Compliance Considerations for Employer-Sponsored Benefit Programs

Transcription

1 Compliance Considerations for Employer-Sponsored Benefit Programs June 1, 2017 Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor CliftonLarsonAllen LLP

2 Disclaimers The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by CliftonLarsonAllen LLP to the user. The user also is cautioned that this material may not be applicable to, or suitable for, the user s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The user should contact his or her CliftonLarsonAllen LLP or other tax professional prior to taking any action based upon this information. CliftonLarsonAllen LLP assumes no obligation to inform the user of any changes in tax laws or other factors that could affect the information contained herein. 2

3 Housekeeping If you are experiencing technical difficulties, please dial: Q&A session will be held at the end of the presentation. Your questions can be submitted via the Questions Function at any time during the presentation. The PowerPoint presentation, as well as the webinar recording, will be sent to you within the next 10 business days. For future webinar invitations, subscribe at CLAconnect.com/subscribe. Please complete our online survey. 3

4 About CliftonLarsonAllen A professional services firm with three distinct business lines Wealth Advisory Outsourcing Audit, Tax, and Consulting More than 5,000 employees Offices coast to coast Providing employee benefit plan audit, tax compliance, and consulting services for more than 60 years. Our 50 principals and 300 professionals audit more than 2,500 plans across the country and provide compliance and consulting services for hundreds more. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC. 4

5 Speaker Introductions Kelly Davis Principal Leader for the firm s employee benefit compensation and consulting practice Author of and quoted in national employee benefit plan publications and newspapers, including the Wall Street Journal Additional areas of experience include: employer-sponsored employee benefit plans, executive compensation, health reform, tax-favored health plans, and fringe plans Kevin Wadle Director More than 30 years of experience working with qualified and non-qualified benefit plans Additional areas of experience include: employer-sponsored employee benefit plans, executive compensation, health reform, tax-favored health plans, and fringe plans 5

6 Learning Objectives At the end of this session, you will be able to: Be familiar with employee benefit plan compliance and reporting concepts Understand the regulatory compliance and reporting requirements that affect your organization Recognize the possible risks associated with program noncompliance Learn how to enhance your organization s return on investment 6

7 Qualified Plans 7

8 Qualified Plans A qualified plan must satisfy the Internal Revenue Code in both form and operation: Plan document provisions must satisfy the requirements of the Code and those plan provisions be operated in accordance The IRS administers a determination letter program that enables plan sponsors to get advance assurance as to the form of their retirement plan document Employers should establish practices and procedures to ensure the plan is operated in accordance with the plan document so participants and beneficiaries receive their proper retirement benefits Be aware that the law and regulations in the retirement plans area frequently changes Make sure your plan document and determination letter, if applicable, are up to date while maintaining fully executed copies on file 8

9 Qualified Plans SEP and SIMPLE IRA plans Defined Contribution plans Defined Benefit plans Hybrid plans 9

10 Defined Contribution Plans Types: Profit Sharing Plan Cash or Deferred Arrangement Plan (CODA) 401(k) Plan 403(b) Plan Money Purchase Pension Plan ESOPs 10

11 Qualified Plans SEP Employer only contributions at uniform rate 25% deduction limit, 20% for self employed Individual limited to $54,000 (2017) Only plan can set up by after year end (extended due date) No

12 Qualified Plans SIMPLE IRAs Employer and employee contributions Employer 3% dollar for dollar match or 2% employer contribution, with exceptions some years Employee deferrals $12,500 or $15,500 if age 50 (2017) No

13 Qualified Plans Profit sharing Employer only contribution 25% deduction limit, 20% for self employed Annual Additions limit $54,000 (2017) Allocations may be uniform rate, integrated with S.S. or New Comparability plan 401(k) plan Employee deferrals $18,000 or $24,000 if age 50 (2017) Annual Additions limit $54,000 (2017) Employer matching Subject to ADP and ACP testing Safe harbor contribution to avoid testing 3% employer 4% matching formula 13

