IRS Publication 560 – Small business owners and self-employed individuals face unique challenges in saving for retirement while managing cash flow and compliance. IRS Publication 560 serves as the official, authoritative resource for understanding SEP, SIMPLE, and qualified plans (such as 401(k) and profit-sharing plans). This guide explains how these plans work, their contribution limits, setup requirements, tax benefits, and more.
Published annually by the IRS (the 2024 edition, released in March 2025, covers tax year 2024 with forward-looking limits for 2025), Publication 560 helps employers choose and maintain the right retirement plan. Download the latest PDF here: https://www.irs.gov/pub/irs-pdf/p560.pdf. Always verify the most current version and limits on IRS.gov, as rules and cost-of-living adjustments change yearly.
Why Small Businesses Should Offer Retirement Plans?
Retirement plans deliver powerful tax advantages: employer contributions are tax-deductible, employee deferrals reduce taxable income, and earnings grow tax-deferred (or tax-free in Roth accounts). They also help attract and retain talent in a competitive job market.
For self-employed individuals and small teams, options like SEP IRAs and SIMPLE plans offer simplicity with minimal administrative burden compared to large-company plans. Recent legislation, including the SECURE 2.0 Act of 2022, has expanded flexibility with features like higher catch-up contributions, Roth options in more plans, emergency savings accounts, and new tax credits for startup costs and employer contributions.
Overview of Plan Types Covered in Publication 560
Publication 560 focuses on three main categories:
- Simplified Employee Pension (SEP) Plans — Easy employer-funded plans ideal for small businesses and self-employed individuals.
- SIMPLE Plans — SIMPLE IRA or SIMPLE 401(k) for businesses with 100 or fewer employees.
- Qualified Plans — More flexible options like 401(k), profit-sharing, money purchase pension, and defined benefit plans.
Chapter 1 defines key terms (e.g., compensation, earned income, highly compensated employees). Later chapters detail setup, contributions, deductions, distributions, and reporting.
Simplified Employee Pension (SEP) Plans
SEP plans rank among the simplest retirement options for small businesses. Employers contribute to traditional or Roth SEP-IRAs for themselves and eligible employees.
Key Features (from Pub 560 Chapter 2):
- Eligibility — Employees aged 21+ who worked in 3 of the last 5 years and earned at least $750 (2024/2025 threshold) in compensation. Excludable: union employees and certain nonresident aliens.
- Contributions — Employer-only (no employee deferrals, except in grandfathered SARSEPs). Up to 25% of compensation, or the annual additions limit ($69,000 for 2024, $70,000 for 2025), whichever is less. Compensation cap: $345,000 (2024), $350,000 (2025).
- Self-employed calculation — Use the reduced rate (e.g., a 25% plan rate yields about 20% of net earnings after adjustments) via the Rate Table or Worksheet in Chapter 5.
- Setup — Adopt by your tax return due date (including extensions) using Form 5305-SEP or a custom plan. Notify employees and open SEP-IRAs.
- Deduction — Fully deductible up to limits; excess can carry forward (with excise tax risks).
- Distributions — Follow IRA rules (Pubs. 590-A/B); required minimum distributions (RMDs) begin at age 73.
Pros: Flexible contributions (discretionary each year), low administrative costs, easy setup.
Cons: No employee salary deferrals; contributions must be uniform percentage for all eligible employees.
SARSEPs (salary reduction SEPs) are grandfathered pre-1997 plans with additional deferral rules and testing.
SIMPLE Plans: SIMPLE IRA and SIMPLE 401(k)
SIMPLE plans suit small employers (≤100 employees earning $5,000+ in the prior year) who want employee participation with straightforward rules.
SIMPLE IRA Plan (Chapter 3):
- Setup — Use Form 5304-SIMPLE or 5305-SIMPLE; notify employees during the 60-day election period (typically Nov. 2–Dec. 31).
- Contributions — Employee salary reductions up to $16,000 (2024) or $16,500 (2025), plus catch-up ($3,500 base, higher for some under SECURE 2.0). Employer must match up to 3% or contribute 2% nonelective (additional nonelective options available post-2023).
- Eligibility — Employees with $5,000+ in compensation in any 2 prior years and expected in the current year.
SIMPLE 401(k): Functions as a qualified plan but exempt from certain nondiscrimination and top-heavy tests if it meets SIMPLE contribution rules.
Pros: Employee deferrals + mandatory employer contributions; simpler than traditional 401(k).
Cons: Lower limits than standard 401(k); 25% early withdrawal penalty in first 2 years for certain distributions.
