TAX BENEFITS OF RETIREMENT PLAN CONTRIBUTIONS

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1 Maximizing the Tax Benefits of Retirement Plan Contributions Employer Responsibilities Conference Fort Worth Chapter Texas Society of Certified Public Accountants January 18, 2012 Jim Griffin Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, Texas TAX BENEFITS OF RETIREMENT PLAN CONTRIBUTIONS Maximum Payment Amount monetary amount equal to the tax the IRS could collect upon plan disqualification the sum for the open taxable years of tax on the trust (Form 1041) additional income tax to the employer resulting from the loss of employer deductions for plan contributions additional income tax to employee resulting from income inclusion (Form 1040), including the tax on plan distributions that have been rolled over penalties and interest 1

2 TAX BENEFITS OF RETIREMENT PLAN CONTRIBUTIONS Small employer tax credit 50% of the cost to set up and administer a SEP, SIMPLE or certain other retirement plans $500 maximum per year for the first 3 years of the plan Saver s Credit Available to low and moderate income individuals, including self employed $2,000 maximum credit 10% to 50% of savings amount, based on AGI EPCRS Revenue Procedure Self-Correction Program (SCP) Voluntary Correction Program (VCP) Audit Closing Agreement Program (Audit CAP) 2

3 COMPLIANCE: THE PRICE TO PAY FOR TAX BENEFITS Coverage and nondiscrimination Controlled and affiliated service group rules 401(a)(17) compensation limit Top heavy rules Annual addition limit 401(k) contribution rule VCP FEE SCHEDULE Number of Participants 20 or fewer 21 to to to to 1,000 1,001 to 5,000 5,001 to 10,000 Over 10,000 Fee $750 $1,000 $2,500 $5,000 $8,000 $15,000 $20,000 $25,000 3

4 THE REST OF THE ROADMAP Kinds of Retirement Plans PEO Plans Multiple Employer Plans ROBs KINDS OF RETIREMENT PLANS No Plan Payroll Deduction IRA Simplified Employee Pensions (SEPs) SIMPLE IRA Plans 401(k) Plans Safe Harbor 401(k) Plans Automatic Enrollment 401(k) Plans Profit Sharing Plans Defined Benefit Plans DB-K 4

5 NO PLAN Advantages Simplicity Understandability No 10% early withdrawal tax No fiduciary responsibility No additional reporting obligations Appreciated by employees Disadvantages Ignores reality that Social Security might not exist or be sufficient for retirement Financially difficult for employees to retire Reliance on public programs PAYROLL DEDUCTION IRAs Employer selects financial institution(s) for payroll deposits Employee opens Regular or Roth IRA Employees make contribution elections Employer collects contributions from payroll and remits those contributions to the financial institution(s) No employer contributions permitted No annual plan filings No limit on number of employees No employer fiduciary responsibility 5

6 PAYROLL DEDUCTION IRAs Annual contribution limited to $5,000 $1,000 catch-up contribution for employees age 50 or over Balances 100% vested all the time Loans from balances to employees are not permitted Distributions subject to 10% penalty tax if employee is under age 59-1/2 SIMPLIFIED EMPLOYEE PENSION (SEPs) IRA based plan Employer establishes and contributes to SEP Tax deductible contributions up to 25% of an employees compensation, up to $49,000 per employee Contributions must be the same percentage of compensation for all employees Contributions flexibility from year to year No annual filings 6

7 SIMPLIFIED EMPLOYEE PENSION (SEPs) Eligible employees At least age 21 Performed services for the employer in at least 3 of the last 5 years Earned at least $550 during the year All eligible employees must be covered, including Part timers Seasonal employees Employees who die or terminate employment during the year SIMPLIFIED EMPLOYEE PENSION (SEPs) IRS Model SEP Form 5305-SEP May be established for a year as late as the due date (plus extensions) for the employer s Federal income tax return for the year 7

8 SIMPLE IRA Plans Two Requirements 100 Employee Rule: business must have 100 or fewer employees who earned $5,000 or more during the preceding calendar year Exclusive Plan Rule: business cannot have another retirement plan Employee Payroll Deductions $11,500 in 2012 $2,500 catchup contribution SIMPLE IRA Plans Employer Contributions Matching: dollar for dollar matching contribution up to 3% of compensation Fixed Percentage: 2% of compensation, regardless of whether employees contribute Annual notice to employees during 60 day election period No Annual Filing 8

