New reporting and fiduciary requirements have been mandated due in part to statistics that report up to 83% of employees are unaware they are paying retirement plan fees. New disclosure requirements are intended to make fees more transparent.

Here are some important dates that you should note regarding the new fee disclosures this year:

July 1, 2012: Service providers must furnish in writing the fees they receive either via direct or indirect (revenue-sharing) sources to the responsible plan fiduciaries/401k sponsor. This is an actual agreement that needs to be obtained in writing by plan sponsors that, if ignored, will open up potential liabilities. Service providers not supplying this disclosure will be subject to the prohibited transaction rules which in turn will cause issues and potential excise tax or penalties for plan sponsors or fiduciaries in 2012.

August 30, 2012: Reporting fees to employees. “The initial annual disclosure of ‘plan-level’ and ‘investment-level’ information—including associated fees and expenses—must be furnished no later than August 30, 2012” to plan participants.

November 14, 2012: The first quarterly statement containing the fees and expenses actually deducted from the participant’s or beneficiary’s account must be sent or made available to the plan participant.

Employers should prepare now to meet the new disclosure requirements as follows:

• Determine which plan service providers are covered by the fee disclosure requirements and contact them to acquire service contracts in writing.
• Develop a plan for assessing the completeness and reasonableness of service provider fee disclosures when they are received.
• Clarify with service providers who will formulate, prepare, and distribute specific participant-level fee disclosures information as required.

Please contact us if you have any questions. Additional information can be found at Department of Labor website: http://www.dol.gov/ebsa/newsroom/fs408b2finalreg.html

written by Kathy Hillenburg, CPA, Partner

Phone Usage as a Fringe Benefit
Generally fringe benefits are taxable unless specifically excluded from income by law. The IRS views that personal use of an employer-provided cell phone is essentially an excludable de minimis fringe benefit, meaning its value would be too small to make it administratively worth the effort of collection.

In order for personal use to qualify as a de minimis fringe benefit in this instance, the IRS requires that the employer provide the phone primarily for noncompensatory business purposes and must have substantial business-related reasons for providing the phone. The IRS gave several examples of these reasons, including instances where the employer needed the ability to contact the employee at all times for work-related emergencies. On the other hand, a cell phone provided for morale, good will, or as additional compensation is not be tax-free.

Employer-provided reimbursements
In a separate memo to its field examination operations, officials from the IRS operating divisions issued “audit guidance” to IRS examiners regarding employer reimbursements to employees for the business use of the employee’s personal cell phone. Examiners were instructed to apply the approach of Notice 2011-72 and not assert that the employer’s reimbursement of expenses incurred after December 31, 2009 was taxable.

Effective date
Notice 2011-72 applies to all tax years after December 31, 2009. While the IRS did not discuss the treatment of cell phones before 2010, it is unlikely the agency is eager to challenge the tax-free treatment of cell phones in the ordinary case.

This article addresses some of the more common compliance issues employers’ need to be aware of when operating their 401(k) and 403(b) plans.

Timely deposit of employee contributions
The IRS requires that any payroll amounts withheld for employee contributions to be deposited into the plan’s trust on a timely basis. Deposits deemed to be late by the IRS are subject to both an excise tax and a penalty for lost employee earnings. So it is crucial employers understand what constitutes a timely deposit under the IRS rules.

In prior IRS guidance, employers of all sizes were required to transmit employee contributions to the plan’s trust fund as soon as the amounts could reasonably be segregated from the general assets of the employer, but no later than the 15th business day of the month following the month in which contributions were withheld by the employer. However, in recent IRS guidance, plans with fewer than 100 participants are now required to deposit employee contributions within 7-days of withholding, unless the employer can show a “reasonable” basis for needing additional days to make the deposit. It is important to coordinate a schedule with your payroll service to ensure employee contributions are timely deposited into the plan’s trust fund.

Employee deferrals (contributions)
The IRS places a limit on the amount of 401(k) and 403(b) elective deferrals a plan participant may exclude from taxable income each year. For 2011, participants under the age of 50 can defer up to $16,500 ($17,000 for 2012), while participants age 50 and older can defer up to $22,000 ($22,500 for 2012).

