RPA 2 - Ch. 3 Keogh & Small Employer Plans

SIMPLE EE contribs

-EEs elect to participate within 60-day period <BOY -Plans may allow EEs to reduce or change salary reduction agreements during year -EE can terminate participation any time during year -ER can prohibit resumed participation until beginning of following year -EE elective contribs are wages for employment taxes purposes

Simplified Employee Pension Plans

-IRC sec 408(j) & (k) provide for an increase in normal IRA limit of certain requirements are met -ER can be incorporated or self-employed individual -utilizes individual retirement accounts or annuities to provide retirement benefits -ER must notify EEs of plan -DC in nature (not DB) -formally adopted program

SIMPLE Distributions

-distributions from SIMPLE IRAs <59-1/2 subject to 10% penalty tax on early withdrawals -withdrawals during first two years participation subject to 25% penalty tax -distribution can be rolled into an IRA without penalty if participated in SIMPLE for >=2years

Keogh deduction limits for owner

-if made before due date of self-employed individual's tax return for prior year are treated as made for prior year as long as plan was established by end of prior year. Contribs designated as prior year & deducted on prior year's tax return. -based on owner's earned income from self-employment, takes into account deduction for 1/2 self-employment tax & deduction for contributions to the plan on owner's behalf.

SIMPLE ER contrib options

-required ER matching either made on up to 3% of comp, or could match at rate <3% but not lower than 1% (applies to IRAs but not 401(k)s -instead of matching can make 2% Nonelective contrib for eligible EEs earning >=$5K -to apply lower matching or make Nonelective contribs, must notify EEs within reasonable time frame before 60-day election period

EGTRRA incentives for small ERs to offer plans

-small ER (<=100 EEs) can receive tax credit for costs of creation or maintenance of a new plan (<=$500 annually) & may be claimed for costs incurred in first 3 years -exempt small ER from paying a user fee -exempt from fees for determination letter requests to IRS if request made within certain time frames

Self-employed SEP contribs

25% contrib limit based on "earned income" -contrib determined with reference to earned income after subtracting amount of contrib & 1/2 self-employment tax -result is 25% limit is 20% of net income before subtracting amount of contrib but after subtracting 1/2 self-employment tax

Max SEP contrib

25% of income up to $51K in 2013. -if ER contrib is less than normal IRA limit in that year, then EE can contribute difference -EE contrib can be to the SEP or one or more IRAs -contribs up to date of the return for the ER's taxable year are treated as made on account of that year

Solo 401(k) plan

401(k) plan offered to a one person firm, or a two-person firm usually owner & spouse -must comply with all 401(k) rules except Form 5500 filing (if assets <$250K -if additional EEs hired, plan viewed as too expensive because of generous ER Nonelective contribs. Since must be nondiscriminatory, could not just be offered to owner & spouse without including other EEs

Owner-employee

A self-employed individual who owns the entire interest in an unincorporated business (sole proprietor) or a partner owning more than 10% of capital or profit interest in partnership. Includes any stockholder in a S-Corp. -partner owning <10% is not an owner-employee even though he is a self-employed individual.

SIMPLE plan characteristics

A) ERs w/ <=100 or fewer EEs who received >=$5K in comp in preceding year B) can be either IRA or 401(k) C) EEs can make elective contribs <=$12K/year in 2013 (indexed) with catch-up contribs for EEs 50+ D)ERs can make matching or no elective contribs E) ERs have certain notification requirements to EEs F) Nonelective contribs subject to $255K compensation cap in 2013 (indexed) (Sec. 401(a)(17) limit); matching contribs not subject to this limit G) ER electing SIMPLE plan cannot have another QP in which contribs were made or vendors accrued for service in period beginning with year SIMPLE created H) all contribs fully vested and nonforfeitable I) to participate, EE must have comp >=$5K in any 2 years prior & reasonably expected to receive >=$5K in the year J)no stipulation that certain number of EEs must participate K) eligible ERs determined on a controlled group basis L) self-employed individuals may participate M) certain nonresident aliens & collectively bargained EES may be excluded

EGTRAA changes that made solo 401(k)s more attractive

A) elective deferrals no longer reduce payroll base for computer ER Nonelective contribs B) PSPs used as underlying base for 401(k)s could receive ER Nonelective contrib of 25% (15% before) C) elective deferral limits increased D) EEs aged >=50 can make catch up contribs

