Posted by James M. Carlson
Mar
31
2016
Any old Keoghs or old profit sharing plans sitting in any files?
Forgotten gems or forgotten liabilities?
Substantial tax benefits are realized by sponsoring businesses and
participants of qualified profit sharing plans and 401(k) plans. In
order to gain such tax benefits such plans must be amended and restated
on a timely basis.
April 30, 2016 is the deadline for most defined contribution plans to be
amended and restated. If a plan has been updated within the last 1-20
months, it should be in compliance. If it has not been updated, it
should be by April 30th, 2016.
CWF has been a prototype plan submitter since 1984. Contact us if your
institution or any of your business clients would benefit by using a CWF
document to amend and restate its retirement plan. The consequences of
missing this deadline means an employer will have to pay substantially
higher fees to bring the plan into compliance. The IRS may argue the
plan is no longer qualified and the funds are deemed distributed and
taxable.
The IRS has always taken the tax position that a distribution in any
pension plan is eligible to be rolled over or directly rolled over to
any type of IRA or other plan only if the plan is "qualified" at the
time of the distribution. To be qualified at the time of distribution
the plan document must set forth the current laws. Thus, the need to
amend and restate the plan.
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Posted by James M. Carlson
Mar
01
2016
Jane Smith wishes to make a SEP-IRA contribution for herself. Jane is a
self-employed horse rider/exerciser. She had a good year and so she
wants to establish a SEP and then make a $26,000 contribution to her
SEP-IRA for tax year 2015.
What forms will she need to prepare?
First, as an employer (a one person busines s), she must establish her
Simplified Employee Pension Plan (SEP). She will do so by completing and
signing the IRS model form 5035-SEP. Note that she signs the form as the
“employer.” The financial institution does not sign this form. Jane will
either obtain this form from her accountant, attorney, financial
institution or she will find it on-line at the IRS website, www.irs.gov.
Second, as the employer, she will write a business check for the amount
of $26,000 and she will contribute it to her SEP-IRA. A SEP- IRA is
established by a person establishing a standard traditional IRA (IRS
model form 5305) and then making a SEP-IRA contribution to it. For 2015
she is permitted to make a SEP-IRA contribution equal to the lesser of
25% of her adjusted business earnings or $53,000.
We recently had a call from an IRA representative where the IRA software
system her bank was using did not make this clear. The system gave the
idea that the only form needed was the Form 5305-SEP. The system did not
make it clear that the individual either needed to have an existing IRA
into which the SEP-IRA contribution would be contributed or a new SEP-
IRA must be established. Both forms are needed and so hopefully the
vendor wil change its system once it is advised that a clarification is
needed.
IRS statistics show that annual SEP-IRA contributions exceed those of
annual traditional IRA contributions. A financial institution will
benefit by communicating with its business customers about the benefits
of SEP-IRAs. The tax laws do not require a person who has an existing
traditional IRA to set up a new SEP-IRA. Some financial institutions
choose for administrative reasons to require a separate IRA, but the tax
laws do not require it. If any employee would fail to have a SEP-IRA so
the business did not make a SEP contribution for such employee, there
would be no SEP and the expected tax benefits would not apply for the
spons oring business and other employees.
In summary, establishing a SEP is easy as long as the two steps above
are completed for a one person business and the three steps are
completed for a business with employees.
Categories:
Posted by James M. Carlson
Mar
01
2016
Definitions
SEP — SEP is the acronym for Simplified Employee Pension plan. In
order to have a SEP, two requirements must be met. First, an employer
must sign a SEP plan document which may be: (1) the IRS model Form
5305-SEP; (2) a SEP prototype; or (3) a SEP plan as written specifically
for that employer by an attorney. The employer may be a gigantic
corporation or a self employed person. Second, all eligible employees
must establish (or have established for them) a SEP-IRA.
SEP-IRA — A SEP-IRA is a standard, traditional IRA established
with a financial institution to which an employer has made a SEP-IRA
contribution. The IRA custodian is required to report SEP-IRA
contributions in box 8 on Form 5498. In all other respects, the
standard, traditional IRA rules will apply to administering SEP-IRAs.
Contributions to SEP-IRAs are always owned by the employee, once the
funds have been contributed to the employee’s SEP-IRA.
Discussion
SEP plans may be established and funded by the
normal tax deadline, plus extensions. A person may come into your
institution in July of 2016, and make a SEP contribution of $53,000, for
tax year 2015. If an individual has the proper extension(s) a SEP
contribution may be made as late as October 15 of 2016, for tax year
2015.
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