Employers need to ensure that participant deferrals do not exceed the IRS dollar limits. If a plan participant’s elective deferral does exceed the limit allowed, then the excess amount, plus applicable earnings, must be distributed to the participant by April 15 of the year following the year in which the excess occurred.

Notification to Eligible Employees
Your plan document provides specific requirements for when employees become plan participants eligible to make contributions into your retirement plan. Every employee who received a W-2 for the year should be scrutinized to determine who is eligible to participate. Those employees who are eligible to participate should receive the following forms and notices:

• Payroll Deferral Election Form
• Summary Plan Description
• Safe Harbor Notice, if applicable
• Beneficiary Form

It is highly recommended that each and every eligible participant complete a Payroll Deferral Election Form, including all eligible participants who do not wish to contribute to the plan. This procedure prevents an eligible participant who does not contribute to the plan, from later claiming that they were not notified of the eligibility to defer.

Basic Fiduciary Responsibilities
Those persons, who often times are the company’s owners, are fiduciaries of the plan with respect to the participants and beneficiaries in the plan. The fiduciary’s responsibilities include:

• Acting solely in the interest of the participants and their beneficiaries
• Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan
• Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with such matters
• Following the plan documents
• Diversifying plan investments

These are the responsibilities that fiduciaries need to keep in mind as they carry out their duties. The responsibility to be prudent covers a wide range of functions needed to operate a plan. And, since all these functions must be carried out in the same manner as a prudent person would carry them out, it may be in your best interest to consult experts in the various fields, such as investments and accounting.

Some decisions with respect to a plan are business decisions, rather than fiduciary decisions. For instance, the decisions to establish a plan, to include certain features in a plan, to amend a plan and to terminate a plan are business decisions. When making these decisions, you are acting on behalf of your business, not the plan, and therefore, you would not be a fiduciary. However, when you take steps to implement these decisions, you (or those you hire) are acting on behalf of the plan and thus, in making decisions, are acting as fiduciaries.

Fidelity Bond
The Department of Labor requires employer sponsored plans to carry a fidelity bond, in the name of the plan, in order to cover any potential loss against those individuals handling funds of the plan. The fidelity bond amount needs to be at least 10% of plan assets, up to a maximum bond amount of $500,000. Please review your fidelity bond policy to ensure it is updated with the required coverage amount.

Summary
Every year it is important to take the time to review the operation of your company’s retirement plan, in order to ensure it is in compliance with the ever changing IRS’s rules. This article provides only a brief discussion of just a few of the compliance issues you may face when operating your company’s retirement plan. You can count on The Whitlock Company to ensure compliance is effortless. Contact us with any questions about your employer sponsored retirement plan.

Written by Kevin Hogan, CPA, CMA
Kevin specializes in tax consulting for businesses and individuals. Including employee benefit plan accounting and administration, specific expertise in qualified retirement plans and cafeteria plans. His education includes a B.S. in accounting and business administration from the University of Kansas. Kevin also earned a M.B.A. from the University of Kansas and a Master’s degree in Tax from Northern Illinois University.

Reporting
Employers must to provide each employee with a Form W-2 annually by January 31 of the following tax year. For example, 2010 Forms W-2 must be provided to employees by January 31, 2011.

The Patient Protection and Affordable Care Act of 2010 (PPACA) adds more reporting requirements. The PPACA requires that the aggregate costs of employer-provided health insurance be reported on Forms W-2.

Deferral
The reporting requirement will not be mandatory for Forms W-2 issued for the 2011 tax year. The IRS will not impose penalties on an employer that fails to report the cost of employer-provided health insurance on Forms W-2 issued for 2011.

Aggregate cost
Employers must report the aggregate cost of employer-provided health insurance. Aggregate cost means that an employee who, for example, has health, dental and eye insurance coverage is provided the total cost and is not given a breakdown of each type of coverage. Reporting does not apply to the costs of long-term care, accident insurance, disability income insurance, or indemnity insurance.