14 Qualified Plans 403(b) Plans Universal Availability Universal availability on employee participation for employee deferrals A 403(b) plan must satisfy the universal availability requirement with respect to elective deferrals All employees of the employer must be eligible to make elective deferrals if any employee has the right to do so. Certain part-time employees may be excluded from eligibility to make elective deferrals: Employees who normally work less than 20 hours per week Students performing services Non-resident aliens Employees who are eligible to make elective deferrals under another 401(k), 403(b) or 457(b) plan sponsored by the same employer 14

15 Qualified Plans 403(b) Plans Universal Availability 403(b) plan may not exclude employees based on a generic classification such as: Part-time Temporary Seasonal Substitute Teacher Adjunct Professor Collectively bargained employee However, if these employees fall under the normally work less than 20 hours per week criterion, then they may be excluded on that basis 15

16 Qualified Plans 403(b) Plans Employee deferrals $18,000 or $24,000 if age 50 (2017) Employer matching and/or non-elective contributions Annual additions limit $54,000 (2017) Subject to ACP testing on match Safe harbor contribution to avoid ACP testing 3% employer 4% matching formula 16

17 Qualified Plan Issues: Tax treatment for employee and employer Employee Credit for Contributions Small Employer Credit for Start-up Expenses Deposits and Payments Form 5500s and other paperwork Non-compliant plan document Plan Operational failures 17

18 Qualified Plan Governing Documents IRS Top 10 Error Original signed and adopted copies on file with employer Timely execution Updated for required legislative updates Plan termination must be supported by amendment and resolution Identify termination date and fully vested balances Cease future benefit accruals Form 5500 reporting item Adopted before payouts may commence Costly to correct 18

19 Late Salary Deferral Contributions IRS Top 10 errors Prohibited Transaction by Plan Fiduciary Lost earnings due Plan Reportable on Form 5500 until lost earnings funded Plan audit financial statement disclosure until lost earnings funded DOL Voluntary Fiduciary Correction Program Excise tax liability and Form 5330 filing due until cured Focus area of DOL audits Costly to correct 19

20 Employer Contributions Timing of Deductions: May be treated as contributed in prior tax year if contributed by due date of employer tax return, including extensions Qualified Plan must be adopted by end of tax year to receive deduction No more distinction between PSP and MPP due to separate limits Failure to Fund Employer Contributions: Amend employer tax return if previously deducted Revise participant statements if accrued Lost earnings due Plan Prohibited Transaction if required contribution Excise tax liability and Form 5330 filing may apply 20

21 Participant Loans Qualified retirement plans, annuity plans and governmental plans may allow Not permitted from IRAs, SEPs, SARSEPs, and SIMPLE IRA plans Loans are not taxable unless they fail to satisfy the plan loan rules of section 72(p) Legally Enforceable Agreement (plan and participant) Maximum Amount = Lesser of 50% of vested balance or $50,000 Repayment Period = Quarterly payments / 5 year term Written Policy Reasonable Interest Rate Adequately Secured 21

22 Qualified Plan Distributions Qualified Plan contributions are includible in employee s income at distribution Plan document must specify available forms Plan document must specify distributable events Distribution notice requirements Distributions should be supported by an executed participant distribution election form Pension Plan and Money Purchase distribution elections should include signature of spouse or beneficiary Distributions must be reported on Form 1099-R Failure to comply could result in Plan disqualification, adverse tax consequences to employer and plan participants, excise tax and costly to correct 22

23 Age 70 ½ Required Minimum Distributions Generally withdrawals are required to be taken from retirement plan accounts when an individual reaches age 70½. These minimum distribution rules apply to: traditional IRAs SEP IRAs SIMPLE IRAs 401(k) plans 403(b) plans 457(b) plans profit sharing plans other defined contribution plans Roth IRAs do not require withdrawals until after the death of the owner. 23

24 Age 70 ½ Required Minimum Distributions Required minimum distribution is the minimum amount that must be withdrawn from retirement accounts each year however one may withdraw more Withdrawals will be included in the individual s taxable income except for any part that was taxed before (basis) or that can be received tax-free (e.g. qualified distributions from designated Roth accounts) If distributions are not taken or if the distribution is not large enough, the individual is subject to pay a 50% excise tax on the amount not distributed as required, reportable to the IRS on Form Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 24

