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.

These plans all maintain separate accounts for their participants. All of these plans are subject to annual limits on voluntary employee contributions, which apply per participant, not per plan. The normal limit for both 2009 and 2010 is $16,500 or the employee’s compensation, if less. Employer limits may reduce the $16,500 amount.

Contributions to a 401(k), 403(b) or 457 plans must be made by the end of the calendar year to apply against that year’s limit. Generally, employees can change the amount or rate of salary reduction contributions by making an election at any time during the year.

Catch-up contributions

For most plans, the limit increases in the year that the employee will turn 50. The increased limit applies even if the employee terminates employment or dies before actually turning 50. The increased limits are known as “catch-up” contributions. Catch-up contributions are additional elective deferrals made by eligible participants above the normal applicable limit. However, a catch-up contribution does not mean that the employee can take an unused limit from an earlier year and catch-up; the catch-up contribution is based on the higher limits allowed to older individuals.

A plan does not have to allow catch-up contributions. There are statutory limits on catch-up contributions, adjusted for inflation each year. For 401(k), 403(b), and 457 plans, the maximum catch-up contribution for both 2009 and 2010 is $5,500. The employer cannot reduce the catch-up limit. Adding the catch-up limit produces a potential overall limit of $22,000 on voluntary contributions by a 50-year old employee. Excess contributions have to be included in income (if not withdrawn in time), plus they are subject to a 10 percent penalty.

IRAs

For an IRA, there is a separate regular limit of $5,000 for 2009, up to the amount of the individual’s compensation, and a separate catch-up limit of $1,000 for an individual who turns 50 by the end of the year. An IRA contribution can be made by the due date of the year’s tax return in the following year (not including extensions). So the deadline is April 15 of the following year. There also are penalties for an excess contribution to an IRA.

What’s so attractive about a Roth IRA? Here’s a summary: 

• Earnings within the account are tax-sheltered (as they are with a regular qualified employer plan or IRA).
• Unlike a regular qualified employer plan or IRA, withdrawals from a Roth IRA aren’t taxed if some relatively liberal conditions are satisfied.
• A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 1/2 as is generally the case with regular qualified employer plans or IRAs. (For 2009, there’s a moratorium on RMDs.)
• Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings (as with a regular qualified employer plan or IRA) and tax-free withdrawals (unlike with a regular qualified employer plan or IRA). They do, however, have to commence regular withdrawals from a Roth IRA after the account owner dies.

The catch, and it’s a big one, is that the rollover will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that wasn’t taxed to an employee when contributed to the qualified employer sponsored retirement plan) and the earnings on those pre-tax dollars. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you’ll owe $28,000 of tax. So you’ll be paying tax now for the future privilege of tax-free withdrawals, and freedom from the RMD rules.

Should you consider making the rollover to a Roth IRA? The answer may be “yes” if: 

• You can pay the tax hit on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you’ll have less money building up tax-free within the account.
• You anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.
• You have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.
• You are willing to pay a tax price now for the opportunity to pass on a source of tax-free income to your beneficiaries.

You also should know that Roth rollovers made in 2010 represent a novel tax deferral opportunity and a novel choice. If you make a rollover to a Roth IRA in 2010, the tax that you’ll owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.

Why on earth would you choose to pay a tax bill in 2010 instead of deferring it to 2011 and 2012? Keep in mind that absent Congressional action, after 2010 the tax brackets above the 15% bracket will revert to their higher pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%. The Administration has proposed to increase taxes only for those making $250,000, but it is difficult to predict who will get hit by higher rates. What’s more, there’s a health reform proposal before the House of Representatives right now that would help finance healthcare reform with a surtax on higher-income individuals.

So if you believe there’s a strong chance your tax rates will go up after 2010, you may want to consider paying the tax on the Roth rollover in 2010.

Here are some ways individuals can prepare now for next year’s rollover opportunity.

(1) Non-high-income individuals who are able to make deductible IRA contributions this year should do so. They’ll reduce their 2009 tax bill and, if they make the conversion to Roth IRA next year, they won’t have to pay back the tax savings until 2011 and 2012.

