1/12/2016. Entity Issues

Transcription

1 - Los Angeles Advanced Pension Conference 2016 Workshop 16 Small Plan Gotchas Richard A. Block, ASA, FSPA, MAAA Block Consulting Actuaries, Inc. Stephen R. Parks, MSPA Retirement Systems of California Entity Issues Unincorporated Businesses Sole Proprietorships Partnerships Partnership with incorporated partners Corporations S-Corporations Controlled Groups Affiliated Service Groups 1

2 Sole Proprietorships Deduction for staff is taken on schedule C (form 1040) Deduction for owner is taken on form 1040 line 28 Due date of the tax return is 4/15 or 10/15 if on extension Sole Proprietorships Plan compensation is determined as: Net, less Employee cost, less Deduction for owner, excluding elective contributions, less Deduction for one-half of self-employment tax Sole Proprietorships 2015 plan compensation Net is $150,000 Employee cost is $8,000 Deduction for owner, excluding elective contributions is $50,000 Deduction for one-half of self-employment tax Plan compensation is $150,000 - $8,000 - $50,000 - $9,248 = $82,752 2

3 Sole Proprietorships Contribution Issues Net is less than minimum required contribution DB Issue No excise tax Likely the contribution will never be deductible Likely the contribution will not form basis Plan is not funded by 9/15 but is funded by 10/15 DC plans-no issues DB plans Delinquent contribution subject to excise tax Deductible for following year? See 2011 Grey Book Q&A & ACOPA comment letter Partnerships Deduction for staff is taken on form 1065 Deduction for owner is taken on form 1040 line 28 Due date of the tax return is 4/15 or 9/15 if on extension Partnerships Plan compensation is determined as: Net, less Employee cost, less Deduction allowed under IRC section 179 Deduction for owner, excluding elective contributions, less Deduction for one-half of self-employment tax 3

4 Partnerships 2015 plan compensation Net is $150,000 Employee cost is $8,000 Section 179 deduction is $2,500 Deduction for owner, excluding elective contributions is $50,000 Deduction for one-half of self-employment tax Plan compensation is $150,000 - $8,000 - $2,500 - $50,000 - $9,215 = $80,285 Partnerships Deductible Contribution Based on aggregating the staff and partners plan compensation Partnerships with Incorporated Partner/ASG Each entity stands alone in determining deductible limit Deduction is allocated to each entity in a reasonable manner Due date of the tax return is 4/15 or 9/15 if on extension 4

5 Corporations Deduction for all staff is taken on form 1120 Amounts in excess of deductible limits may be carried over to future years S-Corporations Plan benefits must be based on wages Taxable income on medical benefits might be includable in the definition of plan compensation. Read your document. Controlled Groups Deduction is allocated in a reasonable manner for each entity that has adopted the plan 5

6 Controlled Groups/Affiliated Service Groups Does your annual request for information ask if there are any changes in the businesses affiliations? For coverage and non-discrimination testing all employees of all entities of the Controlled Group or Affiliated Service Group must be included For plan purposes, all members of a Controlled Group or Affiliated Service Group do not have to be covered Partnership with profit sharing plan Plan Sharing Compensation Contribution Partner A 100,000 35,000 Partner B 100,000 35,000 Staff 100,000 5,000 Total 300,000 75,000 Partnership separately incorporate partners with profit sharing plan Plan Compensation Sharing Contribution Partner A 100,000 25,000 Partner B 100,000 25,000 Staff 100,000 5,000 Total 300,000 55,000 6

7 Partnership with DB/DC Combo Not PBGC covered Plan Sharing Defined Benefit Compensation Contribution Contribution Total Partner A 100,000 5, , ,250 Partner B 100,000 5, , ,250 Staff 100,000 7,500 5,000 12,500 Total 300,000 18, , ,000 Partnership separately incorporated partners with DB/DC Combo Not PBGC covered Plan Sharing Defined Benefit Compensation Contribution Contribution Total Partner A 100,000 6, , ,000 Partner B 100,000 6, , ,000 Staff 100,000 7,500 5,000 12,500 Total 300,000 19, , ,500 Partnership with DB/DC Combo PBGC covered Plan Sharing Defined Benefit Compensation Contribution Contribution Total Partner A 100,000 33, , ,750 Partner B 100,000 33, , ,750 Staff 100,000 7,500 5,000 12,500 Total 300,000 75, , ,000 7

8 Partnership separately incorporated partners with DB/DC Combo PBGC covered Plan Sharing Defined Benefit Compensation Contribution Contribution Total Partner A 100,000 25, , ,000 Partner B 100,000 25, , ,000 Staff 100,000 7,500 5,000 12,500 Total 300,000 57, , ,500 Employee cost in a partnership must be allocated in a reasonable manner In a DC, this may be fairly simple In a DB, it may not be so clear TNC (DB) or pay credit (CB) may provide a starting point, but What if actual contribution doesn t equal total TNC or total pay credits? How do you allocate the excess or deficiency? Insured Plans PS-58 cost for a selfemployed individual (SEI) PS-58 cost is not reported as a distribution, as it would be for an employee The deduction on the SEI s 1040 is reduced by the PS-58 cost Net effect is the same: taxable income increased by the amount of the PS-58 cost 8

9 Information Requests Disclosures Businesses owned by owner or by owner s spouse Employee weds or is adopted by the owner Same sex couple go from civil union to marriage Union never negotiated for benefits Leased employees Part time or temporary employees never disclosed Business entity changed from unincorporated to a corporation Business adopted another retirement plan DB Issues Is the DB a small plan or a large plan? The answer does not depend on the number of participants May depend on the sponsor s objectives and if the sponsor has changed objectives Response to questions will be guided by sponsor s objectives DB Issues Beginning of the year valuation vs. End of the year valuation 9

10 Beginning of the Year Valuation PPA assumes plans are valued at the beginning of the year Guidance on beginning of the year valuations is pretty complete Minimum required contribution is based on prior year census and trust information, i.e., not in sync Work is completed early End of the Year Valuation Minimum required contribution is based on current year census and trust information DB/DC work uses the same information for both funding and 401(a)(4) Document Issues-Top Heavy Top Heavy Minimum Benefits DC Plan-allocation of at least 3% of section 415 compensation for the plan year or, if less, the highest percentage of compensation allocated to a Key Employee for the plan year. DB Plans 2% of high five year average Years with less than 1000 hours are ignored Years before entry into the plan are ignored Service and compensation are ignored for years in which no Key Employee benefits 10

11 Document Issues-Top Heavy Multiple DC Plans Documents should be specific which plan(s) provides the Top Heavy Minimum allocation DC Plan-Top Heavy minimum allocation aggregates all plans in which Key Employees are participants or if plans are aggregated to meet 410(b) or 401(a)(4) Multiple DB Plans Documents should be specific which plan(s) provides the Top Heavy Minimum benefits. Note, somewhat aggressive to split the Top Heavy minimum accruals among several plans Document Issues-Top Heavy DB/DC Arrangements Documents should be specific which plan(s) provides the Top Heavy Minimum allocations or benefits If the DC plan provides for the Top Heavy Minimum Are the documents specific whether a non-key Employee who terminates is entitled to an allocation? Are the documents specific whether a non-key Employee receives a Top Heavy minimum allocation if no Key Employee benefits in either plan? 11