25 Age 70 ½ Required Minimum Distributions Distributions during an owner's life must begin no later than the owner's Required Beginning Date and be distributed over a period no longer than: The owner's life expectancy; The owner's and a designated beneficiary's joint life expectancies; or A fixed period that does not extend beyond such life expectancy(ies) 25

26 Control Groups / Affiliated Service Groups If two or more corporations, trades, or businesses are part of a controlled group, than the controlled group members are treated as a single employer when applying certain employee benefit plan requirements under the Internal Revenue Code; Similarly, if two or more Organizations are members of an affiliated service group they are treated as a single employer for purposes of satisfying the IRC controlled group requirements An affiliated service group is an entity (incorporated or unincorporated) that is either a service or management-type group Retirement Plans, Tax Favored Health Plans (e.g. Cafeteria Plans), Affordable Care Act 26

27 Form 5500 Qualified Plans An Annual Return/Report must be filed for every pension benefit plan, welfare benefit plan, and entity that files as a Direct Filing Entity (DFE) Reporting requirements vary depending on whether the Form 5500 is being filed for a large plan, a small plan, a DFE, and on the particular type of plan or DFE involved (e.g., welfare plan, pension plan, common/collective trust (CCT), pooled separate account (PSA), master trust investment account (MTIA), IE, or group insurance arrangement (GIA)) 27

28 Form 5500 Qualified Plans Small retirement plans (< 100 participants at beginning of a plan year), may be eligible to file the Form 5500-SF instead of the Form 5500 One-participant plans and foreign plans that are not subject to the requirements of ERISA section 104(a) and that do not file Form 5500-SF electronically may file Form 5500-EZ One-participant plan is: A pension benefit plan that covers only an individual or an individual and his or her spouse who wholly own a trade or business, whether incorporated or unincorporated; or A pension benefit plan for a partnership that covers only the partners or the partners and the partners spouses. Every one-participant plan required to file an annual return must file paper Form 5500-EZ with the IRS 28

29 Form 5500 Qualified Plans Large retirement plans (> 100 participants at beginning of a plan year) are required to annually file Form 5500 along with independent audited financial statements on the plan Participant Rule: If the number of participants reported on line 5 is between 80 and 120, and a Form 5500 annual return/report was filed for the prior plan year, a plan sponsor may elect to complete the return/report in the same category ( large plan or small plan ) as was filed for the prior return/report If a Form 5500-SF or a Form 5500 annual return/report was filed for the 2016 plan year as a small plan and the number entered on line 5 of the 2017 Form 5500 is 120 or less, the Plan Sponsor may elect to complete the 2017 Form 5500 and schedules in accordance with the instructions for a small plan, including for eligible filers, filing the Form 5500-SF instead of the Form

30 Form 5500 Small Plan Audit Waiver Annual Audit Exemption for Small Pension Plans Effective beginning in 2001 Pension Plans with < 100 participants Must annually meet conditions for waiver At least 95% of plan s assets must be qualifying plan assets, i.e. mutual funds, annuity contracts, employer securities, participant loans If 95% + of plan s assets are nonqualifiying plan assets, the plan must be 100% bonded 30

31 Form 5500 Qualified Plans Electronic filing and disclosure required starting with 2009 reporting year Compliance & Technical Questions to Report Plan termination resolution adopted Plan paid benefits when due Plan complied with blackout notice regulations Standard supplemental schedule for reporting delinquent participant contributions for use with independent accountant s report If minimum funding amount reported will be met 31