Information purposes
The IRS stressed that the amounts to be reported on Form W-2 are not taxable. The new reporting requirement is intended to be for information purposes only and to provide employees with greater transparency into overall health care costs.

Revised Form W-2
The IRS must revise Form W-2 to reflect the new reporting requirement. The IRS has posted a draft version of revised Form W-2 on its web site.

Please contact us if you have any questions.

1. Payroll deduction IRAs
Many small employers find a payroll deduction IRA very attractive because it allows them to offer their employees a retirement savings vehicle at little cost. A business of any size, even self-employed individuals, can establish a payroll deduction IRA. Under a payroll deduction IRA, only your employees make contributions to an IRA. Your responsibility as an employer is simply to transmit the employee’s authorized deduction to the financial institution that maintains the IRA.

The IRA is set up with a financial institution, such as a bank, mutual fund or insurance company. You can limit the number of IRA providers to as few as one. The employee establishes a traditional IRA or a Roth IRA (based on the employee’s eligibility and personal choice) with the financial institution and authorizes the payroll deductions. As the employer, you withhold the payroll deduction amounts authorized by your employees and send the funds to the financial institution.

An employee’s decision to participate in a payroll deduction IRA is entirely voluntarily. If an employee decides to participate, he or she can only contribute up to a certain amount to the payroll deduction IRA every year. For 2010, the contribution limit is $5,000. An employee age 50 or older may make an additional “catch-up” contribution of $1,000 for a yearly total of $6,000. Every employee who participates is 100 percent vested in the contributions to their payroll deduction IRA.

Let’s look at an example of a payroll deduction IRA:
Aidan’s employer offers its employees the opportunity to have deductions taken from their paychecks to contribute to IRAs that the employees have set up for themselves. Aidan signs up for the program and has $100 from his $1,000 bi-weekly paycheck deposited into his IRA for a yearly total of $2,600. At the end of the year, Aidan’s employer would report the full $26,000 he earned on his Form W-2 and Aidan would add the $2,600 to any other IRA contributions he made during the year for Form 1040 deduction purposes.

The costs of a payroll deduction IRA are low. Moreover, payroll deduction IRAs are not subject to the often complex filing, documentation and administration requirements that are imposed on other employer-sponsored retirement arrangements, such as 401(k) plans.

2. SEP Plans
“SEP” stands for “Simplified Employee Pension” plan. While there are filing, administration and documentation requirements for SEP plans, the goal of an SEP plan is to keep these as simple as possible. The IRS has created, for example, model SEP language for plan documents.

An SEP plan is similar to a payroll deduction IRA. Under an SEP plan, employers make contributions to traditional IRAs set up for employees (including self-employed individuals). An SEP-IRA is funded solely by employer contributions whereas a payroll deduction IRA is funded solely by employee contributions.

As the employer, you must select the financial institution for your SEP. This decision must be made carefully because you and the financial institution will very work closely to administer the plan. After you send the SEP contributions to the financial institution, the financial institution will manage the funds. Depending on the financial institution, SEP contributions can be invested in individual stocks, mutual funds, and other similar types of investments.

Federal law requires you and the trustee to keep employees informed about the administration and health of the SEP. Employees must be provided with plan documents, an annual statement that reports the fair market value of each employee’s account and a copy of an annual statement that is filed by the financial institution with the IRS. Like a payroll deduction IRA, each employee is 100 percent vested in his or her SEP-IRA.

Generally, the annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of:
– 25 percent of compensation,or
– $49,000 for 2010.

Generally, contributions are not required to be made every year to an SEP. In years that contributions are made to an SEP, they must be made to the SEP-IRAs of all eligible employees. Contributions to an SEP-IRA must be made in cash; property cannot be contributed to an SEP-IRA. Special rules apply if you, as the employer, also contribute to a 401(k) or similar plan on the employee’s behalf.

All eligible employees must be allowed to participate. An eligible employee is any employee who is at least age 21 and has worked for you in at least three of the immediate past five years.

To encourage employers to establish SEPs, the government offers a tax credit. You may be eligible for a tax credit of up to $500 for each of the first three years for the cost of starting the SEP.

