BUSINESS - RETIREMENT PLANS Flashcards
HCE
HIGHLY COMPENSATED EMPLLOYEES
- Owned more than 5% of the interest in the business at ANY TIME during the current or preceding year (regardless of compensation)
OR
- Received compensation from the employer in excess of the threshold amount during the look-back year, and if the employer so elects, was in the top 20% of employees when ranked by compensation.
2019 Compensation Threshold
$125,000
Look-back Rule
an individual earning more than $125,000 in 2019 is an HCE for 2020 calculations.
If an employer elects to use the 20% rule, some individuals with compensation above the $125K limit may NOT be considered highly compensated.
Excludable Employees
Employers are NOT required to cover the following employees under a SIMPLE or SEP IRA plan:
- Employees who are covered by a union agreements and whose retirement benefits were bargained for in good faith by the employer’s union and employer.
- Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from employer.
Compensation
Compensation for plan allocations is the pay a participant received from the employer for personal services for a year.
This includes:
- Wages and salaries
- Fees for professional services.
- Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to commissions, tips, fringe benefits, and bonuses.
Compensation for the Self-Employed
A SE TP must make a special computation to determine compensation for purposes of retirement plan contributions and deductions for his own account. Compensation is net earning from self-employment, REDUCED by the total of:
- The deduction for the employer-equivalent portion of self-employment tax.
- The deduction for contributions on own behalf to the plan.
Annual Compensation Limit
The maximum amount of compensation the employer may consider when determining contributions and benefits for an employee in 2019 is:
$280,000.
This limit also applies to non-salary-deferral contributions to a 403(b) plan and a SEP IRA.
Catch-up Contribution
A plan can permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions in addition to elective deferrals and SIMPLE plan salary reduction constributions.
- The 2019 catch-up contributions limitation for defined contribution plans OTHER than SIMPLE plans is $6,000.
- The catch-up contribution limitation for SIMPLE plans is $3,000 for 2019.
LOANS
Loans are NOT permitted from IRA’s or from IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRA plans.
Loans are only possible from qualified plans that satisfy the requirements of §401(a), from annuity plans that satisfy the requirements of §403(a) or 403(b), and from governmental plans. (Code §72(p)(4); Reg. §1.72(p)-1, Q&A-2)
COLA
Cost-Of-Living Increases
Retirement plan Contribution Limitations
Tax Law places limits on the dollar amount of contributions to retirement plans and IRAs and the amount of benefits under a pension plan.
IRC Section 415 requires the limits to be adjusted annually.
SEP-IRA
Simplified Employee Pension - Individual Retirement Arrangement
a simplified method for employers to contribute to a retirement plan for themselves and employees.
Under SEP, and employer can contribute to a traditional IRA (SEP-IRA) for each employee.
A SEP can NOT be a Roth IRA.
A SEP-IRA is one the employee owns and controls.
The employer contributes directly to the financial institution that maintains the SEP-IRA.
Establishing a SEP Plan
Needs to be set up by the employer by the due date of the Income Tax Return for that year. (Extensions NOT included)
- A formal written agreement must be executed. This can be satisfied by adopting the IRS model SEP using Form 5305-SEP
- Each eligible employee must receive info about the SEP.
- A SEP-IRA must be set up for each eligible employee.
SEP-IRA Eligible Employee Requirements
- 21 years or older
- Employee has worked in at least 3 of the last 5 years.
- Employee has received at least $600 in compensation from the employer in 2019.
SEP-IRA Contributions
Employees CAN NOT contribute to a SEP IRA.
Annual employer contributions are NOT mandatory.
All contributions must be based on a WRITTEN Allocation Formula and must not discriminate in favor of HCEs.
Contributions must be made to ALL participants who actually performed personal services during the year. This includes employees who DIE or who TERMINATE EMPLOYMENT before contributions are made.
Contributions are made as a percentage of each employee’s compensation. The percentage MUST be the same for all employees.