32 Form 5500 Qualified Plans Plan administrators and plan sponsors must provide complete, accurate information and comply fully with the filing requirements ERISA and the IRC provide for the DOL and the IRS, respectively, to assess or impose penalties for not giving complete and accurate information and for not filing complete and accurate statements and returns/reports Penalties that may be imposed: A penalty of up to $2,063 a day for each day a plan administrator fails or refuses to file a complete and accurate report. Beginning in 2017, the DOL will adjust the new ERISA Title I penalty amounts annually for inflation no later than January 15 of each year. A penalty of $25 a day (up to $15,000) for not filing returns for certain plans of deferred compensation, trusts and annuities, and bond purchase plans by the due date (i.e. 7 months following the close of a plan year w/o extension) A penalty of $1,000 for each failure to file an actuarial statement (Schedule MB (Form 5500) or Schedule SB (Form 5500) 32

33 Form 8955-SSA Used to report information about separated participants with deferred vested benefits under plans subject to the vesting standards of section 203 of ERISA: Defined Contribution 401(k) / Profit Sharing Plans Money Purchase Pension Plans Employee Stock Ownership Plans 403(b) Plans Defined Benefit Plans sponsors exempt include administrators of government, church and others not subject to section 203 of ERISA Generally, the return is due the same date as the Form 5500 and related schedules (i.e. 7 months after the plan year end) 33

34 Individual Statement about Vested Benefit IRC Section 6057(e) requires plans which file Form 8955-SSA (or the old Schedule SSA) to provide each participant listed thereon with an individual statement Deadline for delivering statement is the due date of Form 8955-SSA Must include all participants listed on Schedule SSA IRC Section 6690 provides for a $50 penalty for willful failure to deliver the statement to a participant 34

35 Form Health & Welfare Plans ERISA Welfare Benefit Plan Reporting ERISA Welfare Benefit Plans required to file Form 5500 if: > 100 plan participants and Unfunded plan (benefits paid from employer s general assets), or Fully insured (benefits are through insurance contracts or policies), or Combo unfunded & fully insured Plan is a MEWA Welfare benefits provided under plan include: Medical, dental Life insurance Disability Severance IRS suspended the filing of Schedule F in This did not suspend filing of Form 5500 and other required schedules (e.g. Schedule A) 35

36 Rollovers as Business Start-Ups ( ROBS ) An arrangement setup where prospective business owners use their retirement funds to pay for new business start-up costs via a tax-free transaction Considered a qualified plan Rollover assets used to purchase the stock of the new business The Plan owns the new business Requires valuation of assets Form 1099-R required to report rollover distribution Form 5500 filing required Plan Audit required if small plan audit waiver not satisfied Fidelity Bonding 36

37 Rollovers as Business Start-Ups ( ROBS ) Concerns: Questionable Transaction by IRS IRS Compliance Project 2010 Contacting Employers for Information Discriminatory Plan Operation IRS Determination Letter provides no protection Generally benefits one individual (owner) Plan Operation could result in prohibited transactions Plan Disqualification Adverse Tax Consequences to Employer and Participants Costly to Correct IRS Considering Adding as an Abusive Tax Avoidance Transaction 37

38 Voluntary Worker Classification Settlement Program New IRS Program Announced 9/21/2011 Part of Fresh Start initiative Designed to increase tax compliance and reduce employer burden Enables employers to voluntarily reclassify workers for employment tax purposes for future tax periods Independent Contractors or other non-employees to employees Exempt Organizations and Governmental Entities may participate Employer must meet Program eligibility requirements to participate 38

39 Voluntary Worker Classification Settlement Program Concerns: Program provides payroll tax relief for federal purposes and does not address state tax relief, potential taxes, penalties or interest Retirement Plan document language Do reclassified employees become eligible Does the plan document need to be amended to retain grandfathered status Medical Plans If self-insured plan, does the plan become discriminatory with taxable benefits to HCE s May the reclassified employees have the right to sue to enforce nondiscriminatory benefits or other equitable relief under ERISA Employees are treated differently from independent contractors for purposes of income, payroll and self-employment taxes 39

40 Nonqualified Retirement Plans 40

41 Nonqualified Deferred Compensation Any plan, agreement, method or arrangement between an employer and employee to pay compensation to employee some time in the future. For profits and non-profits Employer awareness of all arrangements and requirements Written Plan documents IRC Section 409A compliance Significant penalties for noncompliance imposed on employee Immediate Income Inclusion 20% additional tax Interest 41