3. SIMPLE IRAs
A “SIMPLE IRA” is a Savings Incentive Match Plan for Employees IRA. Like an SEP plan, a SIMPLE IRA is intended to be easily created and administrated.

A SIMPLE IRA is funded both by employer and employee contributions. As the employer, you can choose either to (1) match the contributions of employees who decide to participate or (2) contribute a fixed percentage of all eligible employees’ pay. Under option (2), which is known as the nonelective contribution formula, even if an eligible employee does not contribute to his or her SIMPLE IRA, you must make a contribution to the employee’s SIMPLE IRA equal to a fixed percent of the employee’s salary. Each employee is 100 percent vested in his or her SIMPLE IRA.

While similar to a payroll deduction IRA, a SIMPLE IRA has additional requirements. One important requirement is the number of employees. Generally, your business must have 100 or fewer employees to be eligible for a SIMPLE IRA.

Let’s look at an example of a SIMPLE IRA. In this example, the employer matches the employee contributions of employees who decide to participate.

Allison’s employer has established a SIMPLE IRA plan for its employees. The employer will match its employees’ contributions dollar-for-dollar up to three percent of each employee’s salary. If an employee does not contribute to his or her SIMPLE IRA, then that employee does not receive a matching employer contribution. Allison decides to contribute five percent ($2,500) of her annual salary of $50,000 to a SIMPLE IRA. The employer’s matching is $1,500 (three percent of $50,000). Therefore, the total contribution to Allison’s SIMPLE IRA that year is $4,000.

There are contribution limits for SIMPLE IRAs. For employees, the annual contribution limit is $11,500 in 2010. Employees age 50 and older may make additional catch-up contributions of $2,500 in 2010.

The SIMPLE IRA contribution for the employer is dependent upon which contribution formula you select. If you decide to make matching contributions, only eligible employees who have elected to make contributions will receive an employer contribution. If you decide to make a nonelective contribution, each eligible employee must receive a contribution regardless of whether the employee makes contributions.

As with an SEP plan, a SIMPLE IRA creates a relationship between you and the financial institution that manages the funds. SIMPLE IRA plan contributions can be invested in individual stocks, mutual funds and similar types of investments. Each participating employee must receive an annual statement indicating the amount contributed to his or her SIMPLE IRA for the year.

As with SEP plans, you may be eligible for a tax credit to help you offset start-up costs. The tax credit can reach up to $500 per year for each of the first three years for the cost of starting a SIMPLE IRA plan.

We’ve covered a lot of material about retirement plans for small businesses. There are more detailed requirements, especially for SEP plans and SIMPLE IRAs, which we can discuss in depth. Please contact us to set up an appointment to explore these and other retirement arrangements for small businesses.

In an effort to improve plan compliance the IRS is sending a questionnaire to 1,200 randomly selected 401(k) sponsors that filed a form 5500 in 2007. The questionnaires were designed to assess compliance with retirement plan regulations. Plan sponsors who receive a letter will complete the Questionnaire by accessing a special Web site.

According to the IRS’s web site the questionnaire categories are:

• Demographics
• 401(k) plan participation
• Employer and employee contributions
• Top heavy and nondiscrimination rules
• Distributions and plan loans
• Other plan operations
• Automatic contribution arrangements
• Designated Roth features
• IRS voluntary compliance programs
• Plan administration

Ultimately the IRS will utilize the information gathered from the questionnaire to publish a report published identifying those areas where additional education, guidance, and outreach is needed; and how the IRS can focus its enforcement efforts to address or avoid non-compliance related to 401(k) plans.

Although the questionnaire is a compliance check, and not an audit or investigation, failure to complete the questionnaire will result in further enforcement action.

The IRS is also stepping up efforts to ensure that retirement plan sponsors are complying with plan audit requirements. Qualified retirement plans with 100 or more participants at the beginning of its plan year is generally required to obtain an audit by an independent Certified Public Accountant unless the plan meets certain exceptions. The IRS has found that many plans are not complying with the audit requirements and as begun an effort to step up its enforcement in this area.

