The Power of Regular Contributions, a/k/a Exponential Growth, on Retirement Savings as an Infographic

Exponential Growth

Posted In 401(k) Plans , Infographics
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IRS Establishes Pilot Penalty Relief Program for Late Form 5500 - EZ Filings

That's the collective sigh of relief by those business owners who, for whatever reason, haven’t filed Form 5500-EZ for their retirement plans.

It's a big deal especially for those business owners with so-called Solo-K plans.

401(k) plans were introduced in 1978, but it took a tax change starting in 2002 to allow business owners to contribute substantially more that they would with IRAs, SIMPLEs, and SEPs.

Those new rules applied to both incorporated and unincorporated businesses. Any business that employs only the owner and his or her spouse is a candidate-including C corporations, S corporations, single member LLCs, partnerships and sole proprietorships.

Now practically every major financial service company, e.g., insurance companies, brokerage firms, and mutual funds, offers a low cost Solo 401(k) plan. So far so good.

There’s a flashing yellow compliance light. A Solo-K like a regular 401(k) plan must meet certain ERISA and Internal Revenue Code requirements. And one of those requirements is the obligation to file Form 5500-EZ if plan assets exceed $250,000 even if the business owner (and spouse) are the only participants.

Sometimes that requirement gets lost in translation, and a self-employed or small business owner whose plan exceeds that threshold doesn’t file the return. It may be because he or she missed the filing after being exempt for several years before the $250,000 threshold was crossed, or just didn’t get or read the memo.

Form 5500-EZ is due no later than 7 months after the end of the plan year unless extended 2 ½ months. If not filed timely – or at all – the IRS can assess substantial penalties, i.e., $25 per day, up to $15,000 per return.

Relief, however, is available to those plans covering more than just business owners. These plans can take advantage of the Department of Labor's Delinquent Filer Voluntary Compliance (DFVC) program. Penalties are capped at $750 for one delinquent Form 5500 and $1,500 for more than one year, however many years are involved. Many employers take advantage of the DFVC program.

Until recently, business owners were out of luck since they were not eligible for the DFVC. But on May 9, 2014, the IRS published Rev. Proc. 2014-32 establishing a temporary one-year Pilot Program providing administrative relief from the imposition of penalties for failure to timely file Form 5500-EZ and similar filers.

If you’re a business owner who hasn’t filed your retirement plan’s Form 5500-EZ, the meter is ticking. The relief provided under this revenue procedure becomes effective June 2, 2014 and will remain in effect until June 2, 2015.

Image: Phew bumper stickers and other Phew gifts are available at Zazzle.

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans
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The New Health Care Tax Credit: Another Reason to Get Worker Classification Right

Independent contractor vs. employee is an issue that never seems to go away for many employers. 

It's been a regular topic on this blog since 2007.

Now there’s a new concern about employee classification on the horizon. It’s an outgrowth of the Affordable Care Act.

Case in point: “small employers” who may be eligible for a small business tax credit to help cover the cost of providing health insurance benefits to employees. Before we get to the details, let's start with the basics.

Worker Classification Enforcement

Simply stated, an independent contractor is a self-employed person who is hired by a company or individual to perform a specific task. They are not employees of the company, and don't receive  a paycheck, don't have taxes withheld, and don't receive benefits. Employees, on the other hand, do on all three counts.

Of course, it's not that simple. Whether a worker is an independent contractor or employee is determined by the ubiquitous legal concept: "facts and circumstances".

Thus, it's subjective depending which of the enforcement agencies are involved, i.e., the Internal Revenue Service, the Department of Labor, and the various States. Each of which can have their own definition of what constitutes an independent contractor. The financial consequences of worker misclassification can be costly.

The IRS focuses on back taxes and penalties and whether workers should be included in retirement plans. The Department of Labor wants to know whether workers should be classified as employees and eligible for overtime, minimum wage and other rights under the Fair Labor Standards Act. The States are looking to see if employers are liable for workers compensation and unemployment taxes.

