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Qualification Rules: Retirement Plans for Business Owners (2025 IRS Guide)

This guide covers “Qualification Rules” within retirement plans for business owners. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 560 (2025), Retirement Plans for Small Business, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

  • Kinds of plans

  • Qualification rules

  • Setting up a qualified plan

  • Minimum funding requirement

  • Contributions

  • Employer deduction

  • Elective deferrals (401(k) plans)

  • Qualified Roth contribution program

  • Distributions

  • Prohibited transactions

  • Reporting requirements

Publications

  • 575 Pension and Annuity Income

  • 590-A Contributions to Individual Retirement Arrangements (IRAs)

  • 590-B Distributions from Individual Retirement Arrangements (IRAs)

  • 3066 Have you had your check-up this year? for Retirement Plans

  • 3998 Choosing a Retirement Solution for Your Small Business

  • 4222 401(k) Plans for Small Businesses

  • 4530 Designated Roth Accounts under a 401(k), 403(b) or governmental 457(b) plan

  • 4531 401(k) Plan Checklist

  • 4674 Automatic Enrollment 401(k) Plans for Small Businesses

  • 4806 Profit Sharing Plans for Small Businesses

Forms (and Instructions)

  • W-2 Wage and Tax Statement

  • Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc.

  • 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

  • 1040 U.S. Individual Income Tax Return

  • 1040-SR U.S. Tax Return for Seniors

  • Schedule C (Form 1040) Profit or Loss From Business

  • Schedule F (Form 1040) Profit or Loss From Farming

  • 5300 Application for Determination for Employee Benefit Plan

  • 5310 Application for Determination for Terminating Plan

  • 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

  • 5330 Return of Excise Taxes Related to Employee Benefit Plans

  • 5500 Annual Return/Report of Employee Benefit Plan

  • 5500-EZ Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan

  • 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan

  • 8717 User Fee for Employee Plan Determination Letter Request

  • 8880 Credit for Qualified Retirement Savings Contributions

  • 8881 Credit for Small Employer Pension Plan Startup Costs

  • 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits

These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H.R. 10 plans. A sole proprietor or a partnership can set up one of these plans. A common-law employee or a partner can't set up one of these plans. The plans described here can also be set up and maintained by employers that are corporations. All of the rules discussed here apply to corporations except where specifically limited to the self-employed.

The plan must be for the exclusive benefit of employees or their beneficiaries. These qualified plans can include coverage for a self-employed individual.

As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Qualification Rules

To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. The following is a brief overview of important qualification rules that generally haven't yet been discussed. It isn't intended to be all-inclusive. See Setting Up a Qualified Plan, later.

Tip:

Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. A SIMPLE 401(k) plan is, however, not subject to the top-heavy plan rules and nondiscrimination rules if the plan satisfies the provisions discussed in chapter 3 under SIMPLE 401(k) Plan.

Plan assets must not be diverted.

Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the exclusive benefit of employees and their beneficiaries. As a general rule, the assets can't be diverted to the employer.

Minimum coverage requirement must be met.

To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following.

  1. 50 employees.

  2. The greater of:

    1. 40% of all employees, or

    2. Two employees.

If there is only one employee, the plan must benefit that employee.

Contributions or benefits must not discriminate.

Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees.

Contributions and benefits must not be more than certain limits.

Your plan must not provide for contributions or benefits that are more than certain limits. The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. These limits are discussed later in this chapter under Contributions.

Minimum vesting standard must be met.

Your plan must satisfy certain requirements regarding when benefits vest. A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. A benefit is nonforfeitable if it can't be lost upon the happening, or failure to happen, of any event. Special rules apply to forfeited benefit amounts. In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions.

Forfeitures under a defined benefit plan can't be used to increase the benefits any employee would otherwise receive under the plan. Forfeitures must be used instead to reduce employer contributions.

Participation.

In general, an employee must be allowed to participate in your plan if they meet both the following requirements.

  • Has reached age 21.

  • Has at least 1 year of service (2 years if the plan isn't a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all their accrued benefit).

See Elective Deferrals (401(k) Plans), later, for additional information regarding conditions of participation in a 401(k) plan.

Caution:

A plan can't exclude an employee because the employee has reached a specified age.

Leased employee.

A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. These rules include those in all the following areas.

  • Nondiscrimination in coverage, contributions, and benefits.

  • Minimum age and service requirements.

  • Vesting.

  • Limits on contributions and benefits.

  • Top-heavy plan requirements.

Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you.

Benefit payment must begin when required.

Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods.

  • The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan.

  • The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs.

  • The plan year in which the participant separates from service.

Early retirement.

Your plan can provide for payment of retirement benefits before the normal retirement age. If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if the participant meets both the following requirements.

  • Satisfies the service requirement for the early retirement benefit.

  • Separates from service with a nonforfeitable right to an accrued benefit. The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met.

Required minimum distributions (RMDs).

Special rules require minimum annual distributions from qualified plans, generally beginning after age 73. See Required Distributions under Distributions, later.

Survivor benefits.

Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms.

  • A qualified joint and survivor annuity for a vested participant who doesn't die before the annuity starting date.

  • A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse.

The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met.

  • The participant doesn't choose benefits in the form of a life annuity.

  • The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies.

  • The plan isn't a direct or indirect transferee of a plan that must provide automatic survivor benefits.

Loan secured by benefits.

If automatic survivor benefits are required for a spouse under a plan, they must consent to a loan that uses as security the accrued benefits in the plan.

Waiver of survivor benefits.

Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. The plan must also allow the participant to withdraw the waiver. The spouse's consent must be witnessed by a plan representative or notary public.

Involuntary cash-out of benefits not more than dollar limit.

A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit isn't greater than $7,000.

However, the distribution can't be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consent in writing to the distribution. If the present value is greater than $7,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit.

Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits.

A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. See Section 402(f) notice under Distributions, later, for more details.

Consolidation, merger, or transfer of assets or liabilities.

Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit they would have been entitled to just before the merger, etc. (if the plan had then terminated).

Benefits must not be assigned or alienated.

Your plan must provide that a participant's or beneficiary's benefits under the plan can't be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgments or settlements against the participant for violations of plan rules.

Exception for certain loans.

A loan from the plan (not from a third party) to a participant or beneficiary isn't treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. A disqualified person is defined later in this chapter under Prohibited Transactions.

Exception for a qualified domestic relations order (QDRO).

Compliance with a QDRO doesn't result in a prohibited assignment or alienation of benefits.

Payments to an alternate payee under a QDRO before the participant reaches age 59½ aren't subject to the 10% additional tax that would otherwise apply under certain circumstances. Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity.

No benefit reduction for social security increases.

Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. This rule also applies to plans supplementing the benefits provided by other federal or state laws.

Elective deferrals must be limited.

If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. See Limit on Elective Deferrals, later in this chapter.

Top-heavy plan requirements.

A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees.

A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan.

Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. These qualification requirements for top-heavy plans are explained in section 416 and its regulations.

SIMPLE and safe harbor 401(k) plan exception.

The top-heavy plan requirements don't apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. Qualified automatic contribution arrangements (QACAs) (discussed later) also aren't subject to top-heavy requirements.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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