The Pension Specialists

Transcription

1 Rev 02/12/2015 The webinar will be starting shortly 8:45am CST or 1:00pm CST Copyright 2015 Collin W. Fritz & Associates, Ltd. The Pension Specialists All rights reserved. No part of this presentation may be reproduced in any form and by any means without prior written permission from Collin W. Fritz & Associates, Ltd.

2 Just a Reminder This is Copyrighted Material No Video or Audio Recording is permitted without prior written consent from Collin W. Fritz & Associates, Ltd. Thank you for your Compliance

3 The Audio Portion of this presentation is available either by phone or by using the speakers and microphone on your PC. The phone number is provided to you in the confirmation from CWF and again at the time you join the meeting. You will need the access code that was ed to you in the confirmation from CWF. The confirmation code is 9 digits in length e.g You will also need the Audio Pin # which is shown to you at the time you join this meeting If you have trouble re-connecting please call CWF at

4 4 Established by Congress to encourage businesses to set-up a retirement plan, including a one-person business Supplement to Social Security and any Private or Governmental pension plan 1978

5 A Sep IRA is a traditional IRA to which an employer has made a SEP Contribution The Sep-IRA Employer SEP-IRA Contributions Excluded from an employee s income 0 25% x Compensation Maximums $51, $52, $53,000 Custodial or Trust Account Earnings within Account are not Taxed Distributions Accountholder Before Age 59½ Age 59½ to 70½ and older Beneficiaries Original Subsequent In general, the accountholder or beneficiary will include the distribution in income and pay tax. 5

6 6 Types of IRAs Traditional IRAs An individual IRA SEP IRAs An employer plan IRA, including a one-person business. Uses a traditional IRA to handle the investments SIMPLE IRAs An employer plan IRA, including a one-person business Roth IRAs An individual IRA

7 7 Types of SEPs Regular 1 Person 2-10 Employees Employees 100 and over Employees SAR-SEPs In general, repealed but certain plans grand-fathered. (1997)

8 8 Who Can Establish a SEP? SEPs are established by owners of businesses, including incorporated and unincorporated businesses, sole proprietors, and partnerships. All employees who meet the eligibility requirements established by the employer when the plan was adopted must be included in the plan. Sole Proprietors - While SEPs are often established by employers with numerous employees, these plans can also be used by a self-employed individual where that person is the only participant in the plan. A sole owner for purposes of the SEP rules is both an employee (actually an owner-employee since he owns more than 10% of his business) and an employer. As an employee of the sole proprietorship, he may participate in a SEP. As an employer (the sole proprietor) he can make employer contributions to the SEP.

9 9 Who Can Establish a SEP? SEPs are established by owners of businesses, including incorporated and unincorporated businesses, sole proprietors, and partnerships. All employees who meet the eligibility requirements established by the employer when the plan was adopted must be included in the plan. Partnerships - In the case of a partnership, a partner who is an owneremployer, may, as an employee of the partnership, participate in a SEP, and the partnership entity, as the employer, would contribute to the SEP. The partnership should pass a formal resolution evidencing their intent to adopt a SEP plan. This resolution should be in writing and be kept with all other partnership business records. Note: If a partnership established a SEP for the benefit of its employees, and the partnership terminated and was thereafter run as a sole proprietorship, continued employer contributions to the partnership SEP are not permitted. The IRS reasons that since the partnership established the SEP only for its employees, contributions to the SEP made by the sole proprietors could not be contributions to partnership employees. If the new sole proprietor wishes to continue to have a SEP plan, the employer would have to adopt a new SEP plan agreement in their new employer capacity.

10 10 Who Can Establish a SEP? SEPs are established by owners of businesses, including incorporated and unincorporated businesses, sole proprietors, and partnerships. All employees who meet the eligibility requirements established by the employer when the plan was adopted must be included in the plan. Corporations - A corporation can also adopt a SEP plan. There is no limitation on the size of the corporation that adopts the SEP plan. The corporate board of directors should pass a corporate resolution stating the corporation s intention to adopt a SEP plan. This again needs to be documented in writing and retained with all other corporate business records. Non-Profit Corporations - Even non-profit corporations can establish SEPs. SAR-SEPs were not available to non-profits, however.

11 11 Business Goals of Offering SEP Services 1. Large cash deposits 2. New client relationship may be created 3. Existing client relationship may be expanded or strengthened.

12 12 SEP Statistics / Data 1. The percentage begin contributed to each type of IRA has been quite consistent for the five years or as follows: IRA Type Percent Roth IRAs 32.10% SEP-IRAs 27.00% Traditional IRAs 24.90% SIMPLE-IRAs 16.00% Total % 2. End-of-Year Fair Market Value 2008 Number of Tax Payers FMV Value Percent Traditional 43,054,097 $3,257,294, % SEP 3,726,835 $201,497, % SIMPLE 2,896,031 $45,634, % Roth 15,951,065 $176,638, % Total 54,497,580 $3,681,065, %

13 End-of-Year Fair Market values for IRAs for The following charts show the fair market values for traditional IRAs, Roth IRAs, SEP-IRAs and SIMPLE-IRAs. These amounts do vary. They were certainly impacted by the economic recession of The annual percentages surprising stay quite constant: Traditional IRAs 88.5% SEP-IRAs 5.5% SIMPLE-IRAs 1.2% Roth IRAs 4.8% Total % The FMC charts below show that the FMV for all IRAs was 3.7 trillion as of December 31, The DOL reported this value as being 4.7 trillion as of December 31, 2010 as the economy and the markets did improve during Trillion 13