Failure to comply with the numerous rules and regulations surrounding retirement plans can result in disqualification of the plan’s tax exempt status and significant penalties. For instance, failure to file a required 5500 can, in some circumstances, result in a penalty of up to $1,100 per day for each day the filing is late. Willful violations can even result in criminal charges with fines up to $100,000 and imprisonment upon conviction. Please contact us if you have any questions about this project.

By Joe Page, CPA, CFE, The Whitlock Company

The credit is designed to encourage smaller not-for-profit entities with low to moderate income employees to provide health care coverage for its employees. While the eligibility rules restrict the credit to relatively small organizations with low to moderate wages, the credit can be significant and possible allow the organization to provide health care benefits when it might otherwise be unable to do so.

To be eligible to receive the credit the small business or not-for-profit entity must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate. The small business or not-for-profit entity must have less than 25 full time equivalent employees and average annual wages must be below $50,000.

The credit is worth up to 25 percent (increasing to 35 percent in 2014) of the health care coverage premium costs of not-for-profit entities. The credit is phased out for firms with average annual wages between $25,000 and $50,000 and for firms with between 10 and 25 full time equivalent workers.

The credit is non-refundable and can be claimed against the not-for-profit entity’s payroll taxes.

Example (from www.irs.gov) – Not-for-profit entity with 9 employees each earning an average of $22,000 for total gross wages of $198,000 and paying a total of $72,000 in employee health care costs. The credit would be 25% of the $72,000 health care cost or $18,000.

If you believe your organization may qualify for the credit or would like additional information, please contact one the Whitlock Company employee benefit plan specialists.

By Joe Page, CPA, CFE, The Whitlock Company

Shared Responsibility
The health care reform package describes health insurance coverage as “shared responsibility.” Individuals, employers, the federal government, and the states all have roles to play in guaranteeing that individuals do not lack minimum essential health insurance coverage.

The health care reform package assumes that employer-provided health insurance will continue to be the primary means of delivering coverage after 2013. The health care reform package includes measures that lawmakers hope will keep premium costs down along with tax incentives, so employers continue to offer health insurance. For larger employers (those with 50 or more employees), that “encouragement” is also combined with penalties if alternate health insurance is not offered.

Millions of Americans are also currently covered by Medicaid, Medicare and other government programs. They will continue to be covered by these programs after 2013. Indeed, some of these government programs will be expanded between now and 2013, covering more individuals.

Individual Responsibility
Beginning in 2014, the health care reform package imposes a penalty on individuals for each month they fail to have minimum essential health insurance coverage for themselves and their dependents. Another name for the penalty is “shared responsibility payment.”

As a baseline, all individuals without minimum essential health insurance coverage will be liable for the penalty. However, the health care reform package expressly excludes certain individuals from liability for the penalty. They include:

• Individuals whose household income is below their income thresholds for filing a federal income tax return
• Individuals who are exempt on religious conscience grounds
• Individuals whose contribution to employer-provided coverage exceeds a threshold percentage
• Hardship cases
• Native Americans
• Undocumented aliens
• Incarcerated individuals
• Individuals with short lapses of minimum essential coverage
• Individuals covered by Medicare, Medicaid and other government programs
• Certain individuals outside the U.S.

Amount of Penalty
The monthly penalty after 2013 is 1/12 of the flat dollar amount or a percentage of income, whichever is greater. For 2014, the flat dollar amount is $95 and the percentage of income is one percent. The flat dollar amount rises to $695 in 2016 (indexed for inflation thereafter) and the percentage of income increases to 2.5 percent.

For individuals under age 18, the flat dollar amount is 50 percent of the amount for adults. Generally, a family’s total penalty cannot exceed $285 for 2014 (rising to $2,085 by 2016) or the national average annual premium for the “bronze” level of coverage through a state insurance exchange. By 2014, each state must establish an insurance exchange where individuals can shop for health insurance coverage. The exchanges will have four levels of coverage: bronze, silver, gold, and platinum.