The Small Business Health Care Tax Credit

Now enter the new tax credit under the Affordable Care Act. into the employee classification mix. You can find the details here.

The key point here is this: An employer may qualify for an employer health care tax credit if it employs fewer than 25 full-time equivalent employees making an average of about $50,000 a year or less. The tax credit can be worth up to 50% of an employer's contribution toward employees' premium costs, and up to 35% for tax-exempt employers.

Rick Norris, a Los Angeles-based CPA, sees a potential problem. He asks the question, The Health Care Act Tax Credit: Another Battleground in the Employee/Independent Contractor Classification War? in a recent issue of  Health Care Reform Magazine.

Here's what he says,

The law seems cut and dry, but could become complicated as the IRS set out on its mission to redefine “employee.” Take for example, an employer who employs 10 full time employees who earn less than $25,000. Since the employer pays over 50% of the employees insurance premiums, it seems that the employer should be entitled to the full Health Care Act tax credit in 2010. Two years later, the IRS performs a payroll audit and finds that the employer paid an additional 10 salespersons approximately $50,000 each and treats them as independent contractors. To the dismay of the employer, the IRS reclassifies the ten as employees and assesses heavy payroll taxes, penalties and interest on the employer for 2010 and 2011.

The next question, however, is does this reclassification invalidate the employer’s Health Care Act tax credit, assuming the ten employees push him above the eligibility thresholds?

Or, in a similar scenario what if the federal or state labor boards, instead of the IRS, audit the employer and find him in non-conformity with the labor laws by classifying employees as independent contractors as opposed to employees? Will that trigger a recapture of the Health Care tax credit taken on the business tax returns, along with penalties and interest?

My conclusion is the same as Rick's. If you have any concerns about how you are classifying workers; consult with your tax advisor. Even if you think you’re on solid ground, consider a periodic review of how you classify your workers.  

Image: TaxCalcUSA.

Posted In Affordable Care Act , Independent Contractor or Employee
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Looking at 2013 401(k) testing in the rear view mirror

We just drove past it.

The “it” is the March 15 deadline for 401(k) testing to determine whether Highly Compensated Employees (“HCEs”) contributed more than the IRS allows when compared to the Non-HCEs.

Looking back, some 401(k) plans passed. Other did not. The ones that did not had some decisions to make. They could

  • Return the excess deferrals to the HCEs, or
  • Make a fully vested contribution called a Qualified Non-Elective Contribution (“QNEC") to Non-HCEs in an amount sufficient to pass the 401(k) discrimination test

It could be an easy decision. Take the case of one employer who who had the choice of 1) returning approximately $17,000 in excess deferrals plus earnings to the HCEs; or 2) making a $150,000 QNEC contribution to NHCEs. The decision, of course, was Option 1.

For other employers, the options could be reversed. That is, a relatively small QNEC eliminates the need to return any contributions to the HCEs.

And for other employers, some place in between.

That was 2013 in the rear view mirror. Time to consider the road ahead and what can be done to avoid returning 401(k) contributions to the HCEs. Here are a few options for employers in this situation to consider:

Safe Harbor Contribution

Subject to IRS rules, an employer can automatically pass the 401(k) discrimination test, i.e., no returns to HCECs, if the employer makes one of two kinds of safe harbor contributions. Either 3% of compensation to all eligible employees, or a matching contribution of 100% up to the first 3% of contributions, 50% up to the next 2% or contributions with a 4% maximum.

Unfortunately, it would also be looking in the rear view mirror for 2014. In order to have a Safe Harbor plan, an employer must provide notice to the employees not more than 90 days, nor less than 30 days prior to the start of the plan year. Thus, December 1, 2014 is the notice deadline to have a safe harbor plan in 2015.

Targeted Employee Communication.

The objective here, of course, is to increase participation by the Non-HCEs to minimize or eliminate returns to the HCEs. This may require different communication methods based on the specific demographics of the plan. It may not be socio-economics that drives the communication methods. It may be generational. For the first time in our history, there are four generations in the workforce.