Self-Employed TP contributions
A Self-Employed TP can contribute to a SEP-IRA established on his own behalf.
Contributions MUSt be in the form of money, not property.
Employer Contribution limitation to SEP-IRAs for 2019
Contributions can NOT exceed the lower of 25% of the employee’s compensation or $56K.
Compensation generally does not include the employer’s contributions to the SEP.
Self-Employed Compensation - Special Computation
The deduction for contributions to the SEP-IRA and net earnings depend on each other.
The deduction for contributions to the TPs SEP-IRA is determined by reducing the contribution rate called for by the plan.
The formula to determine Contribution Percentage is rate/(1+rate).
Figuring the deduction made to one’s own SEP-IRA
Compensation is net earnings from Self-Employment (provided that personal services are a material income-productin factor), reduced by the total of:
- The deduction for the deductible part of Self-Employment tax.
- The deduction for contributions to his own SEP-IRA.
Calculate Net Earnings for SEP and qualified plans
Net Earnings from SE is:
Gross Income from business (provided personal services are a material income-producing factor)
MINUS - allowable business deductions (including contributions to SEP for common law employees)
MINUS - the deduction allowed for the deductible part of S-E tax.
Net Earnings do include Foreign Earned Income and Foreign Housing Costs, which are included in Gross Income as well.
Net Earnings include a partner’s distributive share of partnership Income/Loss.
It does NOT include pass-through income to shareholders of S Corps.
Guaranteed Payments to limited partners are NET EARNINGS from S-E if they are paid for services to or for the partnership.
However, distributions of other income or loss to limited partners are NOT earnings from S-E.
An employer CAN NOT consider the part of an employee’s comp above the 2019 ACL (Annual Compensation Limit) of $280,000 when figuring the contribution limit for an employee.
However, $56,000 in 2019 is the MAX contribution for eligible employees under §415(c)(1)(A).
Excess contributions are included in the employee’s income for the year and are treated as contributions by the employee to his SEP-IRA.
SEP contributions are NOT included on an employee’s Form W-2 unless contributions were made under a Salary Reduction arrangement.
Additionally, if the employer maintains another Defined Contribution plan for employees, the Annual Additions to an account are limited to the lesser of:
$56,000
OR
100% of the participants compensation.
Because a SEP is considered a defined contribution plan for this limit, employer contributions to a SEP must be added to employer contributions to other defined contribution plans. Contributions are 100% immediately vested to the employee.
SAR-SEP (only before 1997)
A Salary Reduction Simplified Employee Pension.
SEPs set up BEFORE 1997 that includes a salary reduction arrangement.
The employee can choose to have the employer contribute part of their pay to their SEP-IRAs rather than receive it in cash.
It is an ELECTIVE DEFERRAL because an employee chooses (elects) to contribute the money and tax is deferred until it is distributed.
SIMPLE
Savings Incentive Match Plan for Employees (SIMPLE IRA)
403(b) Plan
also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.
Not for the Self-Employed individual.
457(b) Plan
A 457(b) is a retirement plan available for employees of certain local governments.
Not for the Self-Employed individual.
Form 5329
Additional Taxes on Qualified Plans (Including IRAs) ) and Other Tax-Favored Accounts
SIMPLE Plan Qualifying Requirements
- 100 or fewer employees
- $5,000 or more employee income
No other Qualified Plans are allowed unless for Union employees (collective bargaining).
SIMPLE IRA must be maintained for at least 2 years from initial contribution, or the additional tax is…
A 25% additional tax of the amount distributed is applied, from the 10% penalty is simply distributed early.
2 Types of SIMPLE Plans
SIMPLE IRA
SIMPLE 401(k)
A SIMPLE Plan can NOT be a Roth IRA.
NOTE: Unlike the SIMPLE IRA, the SIMPLE 401(K) is a QUALIFIED plan.
Date Range when a SIMPLE IRA can be set up by an employee
Jan 1 - Oct 1
Notification to Employee REQUIREMENT
- Their opportunity to make or change a salary reduction choice.
