Tax Credit for Starting a New Employer Retirement Plan

SR&ED Investment Tax Credits
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Section 45E of the tax code permits an eligible small employer to claim a tax credit versus a deduction for qualified startup costs and plan administration fees.  The credit is 50 percent of the relevant expenses and is limited to $500 per year for the first credit year and each of the following 2 tax years.  The credit is currently set to expire at the end of 2012; however, it has previously been extended.

For example, if such an employer paid $1,200 in fees to establish a new plan in 2011, and then paid $800 in plan administration fees in 2012, the allowable tax credit would be $500 in 2011 and $400 in 2012.  Thus, the real cost to establish the plan is reduced from $1,200 to $700 because of the $500 tax credit.

An eligible small employer is one who had no more than 100 employees during the tax year preceding the first credit year and only employees who were paid more than $5,000 during that tax year are counted.  Further, as the credit is intended to spur the adoption of new plans, if an otherwise eligible employer established or maintained a plan during the 3 tax years preceding the first credit year, they are not eligible to claim the credit.

Get’em before there gone!

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401(k)s: Watch Out For Speed Bumps

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Your 401(k) plan is far too important to ignore it’s administration. With the proper supervision your plan can become a valuable employee benefit. Your fiduciary responsibilities can be outsourced to professionals, relieving you of much of the risk.

Fast-growing companies are particularly prone to having their 401(k) plans get off track in one way or another, say experts. The combination of fluctuating asset levels, executive overload, and Internal Revenue Service rules that are structured in a way to almost ensure closely held companies will violate them means that CFOs at those companies need to keep an especially close watch on them, at least at a high level. “You’d think I’d be most focused on the finance aspect [of the 401(k) plan], but that’s secondary,” says Gene Lynes, CFOof energy-management consultancy Ecova, which has rapidly grown its plan assets in the past few years to close to $15 million. “Being a good employer, we’re trying to protect people for the future and create high morale”: no easy task these days.The move toward fewer 401(k) options is one that has gained a lot of fans from companies both small and large in recent years. J.P. Morgan, for one, recently proposed a winnowing down, or at least an aggregation, of investment options to make things easier for participants. And such screening is a hallmark of plans that are targeted at smaller businesses. At Sharebuilder 401(k) (a division of ING Direct), for example, “our investment committee manages the fund lineup, and takes on the fiduciary responsibility,” giving everyone a fairly slim menu of 16 ETFs or one of five model portfolios, says Stuart Robertson, head of the division, which is aimed at plans with 250 employees or less. While there is still some choice and education involved, “we try to make it hard for participants to get off on the wrong foot,” he says.

That philosophy is extending to other parts of the plans, as well. Vanguard recently announced a new offering aimed at plans with under $20 million in assets, with standardized record-keeping and administration to help keep fees and hassle low. For example, there’s a prototype plan document that plan sponsors are asked to adopt that “has less flexibility than the standard one, but still has everything you need to operate the plan,” says Kathy Fuertes, who leads Vanguard’s new effort.

Most small companies would benefit from outsourcing the investment management fiduciary responsibilities. Be certain the professional agrees to act as the ERISA 3(38) Investment Manager in writing.

Please comment or call to discuss how this affects you and your company.

  • Your employer’s stock: How much is too much? (401kplanadvisors.com)
  • Six steps to the perfect 401(k) (401kplanadvisors.com)
  • On 401(k) plans, the less choice the better (401kplanadvisors.com)
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Bill would remove penalty for tapping 401(k) to avoid foreclosure

WASHINGTON - OCTOBER 26:  Internal Revenue Ser...
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This must be the last recourse for employees. By relying on your retirement account for every emergency your retirement future will be in jeopardy. Responsibly borrowing must be a priority for all Americans.

The change would work like this: Under current rules, anyone making what’s known as a “hardship” early withdrawal of funds from their 401(k) must pay the IRSa 10% penalty on top of ordinary income taxes. A bill introduced Oct. 5 would waive the penalty if the purpose of the distribution is to make loan payments to avoid loss of a primary home to foreclosure.Co-written by Sen. Johnny Isakson and Rep. Tom Graves, both Republicans from Georgia, the bill would allow owners to pull out up to $50,000. The money could be used in a lump sum to pay down the delinquent mortgage balance or to fill shortfalls caused by reductions of household income. It could also be used as part of loan modification agreements with lenders designed to avert a foreclosure. No matter how the money is used to resolve the mortgage delinquency, it would need to be spent within 120 days of receipt and could not exceed 50% of the funds in the retirement account.