42 Nonqualified Plans Under a nonqualified plan, employers generally only deduct expenses when income is recognized by the employee or service provider. In contrast, under a qualified plan, employers are entitled to deduct expenses in the year contributions are made even though employees will not recognize income until the later years upon receipt of distributions. Despite their many names, NQDC plans typically fall into four categories: Salary Reduction Arrangements simply defer the receipt of otherwise currently includible compensation by allowing the participant to defer receipt of a portion of his or her salary. Bonus Deferral Plans resemble salary reduction arrangements, except they enable participants to defer receipt of bonuses. Top-Hat Plans (aka Supplemental Executive Retirement Plans or SERPs) are NQDC plans maintained primarily for a select group of management or highly compensated employees. Excess Benefit Plans are NQDC plans that provide benefits solely to employees whose benefits under the employer's qualified plan are limited by IRC

43 457 Plans 457 Plans of deferred compensation are available for certain state and local governments and non-governmental entities tax exempt under IRC Section Plans may be either: Eligible plans under IRC 457(b), or Ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f) Contributions to 457(b) plans may include employee salary deferrals and employer contributions up to the IRC 402(g) limit ($18,000 in 2015, 2016 and 2017) on behalf of participants under the plan The contributions are reported annually on Form W-2 Contributions to a 457(b) plan are tax-deferred Earnings on the retirement money are tax-deferred 43

44 457 Plans Age 50 catch-up contributions for participants who are age 50 or older at the end of the current tax year are allowed in governmental 457(b) plans however not allowed in nongovernmental 457(b) plans Special catch-up contributions for participants who are within 3 years of normal retirement age 457(b) Plan distributions from a nongovernmental 457(b) Plan to employee or former employee are reported on Form W-2 457(b) Plan distributions from a governmental 457(b) Plan are reportable on Form 1099-R 44

45 457 Plans Non-governmental 457(b) ( Top Hat ) plans must limit participation to groups of highly compensated employees or groups of executives, managers, directors or officers. The plan may not cover rank-and-file employees Non-governmental 457 plans must remain unfunded. Plan assets are not held in trust for employees, but remain the property of the employer (available to its general creditors in the event of litigation or bankruptcy) Non-governmental 457(b) plans commonly use rabbi trusts to hold employee deferrals. The rabbi trust is funded, but the trust assets remain available to creditors Governmental 457(b) plans must be funded via a trust 45

46 457 Plans Select group of management or highly compensated employees While there is no formal legal definition of a "select group of management or highly compensated employees," it generally means a small percentage of the employee population who: are key management employees, or earn a salary substantially higher than that of other employees 46

47 457 Plans Non-governmental, tax-exempt entities can establish 457(f) (ineligible) plans that are tax deferred and that allow contributions exceeding the annual 402(g) deferral limit These plans and the associated deferrals are possible only if there is a "substantial risk of forfeiture" when the risk has been removed, the participant s deferral amounts become taxable, (i.e. benefits vest) Timing of taxation for 457(f) benefits occurs upon vesting vs. upon actual receipt Vested 457(f) amounts are reportable to employee and/or former employee on Form W-2 47

48 457 Plans Filing and reporting requirements IRC Section 457 plans are not required to file Form 5500 as they are not subject to Title I of ERISA. Non-governmental 457(b) (Top Hat) plans must file a notification of the plan s existence with the Department of Labor. Common compliance issues for 457(b) plans Failure to limit participation in a non-governmental 457(b) plan subjects the plan to ERISA Title I funding requirements Non-governmental 457(b) plans that must comply with the ERISA funding requirements will fail to satisfy IRC 457(b)(6), which provides that the plan must be unfunded Contributions to a funded non-governmental 457(b) plan are immediately taxable Age 50 catch-up contributions incorrectly made for non-governmental 457(b) plans 48

49 Form Top-Hat Plan Top-Hat Plan Nonqualified Deferred Compensation Plan for a select highly compensated employee or group of management Exempt from most of ERISA requirements Must submit Top-Hat filing to DOL within 120 days of Plan s inception Failure to file will subject the Plan to ERISA reporting and disclosure requirements, including annual Form 5500 DOL amnesty program available for late filings 49

