IRS Rules and Requirements for Retirement Plans
Michael Mazur, CPA, CFF
Focused on You. Dedicated to Your Success.
October 9, 2017

The IRS has different rules and requirements for each type of retirement plan. Here is important information you should know including the pros and cons of the most common types of retirement plans, deadline dates, contribution limitations (may be subject to cost-of-living adjustments), and filing requirements:

401(k) Plans
Pros and Cons:
  • Greater flexibility in contributions.
  • Employees may contribute more to this plan than under IRA plans.
  • Good plan if cash flow is an issue.
  • Optional participant loans and hardship withdrawals add flexibility for employees.
  • Administrative costs may be higher than under more basic arrangements.
  • Need to test that benefits do not discriminate in favor of the highly compensated employees. This testing can be complicated.
  • Additional withdrawal and loan flexibility adds an administrative burden for the employer.

Deadline to Establish Plan: December 31 of the current fiscal year.
Contribution Deadline: Due date (including extensions) of the tax return for which the deduction is claimed. It is sooner for contributions by participants.
Maximum Deduction for 2017: Two annual limits apply to contributions:
  • A limit on employee elective deferrals; and
  • An overall limit on contributions to a participant’s plan account (including the total of all employer contributions, employee elective deferrals (not catch-up contributions) and any forfeiture allocations.

Employee Elective Deferrals:
  • $18,000 in 2017 for traditional and safe harbor plans.
  • $12,500 in 2017 for SIMPLE 401(k) plans.
Catch-up contributions can be made for taxpayers over age 50:
  • $6,000 in 2017 to traditional and safe harbor 401(k) plans.
  • $3,000 in 2017 to SIMPLE 401(k) plans.

Who Contributes:  Employee salary deferrals and/or employer contributions. Employees are always 100% vested in their salary deferrals. Employer contributions may be vested on a graduated vesting schedule.
Filing Requirements:  Annual Return/Report of Employee Benefit Plan (Form 5500-series returns). Participant Loans:  Permitted.
In-Service Withdrawals:  Yes, but subject to possible 10% additional tax if under age 59 1/2.

Savings Incentive Match Plan for Employees (SIMPLE) IRA Plans 
Pros and Cons :
  • Easy and inexpensive to set up and operate.
  • Employees share responsibility for their retirement.
  • Discrimination testing is not required.
  • Inflexible contributions.
  • Lower contribution limits than some other retirement plans.

Deadline to Establish Plan: October 1 of the fiscal year.
Contribution Deadline: Due date (including extensions) of the tax return for which the deduction is claimed. It is sooner for contributions by participants. Employers must deposit employees’ salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the employee would have received them in cash. They must make matching contributions or non-elective contributions by the due date (including extensions) of their federal income tax return for the year.
Maximum Contribution for 2017: $12,500 plus a catch-up contribution of $3,000 for taxpayers over age 50. Employer matching contributions can be made that exceed these limits.
Who Contributes: Employers are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% (could be as low as 1%) of the employee's compensation. This requirement does not apply if the employer makes non-elective contributions instead. Employees may contribute to the plan.
Filing Requirements: An employer generally has no filing requirements.
Participant Loans: Not permitted. The assets may not be used as collateral.
In-Service Withdrawals: Yes, but includible in income and subject to a 10% additional tax if under age 59 1/2. Also, if withdrawals are made within the first two years of participation, the 10% additional tax is increased to 25%.

Simplified Employee Pension (SEP) Plans
Pros and Cons:
  • Easy to set up and operate.
  • Low administrative costs.
  • Flexible annual contributions.
  • Good plan if cash flow is an issue.
  • Employer must contribute equally for all eligible employees. 

Deadline to Establish Plan: Due date (including extensions) for the tax year for which the deduction will be claimed. This can be as late as October 15 of the year following the year the deduction is claimed for taxpayers on extension.
Contribution Deadline: Due date (including extensions) of the tax return for which the deduction is claimed.
Maximum Contribution for 2017: Contributions an employer can make to an employee's SEP-IRA cannot exceed the lesser of:
  • 25% of the employee's compensation, or
  • $54,000 for 2017.
Elective salary deferrals and catch-up contributions are not permitted in SEP plans.
Who Contributes: Employer contributions only.
Filing Requirements: An employer generally has no filing requirements.
Participant Loans: Not permitted. The assets may not be used as collateral.
In-Service Withdrawals: Yes, but includible in income and subject to a 10% additional tax if under age 59 1/2.

IRA and Roth IRA Plans
Pros and Cons (Payroll Deduction IRA):
  • Easy to set up and operate.
  • Little administrative cost or requirements.
  • Employers may receive little credit for this service from employees.
  • No deduction for the business.
  • Employees may or may not be able to deduct their contributions.

