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Audit Your Clients' Business Retirement Plan: Why and How
There are many benefits of business retirement plans for both business owners and advisors. For business owners, the key benefits are:
- Tax savings through deductions - Employers may be able to deduct contributions of up to 25% of eligible employees compensation from their business tax return.
- Contributions for retirement - the maximum contribution limit for individuals is $45,000 or 100% of compensation, whichever is less. This allows employers and employees to accumulate a substantial amount of retirement assets.
- Attracting and retaining talented employees - an important benefit in tight labor markets.
For advisors, the benefits are just as compelling:
- Access to the business owners - many advisors use these plans as a way to build relationships with business owners and win over their personal business.
- Access to the employees of the business is a great way for advisors to help employees with both their retirement plan and personal financial plans. When you help the employees with their contributions to the plan, it's likely you'll be able to help them when it's time to roll those assets out of the plan into an IRA.
- And finally, contributions are generally made to retirement plans regardless of market conditions. Many advisors use business retirement plans as a way to stabilize their income during cyclical markets.
Once a business retirement plan has been established, it's a good idea for companies to self-audit their retirement plans by working with you, their tax professional, to determine if there are any problems - before they hear from federal examiners. Here are six common operational faults found by the IRS and the Department of Labor:
1. Late Deposit of Deferrals.
Many employers do not realize that deferrals must be deposited as soon as reasonably possible after the pay date.
For example: SIMPLE IRA contributions are invested into individual SIMPLE IRA accounts for each employee. Employers must send salary deferrals to the financial institution as soon as possible, but no later than 30 days after the month during which the dollars were withheld. Employer contributions may be made through the employer's tax filing due date plus extensions.
2. ERISA Violations.
Section 404(c) of ERISA permits retirement plans to transfer the responsibility and liability for selecting investment options to participants if certain requirements are met. Many companies believe that they will be afforded protection for participants' investment decisions under this provision. However, we have found that most plans do not comply with the requirements of §404(c).
3. Employees Versus Independent Contractors.
There are strict rules to determine whether a worker is an employee or independent contractor for tax purposes. The IRS looks at many factors in making a determination. If a company hires an independent contractor and the IRS later reclassifies the person as an employee, the firm can be hit with a tax bill for unpaid taxes, interest and penalties. The firm might also be liable for state taxes, unemployment taxes and employee benefits, such as retirement plan contributions.
4. Services Performed Through an Professional Employer Organization.
Hiring employees through a PEO for long periods of time may not eliminate the obligation to make retirement plan contributions for these workers.
5. Improper Correction Method.
Employers can correct compliance problems in qualified plans without requesting advance IRS approval. However, they must use the proper correction method.
6. Default Account.
Plans often specify a money market account or a GIC (guaranteed investment contract) as the plan's default account. But the fiduciaries for 401 (k) plans must prudently invest non-directed participants' accounts, even if the plan document provides for a "default" account.
In addition to reviewing for these common errors, it is a good idea to consider new plan options to confirm that the current plan is still the best choice for the company.
An owner only business with a paired profit sharing/money purchase plan would be a good candidate for an Individual 401(k). Independent contractors or consultants often find these plans attractive, as well.
Case study: As a result of the recent changes to the tax laws, there is a new retirement plan opportunity for business owners who have no employees - the Individual 401(k). The benefit of the individual 401(k) is that it lets an owner get to the maximum contribution limits at lower income levels than other types of plans.
The change that created the Individual 401(k) is that salary deferrals are no longer included in the employer deduction limit. Now, an owner can defer up to $15,500 -- $20,500 if they're over age 50 -- and make a profit sharing contribution of up to 25% of their compensation for the year. Between these two, the contribution may not total more than $45,000 ($50,000 over age 50).
The key is that the business must not have regular employees - a spouse or a partnership with multiple owners is a good business to consider the Individual 401(k). Partners, spouses and family members are considered highly compensated employees and will not cause the plan to be subject to discrimination testing. If the business hires non-family employees, the plan would be subject to the discrimination testing normally required on a 401(k) which would increase the administration costs on the plan and cause some other potential issues. It is very important that the owner not plan to hire any regular employees in the near future.
Want to know more? Visit www.joinhdvest.com to take our complimentary small business retirement plan CPE programs.
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