A landscape company sponsors a SIMPLE IRA, but the owner contributes $30,000 to her own account in 2025, nearly double the $16,500 deferral cap. The excess triggers a 6% §4973 excise tax each year until corrected, the plan risks disqualification, and rank-and-file employees lose safe-harbor protection from ADP testing.
A qualified plan meets the requirements of §401(a). Employer contributions are currently deductible under §404, the trust is tax-exempt under §501(a), participants are not taxed until distribution, and rollovers between qualified accounts are tax-free. Two main forms:
- Defined benefit (DB): the formula promises a future annuity (e.g., 1.5% × years × final pay). Employer bears investment risk.
- Defined contribution (DC): the employer or employee funds an individual account; participant bears investment risk. §415(c) annual additions cap = lesser of 100% of compensation or $70,000.
Non-qualified plans sit outside §401(a). No coverage testing, no contribution limits, but the employer deduction is delayed until the employee includes the amount in gross income. §409A governs non-qualified deferred compensation.
Common mistakes
- Using 25% instead of 20% for self-employed SEP contributions. The 25% rate applies to W-2 employees; self-employed apply 20% to 0.9235-adjusted Schedule C profit.
- Treating a SIMPLE early distribution like a 401(k) early distribution. Within the first 2 years of SIMPLE participation, the additional tax is 25%, not 10%.
- Counting catch-up contributions against the §415(c) limit. Catch-ups sit on top of $70,000, allowing annual additions up to $77,500 (age 50-59 or 64+) or $81,250 (ages 60-63).
Bottom line
- 2025 elective deferrals: 401(k), 403(b), and 457(b) = $23,500; SIMPLE IRA = $16,500; age-50 catch-up adds $7,500 ($3,500 SIMPLE); SECURE 2.0 ages 60-63 super catch-up = $11,250 ($5,250 SIMPLE)
- §415(c) DC annual additions = $70,000; §415(b) DB annual benefit = $280,000; §401(a)(17) compensation cap = $350,000; HCE = $160,000 prior-year lookback (or >5% owner); key employee officer = $230,000
- SEP: employer-only, lesser of 25% compensation or $70,000; SIMPLE: 100% match to 3% or 2% nonelective; self-employed apply 20% to 0.9235-adjusted net SE earnings
- SIMPLE early distributions carry a 25% additional tax during the first 2 years of participation, then drop to the standard 10%
Exam shortcut
"Self-employed SEP" trigger: use 20% on 0.9235-adjusted profit, not 25%. Maximum SEP is roughly profit × 0.1847 before checking the $70,000 cap. "Within 2 years of SIMPLE" = 25% additional tax; after 2 years = 10% (same as 401(k)). The clock starts at the participant's first SIMPLE contribution.
The full lesson (about 3,197 words, 21 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 3
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