(2) Individuals who have never opened a traditional IRA because they weren’t able to make deductible contributions (and who never rolled over pre-tax dollars to a regular IRA) should consider opening such an IRA this year and making the biggest allowable nondeductible contribution they can afford. If they convert the traditional IRA to a Roth IRA next year they will have to include in gross income only that part of the amount converted that is attributable to income earned after the IRA was opened, presumably a small amount. In 2010 and later years, they could continue to make nondeductible contributions to a traditional IRA and then roll the contributed amount over into a Roth IRA. However, note that if an individual previously made deductible IRA contributions, or rolled over qualified plan funds to an IRA, complex rules determine the taxable amount.

(3) Some high-income individuals may plan to make large conversions in 2010 but to opt out of the deferral of tax until 2011 and 2012 because they fear they will be in a higher tax bracket in those years than in 2010. These individuals should avoid the standard year-end-planning wisdom of accelerating deductions and deferring income but should, rather, do the reverse in an effort to avoid being pushed into the highest brackets by a large IRA-to-Roth-IRA conversion in 2010. These individuals should be considering ways to defer deductions to 2010, and accelerate income from next year into 2009.

There are many details that should be considered, such as whether the amounts you are thinking of switching to a Roth IRA are eligible for the rollover (technically, they are called “eligible rollover distributions”), whether you can make rollovers from your employer sponsored plan (for example, there are restrictions on rollovers from 401(k) plans), and the tax impact of rolling over amounts that represent nondeductible as well as deductible contributions.

A recent article outlined President Obama’s initiatives to help people increase their savings:

• Make it easier for small businesses to automatically enroll workers in a 401(k) or IRA.
•  Gradually increasing automatic worker contributions over time.
• Allow taxpayers to check a box on their tax return to have their refunds sent to them as savings bonds.
• Make it possible for employees to put payments for unused vacation or sick days into their retirement plan.

Read the full article posted by Web CPA

Four committees, House Ways and Means, House Education and Labor, House Energy and Commerce, and Senate Health, Education, Labor, and Pensions (HELP) have all approved health care reform bills along party lines. The Senate Finance Committee (SFC) is the only committee continuing bipartisan discussions as it continues to slowly draft its health care reform bill.

Excise tax

Although the SFC had been expected to mark up a bill before it recessed in August, this plan fell apart as negotiations broke down over how to pay for health care reform. The SFC has rejected a House-proposed surtax and is alternatively considering imposing an excise tax on insurers. This excise tax would apply to high-cost health insurance plans. Members are reportedly looking at taxing “Cadillac plans” valued at more than $10,000 for individual coverage and more than $25,000 for family coverage.

Surtax

The House is expected to approve a gradual surtax on higher-income individuals to fund health care reform, despite strong opposition from the GOP and some Democrats. The surtax marked-up by the Ways and Means Committee in July would generally start at one percent for single individuals with modified adjusted gross income (AGI) exceeding $280,000 and married couples filing joint returns with modified AGI exceeding $350,000. The proposed surtax would reach 5.4 percent for married couples filing jointly with modified AGI exceeding $1 million and single individuals with modified AGI exceeding $800,000.

Small employers

Bills approved by the House committees and the Senate HELP Committee would mandate that employers offer health insurance to their employees or pay an additional payroll tax. Additionally, employer-provided health insurance would also have to meet certain minimum standards or employers whose plans do not meet the standards would be required to pay a penalty. All of the committees agree to provide relief to small employers but have not agreed on the scope of relief.

The most generous relief proposed to small employers comes from the House Energy and Commerce bill. Employers with annual payrolls of $500,000 or less would be exempt from providing health insurance coverage to their employees and would also be exempt from the additional payroll tax.

The House Ways and Means and House Education and Labor bills propose more targeted relief to small employers. Employers with annual payrolls not exceeding $250,000 would be exempt from the additional tax. Very small employers (generally businesses with fewer than 10 employees) would also be eligible for tax credits to offset the cost of health insurance. The Senate HELP bill, on the other hand, would provide tax credits to employers with fewer than 50 employees.

Congress returns to work on September 7^th. Our office will continue to monitor important developments in the debate on health care reform and in connection with other pending tax laws.