qualified retirement plan or a section 403(b) plan, or to an

IRA. If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable

and nontaxable parts of the rollover, the transfer must be

made through a direct (trustee-to-trustee) rollover. If the

rollover is to an IRA, the transfer can be made by any rollover method.

Note: A distribution from a designated Roth account

can be rolled over to another designated Roth account or

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

More information. For more information about rollovers, see Rollovers in Pubs. 575 and 590-A. For rules on

rolling over distributions that contain nontaxable amounts,

see Notice 2014-54, 2014-41 I.R.B. 670, available at

IRS.gov/irb/2014-41_IRB/ar11.html. For guidance on rolling money into a qualified plan, see Revenue Ruling

2014-9, 2014-17 I.R.B. 975, available at IRS.gov/irb/

2014-17_IRB/ar05.html.

Withholding requirement. If, during a year, a qualified

plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to

total $200 or more, the payor must withhold 20% of the

taxable portion of each distribution for federal income tax.

Publication 560 (2025)

Exceptions. If, instead of having the distribution paid

to them, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct

rollover), no withholding is required.

If the distribution isn't an eligible rollover distribution,

defined earlier, the 20% withholding requirement doesn't

apply. Other withholding rules apply to distributions that

aren't eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or

nonperiodic). However, the participant can choose not to

have tax withheld from these distributions. If the participant doesn't make this choice, the following withholding

rules apply.

Chapter 4

Estimated tax payments. If no income tax is withheld

or not enough tax is withheld, the recipient of a distribution

may have to make estimated tax payments. For more information, see Withholding Tax and Estimated Tax in Pub.

575.

Section 402(f) notice. If a distribution is an eligible rollover distribution, as defined earlier, you must provide a

written notice to the recipient that explains the following

rules regarding such distributions.

1. That the distribution may be directly transferred to an

eligible retirement plan and information about which

distributions are eligible for this direct transfer.

2. That tax will be withheld from the distribution if it isn't

directly transferred to an eligible retirement plan.

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

the date the recipient receives the distribution.

4. Certain other rules that may be applicable.

Notice 2026-13, 2026-06 I.R.B. 499, available at

IRS.gov/irb/2026-06_IRB, contains two updated safe harbor section 402(f) notices that plan administrators may

provide recipients of eligible rollover distributions.

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

Method of notice. The written notice must be provided individually to each distributee of an eligible rollover

distribution. Posting of the notice isn't sufficient. However,

the written requirement may be satisfied through the use

of electronic media if certain additional conditions are met.

See Regulations section 1.401(a)-21.

Tax on failure to give notice. Failure to give a section

402(f) notice will result in a tax of $100 for each failure,

with a total not exceeding $50,000 per calendar year. The

tax won't be imposed if it is shown that such failure is due

to reasonable cause and not to willful neglect.

Qualified Plans

Tax on Early Distributions

• Made as a distribution for a victim of domestic vio-

If a distribution is made to an employee under the plan before they reach age 591/2 (early distributions), the employee may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that the

employee must include in gross income.

• Made as a distribution for certain emergency personal

lence

Exceptions. The 10% additional tax won't apply to the

following early distributions:

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

• Made to an employee having a disability within the

meaning of section 72(m)(7).

• Made as part of a series of substantially equal peri-

odic payments beginning after separation from service

and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and their designated beneficiary.

(The payments under this exception, except in the

case of death or disability, must continue for at least 5

years or until the employee reaches age 591/2, whichever is the longer period.)

• Made from a qualified retirement plan other than an

IRA to an employee after separation from service if the

separation occurred during or after the calendar year

in which the employee reached age 55.

• Made from a governmental plan after a qualified public

safety employee separates from service and has

reached the earlier of age 50 or attainment of 25 years

of service under the plan.

• Made from a private sector plan made after a fire-

fighter separates from service and has reached the

earlier of age 50 or attainment of 25 years of service

under the plan.

• Made from a qualified retirement plan other than an

IRA to an alternate payee under a QDRO.

• Made from an IRA to an employee for medical care up

to the amount allowable as a medical expense deduction (determined without regard to whether the employee itemizes deductions).

• Timely made to reduce excess contributions under a

401(k) plan.

• Timely made to reduce excess employee or matching

employer contributions (excess aggregate contributions).

• Timely made to reduce excess elective deferrals.

• Made because of an IRS levy on the plan.

• Made as a qualified reservist distribution.

• Made as a permissible withdrawal from an EACA.