Automatic Enrollment.

Simply stated, the employer automatically enrolls employees at a specific contribution level. While employees have the option to opt out, only about 10 actually do. Part of the Pension Protection Act of 2006, automatic enrollment has been slow to catch on with the employers. But, with the growing realization that retirement readiness is a significant problem, more employers are adopting it.

Implementing automatic enrollment doesn’t have to be a daunting process. It can be made simpler using resources available from the aptly named Retirement Plan Simpler.

There are no guarantees that either targeted employee communication or automatic enrollment will be successful in increasing employee participation. But even if either one increases employee participation by just a little bit, that’s not such a bad thing is it?

Any resemblance between this March 15 and the Ides of March is purely coincidental.


Posted In 401(k) Plans
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The Retirement Income Crisis as an Infographic

SEP: The Procrastinators Pension Plan

Every year about this time, as we get closer to tax filing time, I get a few calls from those business owners who couldn’t quite get around to setting up a retirement plan before the end of the year. They ask the question with not a lot of hope in their heart: “Can I still set up a retirement plan for last year?”

Fortunately for them, there is such a possibility. I call it the "procrastinator’s pension plan,” but you probably heard of it under the name that Congress gave it: Simplified Employee Pension (SEP), which is an IRA-based retirement plan that a business owner can adopt for a prior year. Here are a few of the details:

  • Any employer can set up one up using IRS Form 5305-SEP.
  • No filing fee is required.
  • It must be offered to all employees who are at least 21 years of age, employed by the employer for three of the last five years and had compensation of $550 for 2012 and for 2013.
  • Only employer contributions can be made in an amount not to exceed 25% of compensation or $51,000.
  • Contributions must be immediately 100% vested.

As you can see, it’s not as nearly as flexible as a traditional profit sharing or 401(k) plan, but, hey, it can be done now.

“Now” means that the business owner has to establish and fund the SEP by the due date of his or her 2013 business tax return, including extensions. For calendar year tax payers, the due date depends on the type of business organization:

  • Sole Proprietorship reporting on Schedule C of Form 1040: April 15, 2014 (Oct. 15, 2014 if an extension is filed)
  • Partnership filing Form 1065: April 15, 2014 (Sept. 15, 2014 if an extension is filed) if you file for an extension)
  • Corporation filing Form 1120 or 1120S: March 15, 2014 (Sept. 15, 2014 if an extension is filed).

There are a lot more details, of course, and taxpayers should talk this over with their tax advisers now. Time is running out.

You can order the T-shirt pictured above from Skreened if you get around to it. 

This post originally appeared on the Be Advised Blog of Employee Benefit Advisor for which I am a member of the Editorial Advisory Board.

Posted In 401(k) Plans , Individual Retirement Accounts
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Retirement plan beneficiary designations shouldn't be one and done

What did Amy Winehouse, Jimi Hendrix, Heath Ledger, and Whitney Houston have in common?

No. not just being in the celebrity spotlight, but rather, estate planning done wrong or not at all.

You can add one more celebrity to the list who Darla Mercado writes about in her InvestmentNews article, He needed a script: Actor Philip Seymour Hoffman left a legal mess behind.

Mr. Hoffman, who died February 2, 2014, did have a will that was signed on October 7, 2004. But in the almost 10 years that followed, it became out-of-date because of changing circumstances.

For retirement plan participants changing, or for that matter, changed circumstances, can also affect those beneficiary designations.

There is, of course, ERISA’s spousal consent rule for beneficiary designation which simply stated provides

  • In defined benefit plans and some defined contribution plans, the death benefit for a married participant must be in the form of a spousal annuity unless spousal consent is obtained in another form, a lump sum if it's available.
  • The spousal consent rule also applies to most defined contributions plans, such as 401(k) and profit sharing. The surviving spouse must be the sole and direct beneficiary of the participant unless he or she provides spousal consent subject to special rules.

