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SEP & SIMPLE IRA Plans

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SEP & SIMPLE IRA Plans SEP & SIMPLE IRA Plans: Strategies for Making Correct Contributions and Deductions SEP & SIMPLE IRA Plans: Strategies for Making Correct Contributions and Deductions (edited transcript) Mikio Thomas: Hi my name is Mikio Thomas. I work for Employee Plans Examinations Division of the Internal Revenue Service. I do data analysis; help write the outreach material for our Director of Examinations. I’ve been with the service for a little over 30 years. Does it tell? Yeah but I’m glad to be here. For those of you that attend our Retirement Plan Tax Form Sessions regularly I thank you. In addition you realize most of our topics revolve around small- business employers and sole proprietors. Our section of the website provides a wealth of information to small-business owners about retirement planning for themselves and for their employees, choosing the right plan, maintaining the plan and contribution rules are just some of the items that we provide on our website. You hopefully also remember us telling you in years past that we along with the Treasury Department are trying to get small-business employers to establish a retirement plan for themselves and their employees. According to the 2012 US Census Bureau there are more than 5 million businesses with less than 20 workers. In the same 2012 year a lot of surveys tell us that only 40 percent of small-business employees participate in any retirement plan. We need to get those numbers up so more people have an opportunity to save for retirement. I didn’t mean to get all up there but I’ve been watching the conventions the past couple weeks. SEP and SIMPLE IRA-based plans are 2 popular plan types that small business employers choose to provide retirement benefits for themselves and their employees. The SEP stands for Simplified Employee Pension Plan. The SEP plan allows plan sponsors to contribute to traditional IRA’s set up for the employees. A self- employed business can adopt a SEP, the other plan -- SIMPLE -- stands for Savings Incentive Match Plan for Employees. The SIMPLE plan is ideally suited as a startup retirement plan for small-business employers who currently do not sponsor a retirement plan. Page 1 of 22 SEP & SIMPLE IRA Plans: Strategies for Making Correct Contributions and Deductions These are the two easiest plans to administer but that doesn’t mean we don’t find errors in these plans when we go out and examine these plans. Many of the errors center around contribution and deduction issues and some employers tell us that they find contributions and deductions confusing when it comes to maintaining these SEPs and SIMPLE IRA plans. That’s why I’ll go through the rules in these plans. I’ll start with the discussion of the SEP and SIMPLE contribution requirements and then what I’ll do is tie in the plan contribution limitations that apply. I’ll then chat about deductions. Where do you place the deduction? Which form do I use? Which line item do I need to complete? I understand there’s plenty of confusion in this area and I hope to clarify the situation for you and then I’m gonna tread lightly into the wonderful world of self- employed contribution calculations, which when you first see the worksheet you might think you need a Master’s Degree in Mathematics to determine the proper deduction. That is not true. It’s helpful but it’s not true. From there we’ll discuss the required minimum distribution rules. Next prohibitive transactions could occur in these IRA’s and I’ll provide examples of these transactions and why you don’t wanna deal with ‘em and then finally I’ll go into detail about the contribution to deduction-related recurring errors that we find on our examinations and steps to find, fix and avoid some of these errors. I’ve been doing outreach pretty much my whole IRS career and my manager, she has as well so before one of us go out, we call the other, give a little bit of advice so I gave her a call before I came out here this week and I said, “Okay what do you have?” And she said, “If your speech is long, it better be good. If it’s bad, it better be short and if you fail at this, you better have free candy.” So I think we’re good but you know when you see “In case of emergency break glass?” Just in case but I think we’re good. We’re gonna start with the SEP Contribution Rules. Generally any employee who is age 21 and performed services for your business in 3 of the last 5 years is eligible to participate in the Employer SEP plan and receive a contribution. The law requires a written Page 2 of 22 SEP & SIMPLE IRA Plans: Strategies for Making Correct Contributions and Deductions contribution formula. For example if you use our Form 5305 SEP to establish your plan that form lists the contribution requirements. Some of these rules include 1; contributions are based only on compensation of the first $265,000.00 for each employee. Now this amount is for this year, 2016. Each October this limit and others are adjusted annually for cost-of-living adjustments. You’ll find a table on our website with the current year limits as well as the previous two years. I suggest you visit this site to ensure you’re using the proper limitations. For a SEP there is no requirement that you make a contribution in every year. When you do contribute however you must contribute to the SEP IRA’s of all eligible employees. Contribution to SEP accounts are always 100- percent vested or owned by the employee. Rules permit only cash contributions. Contributing property would be prohibited and elective deferrals are not permitted in SEP IRA’s. If you wish for your employees to be able to make their own contributions or they come up and suggest they would like a plan where they can make their own contributions, we suggest establishing a SIMPLE IRA. So those are the general rules. And what I wanna do now is when we do these outreach we get a lotta questions so I’m gonna share with you some of the questions that we get in this in area and provide you the answers. The first question is do I have to contribute for a participant who is no longer employed on the last day of the year? And the answer is yes you do unless they are otherwise eligible for a contribution. A SEP cannot have a last-day-of-the-year employment requirement like other plans do. If the employee is otherwise eligible they must share in any SEP contribution so this would include eligible employees who die, get fired, get laid off or just quit working before the contribution is made. Another question is if I participate in a SEP plan can I also make tax-deductible, traditional IRA contributions to my SEP IRA? And the answer is if the SEP IRA permits non-SEP contributions you can indeed make regular IRA contributions, including IRA catchup contributions if you’re age 50 or over to your SEP IRA up the maximum annual limit. A key point here: Remember the amount of the regular IRA contribution that you can deduct on your income tax return may be Page 3 of 22 SEP & SIMPLE IRA Plans: Strategies for Making Correct Contributions and Deductions reduced or eliminated due to your participation in the SEP plan and also I mentioned the Form 5305 SEP. That does allow employees to make non-SEP contributions. Let’s move on now to the SIMPLE IRA Contribution Rules. The employer must annually choose one of two contribution methods. Employers can either make a fixed contribution of 2 percent of pay for all eligible employees even for those who do not elect to defer salary into the plan or they can match employee contributions, dollar-for-dollar, 100 percent up to 3 percent of compensation. Now this match can be reduced as low as one percent but no more than two calendar years out of five. The second way a SIMPLE IRA is funded is through employee salary deferrals and the amount an employee can defer for 2016 is $12,500.00. Some employers will set up an automatic enrollment feature in the SIMPLE IRA plan and what this allows is the employer to automatically deduct a fixed percentage or an amount from an employee’s wages and contribute that to the SIMPLE IRA plan unless the employee has affirmatively chosen to contribute another amount or nothing. These automatic enrollment contributions qualify as elective deferrals. Also employees may elect to terminate their salary reduction contributions to a SIMPLE IRA plan at any time and if they do so the SIMPLE IRA plan may preclude them from resuming salary deferrals until the beginning of the next calendar year. Again we get some questions in this area so we’ll provide you some Q&A that we get on these. What steps do I need to take if I wanna switch to non-elective contributions instead of matching contributions? And as I mentioned you can substitute the 2-percent non-elective contribution for matching contribution for the year. In a SIMPLE IRA every eligible employee has a 60-day election period that allows him or her to make or change their salary reduction election and select the financial institution that will serve as their trustee, custodian or issuer of the employee’s SIMPLE IRA and as an employer you are required to notify eligible employees prior to this 60-day election period about their opportunity that I just described.
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