Deadline to Establish Plan: Due date (not including extensions) for the tax year for which the deduction will be claimed. This can be as late as April 15 of the year following the tax year.
Contribution Deadline: Due date (not including extensions) for the tax year for which the deduction will be claimed.
Maximum Contribution for 2017: The most you can contribute to traditional and Roth IRAs is the smaller of:
  • $5,500 for 2017 or $6,500 if you’re age 50 or older by the end of the year; or
  • Your taxable compensation for the year. 
Who Contributes: Only the employees. The employees control where their money is invested.
Filing Requirements: Employer has no filing requirements.
Participant Loans: Not permitted. The assets may not be used as collateral.
In-Service Withdrawals: Yes, but subject to income tax and 10% additional tax if under age 59 ½.

Defined Benefit Plans
Pros and Cons
  • Substantial benefits can be provided and accrued within a short time – even with early retirement.
  • Employers can contribute (and deduct) more than under other retirement plans.
  • Plan provides a predictable benefit.
  • Vesting can follow a variety of schedules from immediate to spread out over seven years.
  • Benefits are not dependent on asset returns.
  • Plan can be used to promote certain business strategies by offering subsidized early retirement benefits.
  • Most costly type of plan.
  • Most administratively complex plan.
  • An excise tax applies if the minimum contribution requirement is not satisfied.
  • An excise tax applies if excess contributions are made to the plan.

Deadline to Establish Plan: December 31 of the current fiscal year.
Contribution Deadline: Due date (including extensions) of the tax return for which the deduction is claimed.
Maximum Contribution for 2017 and Benefit Limitations: Contributions to defined benefit plans 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, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of:
  • 100% of the participant's average compensation for his or her highest three consecutive calendar years, or
  • $215,000 for 2017.

Who Contributes: Generally, the employer makes most contributions. Sometimes, employee contributions are required or voluntary contributions may be permitted.
Filing Requirements: Annual filing of Form 5500 is required. An enrolled actuary must sign the Schedule B of Form 5500.
Participant Loans: A defined benefit plan may permit participant loans.
In-Service Withdrawals: Generally, a defined benefit plan may not make in-service distributions to a participant before age 62.

Profit Sharing Plans
Pros and Cons:
  • Flexible contributions – contributions are strictly discretionary.
  • Good plan if cash flow is an issue.
  • Administrative costs may be higher than under more basic arrangements (SEP or SIMPLE IRA plans).
  • Need to test that benefits do not discriminate in favor of the highly compensated employees.
Deadline to Establish Plan: December 31 of the current fiscal year.
Contribution Deadline: Due date (including extensions) of the tax return for which the deduction is claimed.
Maximum Contribution for 2017: The lesser of 25% of compensation or $54,000 for 2017.
Who Contributes: Employer contributions only. If a salary deferral feature is added to a profit-sharing plan, it is a "401(k) plan."
Filing Requirements: Annual filing of a Form 5500-series return/report is required. Participant disclosures are also required.
Participant Loans: Permitted.
In-Service Withdrawals: Yes, but subject to possible 10% additional tax if under age 59 1/2 and no other exception applies.

Money Purchase Plans
Pros and Cons:
  • Possible to grow larger account balances than under some other arrangements.
  • Administrative costs may be higher than under more basic arrangements.
  • Need to test that benefits do not discriminate in favor of the highly compensated employees.
  • An excise tax applies if the minimum contribution requirement is not satisfied.
Deadline to Establish Plan: December 31 of the current fiscal year.
Contribution Deadline: Due date (including extensions) of the tax return for which the deduction is claimed.
Maximum Contribution for 2017: The lesser of 25% of compensation or $54,000 for 2017.
Who Contributes: Employer and/or employee.
Filing Requirement: Annual filing of Form 5500 is required.
Participant Loans: Permitted.
In-Service Withdrawals: Not permitted.

The IRS, Department of Labor, and Pension Benefit Guaranty Corporation jointly developed the Form 5500-series returns for employee benefit plans to satisfy annual reporting requirements under Employee Retirement Income Security Act (ERISA) of 1974 and the Internal Revenue Code. Plan sponsors must generally file the return on the last day of the seventh month after their plan year ends. More information on when and how to use Form 5500 is available from the IRS.

Additional information on retirement plan reporting and disclosure is also available from the IRS.

Compensation Limits for Contributions 
Annual contributions to all of your retirement accounts including elective deferrals, employee contributions, employer matching and discretionary contributions, and allocations of forfeitures to your accounts may not exceed the lesser of 100% of your compensation or $54,000 for 2017. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited to $270,000 in 2017. 

Contact either Mike Mazur, CPA, CFF, managing principal – New Jersey office (732-341-3893 ext. 14 or Michael.Mazur@MCC-CPAs.com ) or myself (610-828-1900 or Marty.McCarthy@MCC-CPAs.com ) with questions. We are always happy to help.
Martin C. McCarthy, CPA
Managing Partner
McCarthy & Company, PC

Disclaimer This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).