50 Executive Compensation Intermediate Sanctions (non-profits) Section 4958 of the Internal Revenue Code imposes an excise tax on excess benefit transactions between a disqualified person and an applicable tax-exempt organization The disqualified person who benefits from an excess benefit transaction is liable for the excise tax. An organization manager may also be liable for an excise tax on the excess benefit transaction An applicable tax-exempt organization is a section 501(c)(3) or 501(c)(4) taxexempt organization or an organization that was tax-exempt under section 501(c)(3) or 501(c)(4) any time in the five-year period ending on the day the excess benefit transaction occurred Section 4958 does not affect the substantive standards for tax exemption under section 501(c)(3) or 501(c)(4). In appropriate cases, the IRS may also propose revocation of tax-exempt status, whether or not section 4958 excise taxes are imposed 50

51 Executive Compensation Intermediate Sanctions (non-profits) An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of a disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration received by the organization. To determine if an excess benefit transaction occurred, include all consideration and benefits exchanged between or among the disqualified person and the applicable tax-exempt organization and all entities it controls. In addition, if a supporting organization makes a grant, loan, payment of compensation, or similar payment to a substantial contributor of the organization, the arrangement is an excess benefit transaction. The entire amount of the payment is taxable as an excess benefit. An excess benefit can occur in an exchange of compensation and other compensatory benefits in return for the services of a disqualified person, or in an exchange of property between a disqualified person and the applicable taxexempt organization 51

52 IRA s 52

53 Traditional and ROTH IRA Contribution Basics Traditional and ROTH IRAs can be established and/or contributed to up until the tax return filing deadline (without extensions) of the year for which the IRA is to be effective A traditional IRA cannot be established or contributed to if the individual reached age 70 ½ in the given tax year There is no age limit for establishing or contributing to a ROTH IRA (planning tip) Contributions to a ROTH IRA are not deductible, no taxes are paid on ROTH distributions and there is no minimum distribution requirement for ROTH IRAs 53

54 IRA Contribution Limits (cont.) Compensation includes: W-2 (Box 1) income Self-employed income Schedule C Schedule E (if SE taxed and material participating) Alimony Other earned income Compensation does not include: Interest, dividends and/or royalties Pensions and annuities Deferred compensation 54

55 IRA Contribution Limits (cont.) In the case of a married couple filing a joint tax return and one spouse has little or no earned income, the non-income earning spouse may borrow against her spouse s compensation for purposes making a IRA contribution In this case, the lower-income spouse s contribution is limited to: (1) $5,500 (or $6,500) OR (2) the sum of: The compensation paid to that spouse PLUS The compensation paid to the higher-income spouse reduced by his/her contributions to any IRA (ROTH or traditional) 55

56 Traditional IRA Contribution Limits The deductible amount of an IRA contribution is reduced if a taxpayer is an active participant of any employer-maintained retirement plan However, a taxpayer is not considered an active participant in an employer-maintained plan simply because the taxpayer s spouse is an active participant 56

57 IRAs Traditional IRAs (deductible or non deductible) ROTH IRAs If ineligible for ROTH IRA, non deductible IRA contribution and then convert to ROTH IRA $5,500 or $6,500 if age 50 (2017) 57

58 Traditional IRA Contribution Limits An active participant is defined as follows: Defined benefit plan a participant is an active participant if she is eligible to participate for any part of the plan with or within the tax year Profit sharing / stock bonus /SEP/SIMPLE/ 401(k)/403(b) plan a participant is considered an active participant if any employer contribution or forfeiture is allocated to the employee s account during the year NOTE: A taxpayer is considered an active participant in all circumstances where the taxpayer makes a voluntary or mandatory contribution to an employer-maintained plan Box checked on Form W-2 58

59 Traditional IRA Deduction Limits The deductible amount of an IRA contribution may be limited Depending on the taxpayer s filing status Income amount Whether the taxpayer / spouse is covered by a plan through work Even if taxpayers are fully or partially phased out of the deduction, a nondeductible contribution can still be made (subject to earned income limitations) ROTH contribution can be made even if covered by employer plan if AGI limits are met 59