But sometimes changing circumstances intervene to invoke the Law of Unintended Consequences.

Those changed circumstances could be a divorce, remarriage, birth or death of a loved one,  or even a pre-nuptial agreement. Changes in the law can also impact beneficiary designations such as the recent Supreme Court's Windsor decision.

This decision and subsequent Internal Revenue Service and Department of Labor guidance had the immediate effect of granting same-sex couples who are married under state law the same federal rights, protections, and responsibilities that are afforded to married opposite-sex couples under the Internal Revenue Code and ERISA.

In plain English, it means the Windsor decision affect those situations in which a “spouse” could be involved such as lump sum death benefits, annuity benefits, and spousal consents.

One final note: retirement plan beneficiary designations are not governed by a will.  Retirement plan participants should consult with an experienced attorney about completing beneficiary designation forms as part of an overall estate plan, and then reviewing them on a regular basis. 

Posted In 401(k) Plans , 403(b) Plans , Defined Benefit Pension Plans
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Automatic Enrolment in the United Kingdom: Lessons for the United States

England and America are two countries separated by a common language.
--George Bernard Shaw

It's not just the language that separates us and the British. It's our attitude towards automatic enrollment in retirement savings plans.

Spelling aside, automatic enrolment has been the law in U.K. since October, 2012. Here in the U.S., the Pension Protection Act of 2006 addressed the legal aspects by adding provisions for automatic enrollment and the Qualified Default Investment Arrangement (QDIA), but did not make it mandatory.

We’ve been supporters of automatic enrollment since its inception as an effective way to deal with what everyone now acknowledges as the “retirement savings crisis”.  

But it’s never really taken off in the United States; and now, it may have taken a step back. Robert Steyer writes in Pension and Investments that adoption of automatic enrollment is slowing down (login may be required).

But whether automatic enrollment eventually becomes law in the U.S. as some advocate, e.g., the President's myRA proposal, there are some important lessons we can learn from the nascent British experience.

One of the U.K.'s leading advocates for automatic enrolment is The National Association of Pension Funds (NAPF) "whose membership includes 1,300 pension schemes which collectively manage assets of £900bn ($1.5 trillion U.S.) and provide retirement income for nearly 16 million people".

In October, 2013, the NAPF published a report, Automatic enrolment, one year on, which reviewed the results of their survey of the first year's experience for both employers and employees.

The NAPF reported that employers said:

  • Preparation is the key to successful implementation.In some cases, employers started planning years in advance. Smaller employers need to start planning as soon as possible.
  • Communications are an essential component of automatic enrolment. Employers typically put strong emphasis on clear and engaging communications.
  • The automatic enrolment regulations are too complex. This complexity is a disincentive for employers to go above the minimum.

Employees, they reported, said:

  • They welcome the fact that they have been automatically enrolled. They see pension saving as an important and positive thing to do.
  • Employees are still not very engaged with pensions. Employees rely on their employer to pick a good scheme and manage it for them.
  • Although they are happy to be saving, many employees are aware that the current minimum contribution rates are probably too low. There is an appetite amongst some workers to save more.

Not much different from our own experience with clients who have taken the automatic enrollment route; and, we see success with open enrollment in much the same way. That is, you can't start early enough:

  • Planning
  • Engaging with with service providers
  • Starting the communications campaign

Implementing automatic enrollment doesn’t have to be a daunting process. It can be made simpler using resources available from the aptly named Retirement Plan Simpler, a non-profit coalition of the American Association of Retired People (AARP), the Financial Industry Regulatory Authority (FINRA), and the Retirement Security Project. Their common mission is to encourage savings through automatic 401(k).

Picture credit: scienceprogress blog.

Posted In 401(k) Plans , Automatic Enrollment
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The Venn of the New Business Environment

 Source: If I Had A Hammer, Thomas Friedman, New York Times Op Ed

Posted In Audio/Visuals , Small Business , Whatever
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