It must be understood that this bill only exempts the 10% penalty the taxpayer would be required to pay income tax on the withdrawal.

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Safe Harbor 401(k) Deadline Looms for Small Business

The Northumbria
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If a plan sponsor would like to change there plan to a safe harbour plan it must be communicated to employees prior to year end to be effective for the following plan year. One exception is new plans. Year end reviews should be completed well before year end.

s Oct. 1 rolls around, it is time for businessownersto make an important decision about the type of 401(k) plan they are going to offer employees. It is the annual deadline for setting up a Safe Harbor 401(k), a type of retirement plan that makes it possible for business owners to maximize their contributions to their accounts without running afoul of the IRS‘ nondiscrimination testing requirements for traditional 401(k) offerings.Retirement plan experts say Safe Harbor 401(k) programs offer a practical and efficient way for small employers to provide retirement benefits to their employees, including themselves. Using this type of 401(k) plan, business owners can max out their contribution ($16,500 per employee or $22,000 for employees over the age of 50) and receive additional savings through the match.”The Safe Harbor 401(k) does remove some of the perceived risk of compliance testing for smallbusiness owners,” said Janice Nearen-Bell, vice president of human resource services sales at Paychex, a Rochester, N.Y.-based provider of payroll, human resources and benefits outsourcing solutions for small and mid-size businesses.

While any size of company can offer a Safe Harbor 401(k), it is geared toward small- business owners. Safe Harbor plans can be structured in two ways. One option is a dollar-for-dollar matching contributions for all participating employees on the first 3 percent of each employee’s compensation and a 50 percent match from 3 percent to 5 percent. The plan can also be structured to provide 3 percent to each eligible employee’s compensation, regardless of whether they participate in the plan. These plans could be expensive for larger businesses, which would likely have more participants.

Now is the time to determine changes to your 401(k) plan.

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Top 10 Hidden Liability Pitfalls That Retirement Plan Fiduciaries Should Avoid

Internal Revenue Service (IRS)
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Many retirement plan sponsors do not realize the fiduciary risks they carry when providing a plan for their employees. This may be the result of being sold by an financial representative who is unaware of the risks themselves. These risks can be easily minimized. The results would be a much better plan for employees.

Being a retirement plan fiduciary such as a plan sponsor or a plan trustee is like being a homeowner. Homeowners see their homes as a serious financial accomplishment and an important investment. Homeowners are unaware of the hidden liability pitfalls that homeownership entails, like lawsuits for those injured on their property or the liability to trespassers who are injured because of an attractive nuisance like a swimming pool. The same can be said of a plan sponsor or a plan trustee that is unaware of the hidden liability in their roles as plan fiduciaries.

Retirement plan fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include: acting solely in the interest of plan participants and with the exclusive purpose of providing benefits to them; carrying out their duties prudently; following the plan documents; diversifying plan investments; and paying only reasonable plan expenses. While these duties seem pretty straightforward, there are certain instances where a plan sponsor is unaware that their action or inaction puts them at risk to liability from either plan participants or governmental agencies such as the Department of Labor (DOL) and the Internal Revenue Service (IRS). For plan trustees, that liability may be personal liability. This article details pitfalls that plan fiduciaries are usually unaware of, that exposes them to potential fiduciary liability.

The plan sponsors must realize that 80% of the baby boomer generation do not have enough saved to comfortably retire. The baby boomers will be looking for solutions. They may look at their company sponsored retirement plan for a cure to their problem.

Please comment or call to discuss how you can address this.

  • Why Should 401k Plan Sponsors Care What Others Think About the Fiduciary Standard? (401kplanadvisors.com)
  • ERISA §3(38) Fiduciaries and the Flavor of the Month (401kplanadvisors.com)
  • Action Can Reduce Fiduciary Risk When Stock Markets Swoon (401kplanadvisors.com)
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Press Release

Internal Revenue Service (IRS)
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401K Plan Advisors LLC is Proud to announce that Tony
Krance, MBA, CFP®, AIF®, ERPA has been awarded the designation of Enrolled
Retirement Plan Agent (ERPA) by the Internal Revenue Service.  This enrollment allows Mr. Krance to
represent taxpayers before the Internal Revenue Service concerning the
following qualified retirement plan issues:

  • IRS/DOL audit representation
  • Employee Plan Compliance Resolution Program
  • Employee plan determination letters
  • Form 5500 and 5300 representation

The ERPA designation reflects Tony Krance’s commitment to
providing the expertise to their clients necessary in this increasingly complex
regulatory environment.