60 UBIT IRAs (including ROTH IRAs) Self directed IRAs Qualified plans (including S corp. ESOPs) 60

61 How UBTI can occur Debt-financed property Rental activities Other activities Percentage of debt determines amount subject to UBTI 61

62 How UBTI can occur Example An IRA owner in a self directed IRA purchases a condo in Florida to rent to third parties 10% of the purchase price is paid for with cash 90% of the purchase price is paid for with a 15 year mortgage To the extent there is net income from the rental activity, 90% of the net income is subject to UBTI As the mortgage is paid down, the % of the net income subject to UBTI will decrease each year 62

63 How UBTI can occur Unrelated trade or business income Partnership Sole proprietorship S corporation 63

64 How UBTI can occur S Corp. ESOPs ESOPs S Corp. K-1 exempt from UBTI 409(p) When applies (non allocation year) Disqualified persons own at least 50% of S corporation stock including deemed owned ESOP shares Disqualified persons defined: Individual 10% Family 20% 64

65 How UBTI can occur S Corp. ESOPs Consequences 50% excise tax on employer Applies to FMV of deemed owned shares in ESOP of disqualified person Synthetic equity (includes stock options and nonqualified deferred compensation) also considered when testing for excise tax How to avoid consequences Non ESOP S Corp. shares subject to UBTI 65

66 How UBTI can occur Reporting Form 990T $1,000 exemption Usually subject to trust income tax rates and not corporation tax rates May also have state filing requirement 66

67 Disallowed IRA investments (cont.) Musical instruments Historical objects (documents, clothes, etc.) Other tangible personal property specified by the Secretary of the Treasury or the IRS Commissioner. The individual has ordinary income at the time the investment is made in an amount equal to the collectible's cost. 67

68 Disallowed IRA Investments (cont.) Exceptions Any coin which is A gold coin described in paragraph (7), (8), (9), or (10) of Section 5112(a) of Title 31, United States Code A silver coin described in Section 5112(a) of Title 31, United States Code A platinum coin described in Section 5112(a) of Title 31, United States Code, or A coin issued under the laws of any State, or 68

69 Disallowed IRA Investments (cont.) Any gold, silver, platinum or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in Section 7 of the Commodity Exchange Ac, 7 U.S.C. 7) requires for metals which may be delivered in satisfaction of a regulated futures contract, If such bullion is in the physical possession of a trustee 69

70 Prohibited Transactions Any direct or indirect sale or exchange, or leasing, of any property, lending of money, or the furnishing of goods, services or facilities between a plan and a disqualified person Disqualified person is IRA owner, beneficiary, fiduciary, employer, employer etc. Penalty is immediate disqualification of the IRA back to the beginning of the tax year. Assets deemed distributed to the IRA owner and taxed 70

71 IRA allowed income Not UBTI Dividends, interest and annuities (unless derived from debtfinanced property) Royalties (unless derived from debt-financed property) Rents from real estate property (unless derived from debtfinanced property) unless 50 percent or more of the total rent is attributable to personal property, and unless the determination of the rent depends, in whole or in part, on the income or profits derived from the property (other than amounts based on a fixed percentage of receipts or sales) 71

72 Unrelated Business Income (cont.) IRA cannot be S corporation shareholder See Taproot Administrative Services, Inc. v. Comm, (2012, CA9) 109 AFTR 2d Ninth Circuit Court of Appeals held that ROTH IRA is not eligible shareholder of S corporation Exception: IRA or ROTH IRA may hold shares of an S corporation that is a bank or a depository institution holding company of the Federal Deposit Insurance Act, but only to the extent of the shares held in the IRA or ROTH IRA in the bank on October 22, 2004 The individual beneficiary of the IRA or ROTH IRA is treated as the shareholder Qualified retirement plans under Section 401(a) can be S corporation shareholders (see Section 1361(c)(6)) 72

