Qualified Plan A qualified retirement plan is a written plan you can set up forthe exclusive benefit of your employees and their beneficiaries. It issometimes called a Keogh or HR-10 plan. You, or you and your employees, can make contributions to the plan.If your plan meets the qualification requirements, you can generallydeduct your contributions to the plan. For more information, seePublication 560. Your employees generally are not taxed on your contributions orincreases in the plan's assets until they are distributed to them.However, certain loans made from qualified employer plans are treatedas taxable distributions. For more information, see Publication 575. Qualification requirements.To be a qualified plan, the plan must meet many requirements. Theyinclude the following. Who must be covered by the plan. How contributions to the plan are to be invested. How contributions to the plan and benefits under the planare to be determined. How much of an employee's interest in the plan must beguaranteed (vested). For more information, see Publication 560. More than one job.If you are self-employed and also work for someone else, you canparticipate in retirement plans for both jobs. Generally, yourparticipation in a retirement plan for one job does not affect yourparticipation in a plan for the other job. However, if you have anIRA, you may not be allowed to deduct some or all of your IRAcontributions. See Publication 590. Kinds of Qualified Plans There are two basic kinds of qualified retirement plans: definedcontribution and defined benefit. Defined Contribution Plan This plan provides for a separate account for each person coveredby the plan. Benefits are based only on amounts contributed to orallocated to each account. There are three types of defined contribution plans:profit-sharing, stock bonus, and money purchase pension. Profit-sharing plan.This plan lets your employees or their beneficiaries share in theprofits of your business. The plan must have a definite formula forallocating the contributions made to the plan among the participatingemployees and for distributing the funds in the plan. Stock bonus plan.This plan is similar to a profit-sharing plan, but it can only beset up by a corporation. Benefits are payable in stock of theemployer. Money purchase pension plan.Under this plan, your contributions are a stated amount or arebased on a stated formula that is not subject to your discretion. Forexample, your formula could be 10% of each participating employee'scompensation. Your contributions to the plan are not based on yourprofits. Defined Benefit Plan This is any plan that is not a defined contribution plan. Ingeneral, a qualified defined benefit plan must provide for setbenefits and your contributions to the plan are based on actuarialassumptions. Generally, you will need continuing professional help toadminister a defined benefit plan. Plan Approval You must adopt a written plan. The Internal Revenue Service (IRS)will issue a determination or opinion letter regarding the plan'squalification. The determination or opinion of the IRS will be basedon how the plan is written, not on how it operates. You are not required to request a determination or opinion letterto get all the tax benefits of a plan. But, if your plan does not havea determination letter, you may want to request one to ensure thatyour plan meets the requirements for tax benefits. A request for a determination, opinion, or ruling letter can becomplex. You may need professional help to complete the request. Also,the IRS charges a fee for issuing these letters. Attach Form8717, User Fee for Employee PlanDetermination Letter Request, to your application. Master and prototype plans.It may be easier for you to adopt an IRS-approved existing masteror prototype retirement plan than to set up your own original plan.Master and prototype plans can be provided by the following sponsoringorganizations. Trade or professional organizations. Banks (including some savings and loan associations andfederally insured credit unions). Insurance companies. Mutual funds. Adoption of a master or prototype plan does not mean that yourplan is automatically qualified. It must still meet all of thequalification requirements stated in the law. Deduction Limit The limit on your deduction for contributions to a qualified plandepends on the kind of plan you have. Caution: In figuring the deduction for contributions to these plans, youcannot take into account any contributions or benefits that are morethan the limits discussed under Limits on Contributions andBenefits in Publication 560. Defined contribution plans.The deduction limit for a defined contribution plan depends onwhether it is a profit-sharing plan or a money purchase pension plan. Profit-sharing plan.Your deduction for contributions to a profit-sharing plan cannot bemore than 15% of the compensation from the business paid(or accrued) during the year to the common-law employees participatingin the plan. You must reduce this limit in figuring the deduction forcontributions you make for your own account. See Deduction ofcontributions for yourself, later. Money purchase pension plan.Your deduction for contributions to a money purchase pension planis generally limited to 25% of the compensation from thebusiness paid during the year to a participating common-law employee.You must reduce this limit in figuring the deduction for contributionsyou make for yourself, as discussed later. Defined benefit plans.An actuary must figure the deduction for contributions to a definedbenefit plan since it is based on actuarial assumptions andcomputations. Deduction of contributions for yourself.To take a deduction for contributions you make to a plan foryourself, you must have net earnings from the trade orbusiness for