Employee Benefits-IRS Provides Guidance On Plans For Self-Employed Individuals

In the latest Retirement News for Employers (Spring 2011), the IRS provided guidance on the type of retirement plans that may be maintained by self-employed individuals (i.e., sole proprietors and partners). It is interesting to compare the contribution/benefit limits which apply to each plan. Here they are, according to the IRS:

(1) Savings Incentive Match Plan for Employees (a SIMPLE IRA Plan)-each year, the individual can contribute all of his or her net earnings from self-employment, up to $11,500 (plus $2,500 if at least age 50) in salary reduction contributions, and either a 2% fixed contribution or a 3% matching contribution.

(2) Simplified Employee Pension (a SEP)-each year, the individual can contribute up to the lesser of : (a) 25% of his or her net earnings from self-employment (not including his/her contributions) or (b) $49,000.

(3) 401(k) Plan-each year, the individual can make: (a) salary deferrals up to $16,500 (plus $5,500 if at least age 50) of his or her pay from the business either on a pre-tax basis or as a designated Roth contribution and (b) an additional 25% of his or her net earnings from self-employment (not including his/her contributions), up to $49,000 including salary deferrals.

(4) Profit-Sharing Plan-each year, the individual can contribute up to 25% of compensation (not including his/her own contributions) or $49,000, if less.

(5) Money Purchase Plan-each year, the individual is required to contribute a fixed level of pay, according to a formula set forth in the plan, up to 25% of compensation (not including his/her own contributions) or $49,000, if less.

(6) Defined Benefit Plan (can be a traditional defined benefit plan or a cash balance plan)-the individual may receive a maximum annual benefit of up to $195,000 after retirement.
The dollar figures above apply in 2011 and are subject to cost-of-living adjustments. Remember, if the individual’s business has employees, they are entitled to make and receive contributions, or to receive benefits, in amounts determined under the Internal Revenue Code and the underlying regulations