73 ROTH Traps to watch for Beneficiaries of inherited ROTH IRAs not taking RMDS IRA custodian not required to notify or calculate RMD Direct rollover from qualified plan to ROTH IRA not taxed 1099-R is coded G as rollover but it is not reported as taxable income on Form 1040 Make sure funds get into the correct accounts Errors can be fixed if identified in time ROTH IRA contribution exceeds the limits Dollar limits apply to total ROTH and traditional IRA contributions ROTH IRA is subject to Modified Adjusted Gross Income limits ROTH IRA contributions normally not reported on Form 1040 so taxpayer might not tell us they funded the ROTH IRA 73

74 ROTH Planning opportunities Children with summer or part-time jobs Parents or grandparents fund children's ROTH IRAs Little income tax cost to fund Growth potential is huge with the long time horizon ROTH IRA contribution not allowed because MAGI over limit Make non-deductible traditional IRA contribution and then immediately convert to ROTH IRA Tax-free conversion if there are no traditional or SEP IRAs One time big decrease in taxable income Convert some or all of traditional or SEP IRAs to ROTH IRAs 74

75 ROTH Planning opportunities (cont.) Consider delaying a plan rollover to following year in order to maximize the basis allocated to the funds converted to ROTH IRA If employer qualified plan allows IRA rollovers and IRA has nondeductible contributions, consider rolling taxable amount into qualified plan: After tax funds and nondeductible contributions cannot be rolled over to a qualified plan First, roll all taxable IRA funds to plan Second, convert remaining IRA funds ROTH conversion is not taxable 75

76 ROTH Planning opportunities (cont.) When rolling from Qualified Plan to ROTH IRA, plan ahead: Always do as trustee-to trustee transfer Avoid distributions to individual because of requirement for 20% federal income tax withholding, even if then rolled into ROTH IRA Put ROTH conversion into more than one ROTH IRA Invest each ROTH IRA in different investments, diversification For ROTH IRAs that have deceased in FMV since the conversion, recharacterize those ROTH IRAs For ROTH IRAs that have increased in FMV since the conversion, leave those in the ROTH IRAs 76

77 ROTH Planning opportunities (cont.) Spread ROTH conversions over several years converting just enough each year to either stay in current marginal tax bracket or the anticipated tax rate at retirement If spreading ROTH conversion over several years, convert IRA assets that have the most potential for future growth in the ROTH IRA first 77

78 Affordable Care Act Reporting The Affordable Care Act (ACA) requires Applicable Large Employers (ALEs) (generally, employers that, together with the other employers in their controlled group, employed 50 or more full-time and full-time equivalent employees in the prior calendar year) to report to the Internal Revenue Service (IRS) whether they offered their full-time employees and their full-time employees' dependent children the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan These requirements started in 2015 with the first tax filings due in early 2016 In 2016, ALEs need to file Forms 1094-C and 1095-C with the IRS, and furnish Forms 1095-C to their full-time employees (and any non-full-time employees enrolled in their self-insured plan). These forms report information about the health coverage offered under an ALE s employer-sponsored plan for the 2015 calendar year ALEs will want to be sure to get these forms filed on time because the penalties for failure to timely and accurately file and furnish these forms were significantly increased in a recent trade bill, the Trade Preferences Extension Act of

79 Affordable Care Act Reporting Any employer filing 250 or more information returns during the calendar year must file these returns electronically. For employers with fewer than 250 returns, electronic filing is voluntary Employers that wish to manage their penalty exposure should consider verifying the names/ssns of employees in their benefits systems with the names/ssns in their payroll systems, since employers have likely previously verified the names/ssns in their payroll systems for Form W-2 reporting purposes Prepare now for the 2017 reporting season 79

80 Questions? Kelly Davis Principal, Employee Benefit Plans Phoenix, AZ Kevin Wadle Director, Tax Peoria, IL To receive future webinar invitations, subscribe at CLAconnect.com/employee-benefit-plans/ CLAconnect.com linkedin.com/company/ cliftonlarsonallen facebook.com/ cliftonlarsonallen twitter.com/claconnect