Limits on Contributions and Benefits

Employer contributions:

There are limits on how much an employer can contribute on behalf of plan participants.

There are also limits on the amount an employer may deduct.

Your plan must provide that contributions and benefits cannot exceed certain limits.

These limits differ depending on whether your plan is a defined contribution plan or defined benefit plan.

  • Defined contribution plan:
    • For tax year 2012, the employer's annual contributions and other additions, (excluding earnings) to the account of a plan participant cannot exceed the lesser of the following amounts:
      • 100% of the participant's compensation.
      • $50,000 ($49,000 for 2011).
    • Note: Catch-up contributions are not subject to the above limits.

Contribution Restriction for Self-Employed Persons

If you're self-employed you may or may not be able to make plan contributions for yourself in any given year depending on whether you have net business income or a loss and whether you earned the income from your services in the business or just as an investor.

You MAY make before-tax contributions for yourself in any given if:

  • You have net income in the trade or business for which the plan was set up.
  • Your net business income was earned in connection with your personal services, not merely as an investor.

You may NOT make plan contributions in any given year if:

  • You have a net loss from self-employment even if you can make contributions for your common-law employees.
  • You may not make a contribution in a business's qualified plan if you were just an investor in that business.

You deduct contributions for yourself, as a self-employed person, on Form 1040, line 28. Contributions on behalf of your employees are deducted on Scheduled C (or Schedule F) for sole proprietors.

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