• Made as a qualified birth or adoption distribution.

• Made as a qualified disaster distribution.

• Made to an individual who has been certified by a

expenses.

• Made from an IRA as a distribution to buy, build, or rebuild a first home.

• Made from an IRA as a distribution for your qualified

higher education expenses.

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

Most of these exceptions are explained below.

Disabled. You are considered disabled if you can furnish

proof that you can't do any substantial gainful activity because of your physical or mental condition. A physician

must determine that your condition can be expected to result in death or be of a long, continued, or indefinite duration.

Distributions to terminally ill individuals. You may be

able to take a distribution from a retirement plan before

reaching age 59 1/2 and not have to pay the 10% additional

tax on early distributions if you receive the distribution on

or after the date you have received a certification by a

physician that you are terminally ill.

Terminally ill individual. You are considered terminally

ill if you are certified by a physician as having an illness or

physical condition which can reasonably be expected to

result in death in 84 months or less after the date of the

certification. See Notice 2024-02, 2024-02 I.R.B. 316,

available at IRS.gov/irb/2024-02, for more information.

Separation from service. Requirements apply for exceptions to the 10% additional tax for qualified public

safety employees and private sector firefighters. You must

have separated from service in or after the year in which

you reach age 55 (or the earlier of age 50 or with 25 years

of service under the plan, whichever is earlier). In these

cases wait until you reach the applicable age or years of

service, separate from service, and then take a distribution.

Example. George separated from service from his employer at age 49. In the year he reached age 55, he took a

distribution from his retirement plan. Because he separated from service before he reached age 55, he didn’t meet

the requirements for the exception for a distribution made

from a qualified retirement plan (other than an IRA) after

separating from service in or after reaching age 55.

Qualified public safety employees. If you are a qualified public safety employee, distributions that are made

from a governmental retirement plan may not be subject to

the 10% additional tax on early distributions.

You are a qualified public safety employee if you provided police protection, firefighting services, or emergency

medical services for a state or municipality.

physician as having a terminal illness.

Chapter 4

Qualified Plans

Publication 560 (2025)

For tax years beginning after 2015, the definition of

“qualified public safety employees”is expanded to include:

• Federal law enforcement officers,

• Federal customs and border protection officers,

• Federal firefighters,

• Air traffic controllers,

• Nuclear materials couriers,

• Members of the United States Capitol Police,

• Members of the Supreme Court Police, and

• Diplomatic security special agents of the United

States Department of State.

Certain distributions to qualified public safety employees. The exception to the 10% additional tax for

early distributions applies to distributions made to qualified public safety employees and firefighters covered by

private sector retirement plans after separation from service on or after they reach age 50 or with 25 years of service under the plan, whichever is earlier. The exception

also includes distributions from an IRA, and to those employees who meet the age or years of service requirement, as described earlier, who provide services as a corrections officer or as a forensic security employee

providing for the care, custody, and control of forensic patients.

Qualified reservist distributions. A qualified reservist

distribution isn’t subject to the 10% additional tax on early

distributions. A qualified reservist distribution is a distribution (a) from an IRA or from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement; (b) to

an individual ordered or called to active duty (because

they are a member of a reserve component) for a period of

more than 179 days or for an indefinite period; and (c)

made during the period beginning on the date of the order

or call and ending at the close of the active duty period.

You must be ordered or called to active duty after September 11, 2001.

Tip: You can choose to recontribute part or all of the distributions to an IRA. These additional contributions must

be made within 2 years after your active duty period ends.

Any amount recontributed must be reported on Form 8606

as a nondeductible contribution. You can’t take a deduction for these contributions. However, the normal dollar

limitations for contributions to IRAs don't apply to these

special contributions, and you can make regular contributions to your IRA, up to the amount otherwise allowable.

Qualified birth or adoption distributions. A qualified

birth or adoption distribution isn't subject to the 10% additional tax on early distributions. An individual can receive

up to $5,000 from an applicable eligible retirement plan for

a distribution made during the 1-year period beginning on

the date on which a child of the individual is born or the

date on which the legal adoption by the individual of an eligible adoptee is finalized. For more information on qualified birth or adoption distributions, see Notice 2020-68,

Publication 560 (2025)

Chapter 4

which is on page 567 of Internal Revenue Bulletin 2020-38

at IRS.gov/pub/irs-irb20-38.pdf.

Repayment of qualified birth or adoption distributions limited to 3 years. If you received a qualified birth

or adoption distribution after December 29, 2022, you may

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