Example. Ana, age 38, is self-employed with a modified adjusted gross income (AGI) of $68,500 for 2014. Ana does not have minimum essential coverage for all 12 months of 2014 and is not exempt from carrying minimum essential coverage because of income or other qualifying reasons. Ana will be liable for a penalty of the greater of $95 or one percent of her modified AGI.

Example. Ana’s mother, Barbara, is enrolled in Medicare. Barbara has minimum essential coverage because she is enrolled in Medicare and is not liable for a penalty.

Health Insurance Tax Credits
At the same time the individual responsibility requirement kicks in, the health care reform package provides a refundable health insurance premium assistance tax credit to qualified persons. The premium assistance credit will operate on a sliding scale based on an individual’s relationship to the federal poverty level (between 100 and 400 percent).

The healthcare reform package makes the premium assistance tax credit refundable and also provides for advance payment of the credit. Advance payment will be made to the health plan in which the individual is enrolled.

Adult Children
There is one important change regarding individual coverage for 2010. Effective September 23, 2010, the health care reform package enables more young adults to remain on their parents’ health insurance policies. Generally, employer-sponsored group health plans will be required to provide coverage for adult children up to age 26 if the adult child is ineligible to enroll in another employer-sponsored plan. The health care reform package also extends the employer-provided health coverage gross income exclusion to coverage for adult children under age 27 as of the end of the tax year.

Guidance
The IRS, the U.S. Department of Health and Human Services and other federal agencies are expected to issue extensive guidance on the individual responsibility mandate. We will keep you posted on developments.

We will contact you soon with more information and instructions on how to register with the DOL. Click here to learn more.

By Kathy Hillenburg, CPA – Manager

Reduced premiums
Individuals who are involuntarily separated from employment between September 1, 2008 and February 28, 2010 may be able to make reduced premium payments for COBRA continuation coverage. Instead of paying the full monthly premium, assistance eligible individuals pay 35 percent of the premium and their former employers pay the remaining 65 percent of the premium. The former employer is reimbursed by a payroll tax credit.

Extension
Originally, Congress set a December 31, 2009 deadline for eligibility for COBRA premium assistance. The 2010 Defense Act extended the deadline for eligibility to February 28, 2010. The 2010 Defense Act also extended the maximum period for receiving the subsidy an additional six months (from nine to 15 months).

In some cases, an individual may have exhausted his or her nine months of COBRA premium assistance before Congress approved the extension. The 2010 Defense Act provides an extended period for the retroactive payment of the individual’s 35 percent payment. To continue coverage, the assistance eligible individual must pay the 35 percent of premium costs by February 17, 2010 or, if later, 30 days after notice of the extension is provided by their plan administrator.

In other cases, an individual may have exhausted his or her nine months of COBRA premium assistance and paid 100 percent of the COBRA premium for December. Individuals who paid the full COBRA premium in December are entitled to a refund under the 2010 Defense Act.

Automatic
Individuals who qualify for COBRA premium assistance are automatically eligible to pay reduced premiums for up to six more months for a total of 15 months. The individual must continue to be eligible for the subsidy. If he or she becomes eligible for other group health coverage (such as a spouse’s plan) or Medicare the individual is no longer eligible for COBRA premium assistance.

Income limits
Higher-income individuals may qualify for COBRA premium assistance but find they have to repay it. If an individual’s modified adjusted gross income for the tax year in which the premium assistance is received exceeds $145,000 (or $290,000 for married couples filing a joint return), the amount of the subsidy during the tax year must be repaid. For taxpayers with adjusted gross income between $125,000 and $145,000 (or $250,000 and $290,000 for married couples filing a joint return), the amount of the premium reduction that must be repaid is reduced proportionately.
Higher-income individuals may permanently waive the right to COBRA premium assistance. However, they may not later obtain the subsidy if their adjusted gross incomes end up below the limits. We can help you decide which option is best.

Possible extension
Many lawmakers in Congress support extending eligibility for COBRA premium assistance beyond February 28, 2010. In fact, the House of Representatives approved a bill in December extending eligibility through June 30, 2010. However, the Senate has yet to vote on the bill.