SEP characteristics

A) in writing & specific about employee participation requirements, when EEs must make contributions & how each eligible EEs contrib is computed. B) must make contribs for EEs >=21, worked during at least 3 of last 5 years, received >=$550 in 2013 in comp for year C) ER contribs cannot discriminate in favor of HCEs D) ER contribs can be discretionary from year to year but plan doc must specify allocation formula E) each EE must be fully vested at all times F) must give unrestricted withdrawal rights to EEs G) may not require EE to leave some or all contribs in the SEP as a condition to earn future ER contribs H) EGTRRA increased % of comp allowance from 15% to 25% beginning in 2002, Sec. 415 limit to lesser of 100% of comp or $40K, & amount allocated or contributed by ER in total may not exceed Sec. 415 limits. EE may make IRA contribs and it's not aggregated with SEP contribs for 25% or Sec.415 limits I) top heavy provisions apply, but ER can elect to measure aggregate ER contribs instead of aggregate account balances to test the 60% limit J) cannot permit EE loans since plans are IRAs

ER administrative issues for SIMPLEs

A) must advise EEs of right to make salary reduction contribs & contrib alternative if elected by ER B) EE notification must include SPD < plan election period C) ER must submit elective deferrals to financial institution <=30 days after last day of month for which contribs made D) matching contribs due for deposit by due date of ERs tax return E) ER Makes contribs for EEs to a designated trustee or issuer F) participants must be notified that account balances may be transferred to another individual account or annuity

SIMPLE Trustee administrative issues

A) must annually provide ER with summary description with certain required info B) individual participants must be supplied with account statement with activity & balance within 30 days of calendar year end C) must file with secretary of the treasury. Failure = $50/day penalty

Administrative issues ERs avoid with SIMPLEs

A) not required to file annual reports B) SIMPLE 401(k) not subject to nondiscrimination & top-heavy rules; exempted from ADP & ACP tests C) relieved of fiduciary liability under ERISA once participant or beneficiary exercises control over account assets

Keogh Loans

Because of EGTRRA 2001, loans are permitted on same basis as QPs. SEPs & SIMPLE-IRAs don't allow loans

ER Contribs

Deductible for ER -Nonelective are deductible in year made -matching are deductible for ER's tax year if contributed by due date (w/ extensions) for ER's tax return

SEP Eligibility

For IRA funded by ER To be treated as a SEP- ER must contribute for each eligible EE. Do not have to make a contrib for members of a collective bargaining agreement or nonresident aliens with no US income

Keogh Death Benefits

If life insurance benefit provided- beneficiary may consider pure insurance portion (excess of face amount over cash value) as income tax-free life insurance proceeds. -Cash value of contract & any other cash distribution is taxable income. -same tax treatment as plan distributions

Keogh DC contribution limits

Lesser of 100% of participant's compensation or $51K in 2013 (indexed in $1K increments) -For self-employed, DC "comp" is self-employed person's "earned income from self-employment" less 1/2 of the self-employment tax (not to exceed $255K in 2013) DC Keogh Contrib = [Keogh contrib rate X (earned income - 1/2 self-employment taxes)] / (1+Keogh contribution rate)

Deduction of SEP contribs

May not exceed actual contrib to the extent that contribs for each EE do not exceed 25% &/or Sec. 415 limits -If ER contributes more than deductible amount, ER can carryover excess deduction to succeeding taxable years. -10% excise tax applies to nondeductible contribs

SEP ER contribs

Must bear a uniform relationship to total comp <=$255K -integration with social security is allowed under "permitted disparity" rules

Keogh (HR-10) plans

Plans for the self-employed

Keogh DB contribution limits

Same limit as corporate pension plans- lesser of 100% of average of participant's highest 3 consecutive calendar years of earnings or $205K in 2013 (indexed in $5K increments)

SIMPLE plans

Small Business Protection Act of 1996 instituted to create a retirement savings vehicle for small ERs that was not subject to complex rules w/ QPs (nondiscrimination & top-heavy)

Keogh rollovers

Tax-free rollovers from Keogh to an ER sponsored plan, 403(b), governmental 457(b), or IRA are permitted.

Taxation of Keogh distributions

Taxable in same fashion as if made from a corporate ER plan -periodic payments taxed as ordinary income -simplified method under SBJPA '96- non-taxable component of each year's distinction =nontaxable investment in contract a doc annuity start date/ # of anticipated payments to be received according to a table

Keogh eligibility requirements

a) only sole proprietor (not common law EE) or partnership (not individual partner) can establish b) if owner-employee wishes to establish & participate- must cover all EEs >=21 & with 1 year of service. 2 years if 100% vesting c) must meet same nondiscrimination coverage & participation requirements as other QPs