which the plan was set up. Limit on deduction.If the qualified plan is a profit-sharing plan, your deduction foryourself is limited to the lesser of $30,000 or 13.0435% (15% reducedas discussed below) of your net earnings from the trade or businessthat has the plan. If the plan is a money purchase plan, the deductionis limited to the lesser of $30,000 or 20% (25% reduced as discussedbelow) of your net earnings. Net earnings.Your net earnings must be from self-employment in a trade orbusiness in which your personal services are a materialincome-producing factor. If you are a partner who only contributedcapital and did not perform personal services, you cannot participatein the partnership's plan. Your net earnings do not take into accounttax-exempt income (or deductions related to that income), other thanforeign earned income and foreign housing cost amounts. Your net earnings are your business gross income minus theallowable deductions from that business. Allowable deductions includecontributions to the plan for your common-law employees and your otherbusiness expenses. If you are a partner other than a limited partner, your netearnings include your distributive share of the partnership income orloss (other than separately computed items such as capital gains andlosses) and any guaranteed payments you receive from the partnership.If you are a limited partner, your net earnings include onlyguaranteed payments you receive for services rendered to or for thepartnership. For more information, see Partners underWho Must Pay Self-Employment Tax in Publication 533. Net earnings do not include income passed through to shareholdersof S corporations. Adjustments.You must reduce your net earnings by the deduction for one-half ofyour self-employment tax. Also, net earnings must be reduced by thededuction for contributions you make for yourself. This reduction ismade indirectly, as explained next. Net earnings reduced by adjusting contribution rate.You must reduce net earnings by your deduction for contributionsfor yourself. The deduction and the net earnings depend on each other.You can make the adjustment to your net earnings indirectly byreducing the contribution rate called for in the plan and using thereduced rate to figure your maximum deduction for contributions foryourself. Annual compensation limit.You generally cannot take into account more than $160,000 of yourcompensation in figuring your contribution to a defined contributionplan. Figuring Your Deduction Use the following worksheet to find the reduced contribution ratefor yourself. Make no reduction to the contribution rate for anycommon-law employees. Rate Worksheet for Self-Employed 1) Plan contribution rate as a decimal (10 1/2% = .105)            2) Rate in line 1 plus 1(.105 + 1 = 1.105)            3) Self-employed rate as a decimal rounded to atleast 3 decimal places (line 1 line 2)            Now that you have figured your self-employed rate, you can figureyour maximum deduction for contributions for yourself by completingthe following steps. Deduction Worksheet for Self-Employed Step 1  Enter the self-employed rate shownon line 3 above            Step 2  Enter your net earnings (net profit)from line 31, Schedule C (Form 1040); line 3, Schedule C-EZ(Form 1040); line 36, Schedule F (Form 1040); or line 15a, ScheduleK-1 (Form 1065)            Step 3  Enter your deduction forself-employment tax from line 27, Form 1040            Step 4  Subtract step 3 from step 2 andenter the result            Step 5  Multiply step 4 by step 1 and enterthe result            Step 6  Multiply $160,000 by your plancontribution rate. Enter the result, but not more than $30,000            Step 7  Enter the smaller of step 5 or step6. This is your maximum deductible contribution. Enter yourdeduction on line 29, Form 1040            Example.You are a self-employed farmer and you have employees. The terms ofyour plan provide that you contribute 10 1/2% (.105) ofyour compensation (defined earlier) and 10 1/2% of yourcommon-law employees' compensation. Your net earnings from line 36,Schedule F (Form 1040) are $200,000. In figuring this amount, youdeducted your common-law employees' pay of $100,000 and contributionsfor them of $10,500 (10 1/2% x $100,000). You figure yourself-employed rate and maximum deduction for contributions on behalfof yourself as follows. Rate Worksheet for Self-Employed 1) Plan contribution rate as a decimal (10 1/2% = .105)      0.105 2) Rate in line 1 plus 1(.105 + 1 = 1.105)      1.105 3) Self-employed rate as a decimal rounded to atleast 3 decimal places (line 1 line 2)     0.0950 Deduction Worksheet for Self-Employed Step 1  Enter the self-employed rate shownonline 3 above     0.0950 Step 2  Enter your net earnings (net profit)from line 31, Schedule C (Form 1040); line 3, Schedule C-EZ(Form 1040); line 36, Schedule F (Form 1040); or line 15a, ScheduleK-1 (Form 1065)   $200,000 Step 3  Enter your deduction forself-employment tax from line 27, Form 1040      7,180 Step 4  Subtract step 3 from step 2 andenter the result    192,820 Step 5  Multiply step 4 by step 1 and enterthe result     18,318 Step 6  Multiply $160,000 by your plancontribution rate. Enter the result but not more than $30,000     16,800 Step 7  Enter the smaller of step 5 or step6. This is your maximum deductible contribution. Enter yourdeduction on line 29, Form 1040   $ 16,800 When to make contributions.To take a deduction for contributions for a particular year, youmust make the contributions not later than the due date, plusextensions, of your tax return for that year. More information.See Publication 560for more information on retirement plans forsmall business owners, including the self-employed. Publication 560also discusses the reporting forms that must be filed for these plans.