9 SIMPLE IRA Plans 10% penalty tax for distributions before age 59-1/2 25% penalty tax for distributions with the first 2 years of participation. 401(k) PLANS More flexibility in eligibility Vesting schedule Loans to participants In service withdrawals Annual Form 5500 Audit required if plan has more than 100 participants at the beginning of the plan year Fiduciary responsibility 9

10 401(k) PLANS Traditional Safe Harbor Fully Vested Matching: Dollar for dollar up to 3% and 50 cents on the dollar on the next 2% Nonelective: 3% fixed contribution, whether or not an eligible employee contributes Vesting Schedule Matching: Dollar for dollar up to 1% and 50 cents on the dollar on the 5%, AND Automatic Enrollment Automatic Enrollment Automatic escalator PROFIT SHARING PLANS Qualified plan Flexible design and eligibility Flexible contributions Limited to lesser of: 100% of employee compensation, or $49,000 per year Deductible contributions up to 25% of aggregate employee compensation Vesting schedule Form 5500 annual filing 10

11 DB-K PLANS Eligible combined plan Initially available in 2010 Businesses with 500 or fewer employees One plan, two parts Defined benefit Final pay and years of service, or Cash balance 401(K), including automatic enrollment and match PEO Plans With Insperity Retirement Services, you ll benefit from: Flexible plan features Large plan services and support Investment fund independence Care and guidance from 401(k) experts Exceptional responsiveness to your needs Revenue sharing to offset expenses in the plan 11

12 PEO Plans Your employees will enjoy convenient, fullservice features, such as: Online access to plan account for easy enrollment, transfers and changes Interactive educational materials, such as planning calculators Investment choices from brand-name mutual fund families Superior call center support with knowledgeable specialists Low participant fees PEO Plans The Law The employment relationship between workers and the employer maintaining a plan is fundamental to whether a plan is qualified under 401(a) of the Internal Revenue Code. The determination of whether an employment relationship exists depends on the facts and circumstances of each particular case. If a retirement plan provides benefits for individuals who are not employees of the employer maintaining the plan, the plan does not satisfy the exclusive benefit rule contained in 401(a)(2), and therefore could be disqualified. 12

13 Multiple Employer Plans (MEP) Plan managed by a promoter and joined by several unaffiliated employers Treated as single plan for 5500s Audit Disqualification Treated as plan of participating employer for IRS testing Multiple Employer Plans (MEP) Economies of scale for Administrative costs Compliance testing Investments expenses Do MEPs work for unaffiliated employers? Specifically targeted to small business clients Fiduciary responsibility 13

14 ROBS Retirement plan assets used on a tax-free basis to provide start up capital for a new business Newly formed C corporation with newly formed profit sharing plan (PSP) that permits investments in employer stock Existing IRA rollover that is transfer to PSP and used by PSP to purchase employer stock ROBS IRS Concerns Discrimination for failure to allow other employees to purchase employer stock Prohibited transaction on purchase of employer stock at improper valuation 14

15 SELF EMPLOYED INDIVIDUALS Special contribution rate calculations for SEPs and qualified plans Not for SIMPLEs Plan contribution for self employed individual is based on net earnings from self employment. Contribution for a common law employee at 10% of compensation is equal to a contribution of 9.09% of pay for a self employed individual. See tax table in IRS Publication 560 for additional details. Things to Double Check 1. Plan Document 2. Eligibility 3. Compensation Definition 4. Timely Deposits 5. Reasonableness of Plan Expenses 6. Investment Performance 7. Related Employers 8. IRS Discrimination Tests 15

16 IRS Resources Phone Forums 3. Retirement News for Employers 4. Employee Plan News Maximizing the Tax Benefit of Retirement Plan Contributions Employer Responsibilities Conference Fort Worth Chapter Texas Society of Certified Public Accountants January 18, 2012 Jim Griffin Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, Texas (D) 16