- The employer’s contribution method
- A summary description from the financial institution.
- Written notice that the employee can xfer balance without cost when using a designated financial institution.
SIMPLE Plan Election Period
60-days immediately preceding Jan 1.
This is adjusted if the plan is established mid-year.
A written plan is required to establish a SIMPLE 401(k) or a SIMPLE IRA.
Note: A SIMPLE IRA may opt to use an IRS Model Plan Doc
Form 5304-SIMPLE - employee choice of financial institution
Form 5305-SIMPLE - employer initially designates financial institution.
SIMPLE PLAN Eligibility Requirements
An employee must have received at least $5,000 in compensation during any 2 years preceding the current calendar year, and who can expect to receive $5,000 in the current calendar year.
Employers may use less restrictive requirements if they want to.
SIMPLE PLAN Contribution Limits
Employees - $13,000 in 2019, through salary reductions. It must be a percentage of their compensation.
Max - 100% of compensation up to the dollar limit.
SIMPLE PLAN Contribution Limits with Multiple Plans
An employee participating in multiple SIMPLE IRAs can contribute up to $19,000 to all the plans, with Elective Salary Reductions.
Catch-up Contributions
For employees 50 or older, the catch up addition is $3,000 for 2019.
2 methods for Employer Contributions
The employer MUST match each employee’s salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee’s compensation.
- The employer can lower the matching as low as 1% for not more than 2 years of the 5 year period following the reduction.
- Max matching contribution is always based on the employee’s compensation for the ENTIRE year.
SIMPLE Plan Example:
Olivia’s annual salary is $50,000 and she starts contributing to her employer’s SIMPLE IRA plan on Sept 1. She contributes $1536 through December 31.
Olivia’s employer MUST match her contributions up to 3% of Olivia’s calendar-year compensation, or $1,500 (3% of $50,000). It doesn’t matter that Bob only contributed to the plan during the last 4 months of the calendar year.
The more you know!
2% Non-elective Contribution
The employer MUST make nonelective contributions of 2% of the employee’s compensation up to the annual limit of $280,000 for 2019 for ALL eligible employees, regardless of whether or not the employee chooses to make salary reduction contributions.
Contributions are 100% immediately vested to the employee.
How SIMPLE IRA contributions are Taxed
An employer deducts contributions for employees on its tax return, and employees can exclude these contributions from their gross income.
HOWEVER, salary reduction contributions are subject to FICA and Federal Unemployment (FUTA) taxes.
Matching and non elective contributions are NOT subject to these taxes. Contributions are not subject to Federal Income Tax withholding.
SIMPLE Plan deductions “Tip” for Sole Proprietors and Partners
A sole proprietor or partner CANNOT deduct contributions made to a retirement plan for himself as a business expense, only those made for his common-law employees.
Sole Proprietors and Partners deduct contributions on Form 1040.
What is the common name for a 403(b) Plan
A 403(b) Plan is often called a Tax-sheltered Annuity (TSA)
What is a 403(b) Plan, (AKA TSA)
A 403(b) is a retirement plan for certain employees of PUBLIC SCHOOLs, Tax-Exempt Orgs, and certain Ministers.
Employees can NOT set up their own 403(b) account.
403(b) contribution limits
They are similar to qualified plans, such as the ability to borrow against a balance.
However, it is not necessarily a “qualified plan” for ERISA purposes.
ERISA
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
Types of 403(b) Plan Accounts:
- An Annuity Contract
- A Custodial Account
- A Retirement Income Account for Church Employees.
The MAC to a 403(b) for 2019
- Annual Additional Limit - $56,000 or 100% of Compensation for the most recent year (whichever is LESS)
- The Elective Deferral Limit - An employee may generally contribute up to $19,000.
Participants with at least 15 years of service can add an additional $3,000.
50 or older catch-up is $6,000.
MAC
Maximum Amount Contributable