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When is a 401k Distribution Not Subject to the 10% Penalty?

WASHINGTON - OCTOBER 26:  Internal Revenue Ser...
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When is a 401k Distribution Not Subject to the 10% Penalty?

There are only a couple of situations where the IRS will waive the 10% 401k early withdrawal penalty, i.e., a withdrawal prior to the participant reaching age 59½.

  • Amount of your unreimbursed medical expenses greater than 7.5% AGI ( IRC §72(t)(2)(B) ).
  • There is a Qualified domestic Relations Order (QDRO) from the courts that mandate funds from your account go to a former spouse, child, or dependent ( IRC §72(t)(2)(C) ).
  • You have separated from service and were at least 55 years of age when you did so (or separated from service in the year in which you turned 55) ( IRC §72(t)(2)(A)(v) and 72(t)(10) ).
  • You have elect a Section 72(t) distribution.
  • You are totally disabled. (The key to the disability exception seems to lie in the permanence of the condition, not the severity. Therefore, to claim this exemption you have to furnish not only information proving that you are totally disabled, but also information on the permanence of the disability.) ( IRC §72(t)(2)(A)(iii) )
  • You have died and your beneficiary gets the money ( IRC §72(t)(2)(A)(ii) ).
  • You have made contributions under special automatic enrollment rules that are withdrawn pursuant to your request within 90 days of enrollment ( IRC §414(w)(1)(B) ).
  • Certain distributions to qualified military reservists called to active duty (IRC §72(t)(2)(G) )
  • Because of an IRS levy of the plan ( IRC §72(t)(2)(A)(vii) )

It goes without saying that early withdrawal from your retirement plan should be your last resort.

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The Two Biggest Traps Behind 401(k) Loans and How to Avoid Them

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The old pension funds would very seldom allow loans why then should the 401(k)? This is your future. Avoid loans at all cost.

Hazard #1 – Steep taxes and penalties that come from late payments or switching jobsIf you don’t make a payment on your 401(k) loan for 90 days, the outstanding amount of the loan is treated as a distribution. That means it loses its tax-deferred status and Uncle Sam will require the taxes paid on the outstanding amount plus penalties.  Specifically, the IRS taxes the outstanding balance at your current tax rate, and if not of retirement age (59 ½), you will owe an additional ten percent penalty.  If you took a loan, finding the money to cover this penalty is insult to injury – not to mention hard to pay off.

There are several equally hazardous scenarios that have the same brutal outcome on your pocketbook. If you decide to quit or are let go from your job, the outstanding 401(k) loan amount is due quickly — typically within 60 days. If you don’t pay it back in this time period, it is considered a distribution and will be taxed at your current tax rate plus a ten percent penalty.  Not pretty.

Hazard #2 – A big dent in your retirement savings

While borrowing from a 401(k) provides an easy and low-cost path to immediate cash, the impact on your retirement savings can be dramatic. Time is the key to building a healthy nest egg.   It’s why 20-year-olds who start by contributing small amounts in a 401(k) are often much better off than those in their 40s that contribute a much greater amount to their accounts. This effect is called compounding.  The time your money is out of your 401(k) from the loan is time it will never have again to work for you and grow through compounding.  Additionally, the tax advantages you were enjoying by contributing to your 401(k) vanish.

This is why it’s so important to exhaust every other means to manage your cash needs such as bank loans, a home equity line, etc. before turning to your 401(k).

Loans from your 401(k) must be your last resort. This is another case of protecting your future self from your current self.

Please comment or call to discuss.

  • Raiding Your 401(k) Can Be Taxing (turbotax.intuit.com)
  • 401(k) Nation: Road To Retirement Gets Rockier (401kplanadvisors.com)
  • How to Manage Your 401(k) Through Market Down Swings (401kplanadvisors.com)
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