Qualified Plans: 401(k), Profit-Sharing, and Defined Benefit
Qualified plans (Chapter 4) offer the most flexibility but require more compliance.
- Defined Contribution Plans (e.g., 401(k), profit-sharing) — Individual accounts; annual additions limit $69,000 (2024) / $70,000 (2025).
- Defined Benefit Plans — Promise a specific benefit; annual benefit limit $275,000 (2024) / $280,000 (2025).
- 401(k) Features — Elective deferrals up to $23,000 (2024) / $23,500 (2025) + catch-up $7,500 (age 50+). Safe harbor designs simplify testing. Roth contributions and other SECURE 2.0 features (student loan matching, emergency savings) are available.
Setup and Rules: Written plan document required; must meet coverage, nondiscrimination, vesting, and minimum funding (for defined benefit) rules. Deadlines generally align with tax return filing.
Pros: Higher limits, loan provisions, greater design flexibility.
Cons: Higher administrative costs and testing requirements (unless safe harbor or SIMPLE 401(k)).
Plan Comparison Table
| Feature | SEP IRA | SIMPLE IRA | Qualified Plans (e.g., 401(k)) |
|---|---|---|---|
| Best For | Self-employed, very small teams | Businesses ≤100 employees | Growing businesses wanting flexibility |
| Employee Deferrals | No (except SARSEP) | Yes (up to limit) | Yes (highest limits) |
| Employer Contribution | Discretionary, up to 25% | Mandatory match (3%) or 2% | Flexible (profit-sharing, etc.) |
| 2024/2025 Contribution Limit (employee + employer) | $69k / $70k | Lower (deferral-focused) | $69k / $70k + deferrals |
| Setup Complexity | Easiest | Simple | More complex |
| Administrative Burden | Low | Low | Higher (Form 5500 often required) |
Limits exclude catch-up; compensation caps apply. Check IRS for 2026 updates (e.g., elective deferrals rise to $24,500, defined contribution to $72,000).
Contribution Limits and Self-Employed Deductions
Publication 560 provides detailed limits and worksheets. For self-employed individuals, Chapter 5 includes the Rate Table for Self-Employed (e.g., 25% plan rate → 20% effective deduction rate) and Deduction Worksheet to calculate the exact amount after self-employment tax adjustments.
Key 2024/2025 figures (Pub 560):
- Compensation limit: $345,000 → $350,000
- Defined contribution limit: $69,000 → $70,000
- Elective deferrals: $23,000 → $23,500
For 2026, IRS announcements show further increases: elective deferrals to $24,500, defined contribution limit to $72,000, and compensation limit around $360,000. Always confirm on IRS.gov.
Distributions, Reporting, and Compliance
- Distributions → Taxed as ordinary income (Roth qualified distributions are tax-free). 10% early withdrawal penalty (before 59½) with exceptions; 25% for certain SIMPLE distributions in first 2 years. RMDs required starting at age 73.
- Reporting → Form 5500 series for most qualified plans; W-2 for deferrals; 1099-R for distributions. SEP and SIMPLE have lighter requirements.
- Prohibited Transactions → Strict rules; violations trigger taxes and disqualification risks.
Recent Enhancements from SECURE 2.0 Act
Publication 560 highlights updates including:
- Roth IRAs in SEP and SIMPLE plans
- Higher catch-up limits for certain employers
- Startup cost tax credits (up to 100% for smaller businesses)
- Emergency savings accounts linked to 401(k) plans
- Matching contributions on student loan payments
How to Get the Most from IRS Publication 560?
- Download the PDF: https://www.irs.gov/pub/irs-pdf/p560.pdf
- Review the Table of Contents and use the index.
- Use Chapter 5 worksheets for self-employed calculations.
- Consult IRS resources like Publication 4222 (401(k) for Small Businesses) or Form 5305 series for model plans.
For personalized advice, work with a tax professional, financial advisor, or retirement plan administrator. Tax laws are complex, and errors can be costly.
Take Action Today
Offering a retirement plan through options detailed in IRS Publication 560 boosts your business’s appeal and secures your financial future. Start by reviewing the publication and assessing which plan (SEP, SIMPLE, or qualified) best fits your needs and employee count.
Bookmark IRS.gov/Pub560 for updates, and contact the IRS or a qualified advisor for setup assistance. Your future self—and your team—will thank you.
This article is for informational purposes only and is not tax or financial advice. Rules can change; refer to the official IRS Publication 560 and consult professionals for your specific situation.