14 SEP Statistics / Data 14

15 15 Tax Benefits of a SEP-IRA Tax deferred income. Compounding Growth. Contribution is Excludable from Income for numerous taxes: Income, Social Security, Unemployment, etc. Example Betsy Ryan * Wage Income $30,000 SEP Contribution (0-25%) $6,000 (20%) Total Compensation $36,000 *Taxes apply to the $30,000, but not to the $6,000. Taxes means income, social security, Medicare and unemployment. * Betsy is an employee. A special calculation applies for a self-employed individual.

16 16 Establishing a SEP 1. Employer signs a SEP plan document a. IRS Model Form 5305-SEP b. SEP Prototype, or c. Customized SEP Document Prohibitively expensive 2. Each eligible employee, including an employee who is the only employee, must establish a traditional IRA (a SEP IRA). Employer has authority to sign on behalf of an employee who refuses to sign.

17 17 Types of SEP Plan Documents To establish a SEP, the employer must execute a SEP plan document by the deadline for filing the business tax return, including extensions. (Treasury Regulation section ) The type of SEP plan the employer executes or adopts may vary, as SEP plans may be adopted using the IRS Form 5305-SEP (the IRS model SEP form), a prototype SEP, or an individually-designed SEP. (The IRS also provides a model salary-deferral SEP plan, Form 5305-A SEP, however, new SAR-SEPs can no longer be adopted.) The following material discusses some of the features of these different SEP plans.

18 18 IRS Form 5305-SEP A financial institution should, at a minimum, have the IRS Model Form 5305-SEP available. This form may be obtained at no charge from the IRS, or at a nominal fee from most forms vendors, such as Collin W. Fritz and Associates. The actual plan document form is very short and very easy to complete. The portion of the document to be completed is set forth below. *

19 Financial institutions should note that the customer has responsibility for accuracy. If customer uncertainty exists, consultation with his or her tax advisor may be warranted. Although the customer bears ultimate responsibility for completing these forms, it s relatively easy for a financial institution to provide basic assistance, and therefore reap the benefits of maintaining their SEP account. Filling out the Form 5305-SEP is easy: A. Fill out the name of the business (blank #1); 19

20 20 B. Define minimum age for plan participation (blank #2). This is usually 21, or could be N/A (not applicable) if a one-person business; C. Set years-of-service requirement (blank #3). This is commonly three years. But remember that for new businesses a contribution can t be made until the requirement is met. N/A may also apply here;

21 21 D. Indicate whether or not the plan will include union employees (blank #4). Most will not; E. Indicate whether or not the plan will include non-resident aliens (blank #5). Most will not, F. Indicate whether or not the plan will include employees earnings less than $450 for the current year (blank #6). Most will not;

22 22 SEP Limits for Maximum Contribution Per Individual $51,000 $52,000 $53,000 Required Compensation for Current Year $550 $550 $600 Maximum Compensation which may be used $255,000 $260,000 $265,000

23 G. The employer signs and dates the plan. A copy of the completed plan must be provided to all employees. A completed copy should be retained by the financial Institution. 23

24 Few plans are simpler to open. If a SEP plan is unavailable to employees, an IRA custodian/trustee cannot accept deposits in excess of the annual limits of $5,500/$6,500 as applicable, unless the contribution is a rollover. A signed copy of Form 5305-SEP is sufficient verification to accept such a contribution. 24

25 25 Although many businesses can use IRS Form 5305-SEP, certain employers cannot, including the following: An employer who currently maintains any other retirement plan. Note that this restriction prevents an employer who has a QP/Keogh plan from using the IRS Model Form 5305-SEP as the SEP plan document. A SEP prototype, however, could be used. This restriction does not apply if there are two different employers. Example: If a person working for John Deere, Inc. participates in the company s profit sharing plan, and this person also farms, then he or she may establish a SEP for their farm income. As an employer, this person only has one plan the SEP. As an employee, he/she participates in two plans. This participation does not disqualify use of the IRS 5305-SEP form. An employer who now, or who has ever, maintained a defined-benefit plan. An employer who has any eligible employees for whom IRAs have not been established. An employer who uses the services of leased employees (as described in Code section 414(n)).

26 26 Although many businesses can use IRS Form 5305-SEP, certain employers cannot, including the following: An employer who is a member of an affiliated service group (as described in section 414(m)), a controlled group of corporations (as described in section 414(b)), or trades or businesses under common control (as described in section 414(c)), UNLESS all eligible employees of all the members of such groups, trades, or businesses, participate under the SEP. The 5305-SEP form should only be used if the employer will pay the cost of the SEP contributions. This form is not suitable for a SEP that provides for contributions at the election of the employee whether or not made pursuant to a salary-reduction agreement. These limits do not apply to employers who adopt either a prototype SEP or an individually-designed SEP. For example, even though an employer already has a Keogh plan, he could adopt a SEP plan if he adopted a prototype or individuallydesigned SEP.

27 27

28 28

29 29

30 30 Prototype SEPs Probably the second most widely used SEP plans are prototype SEPs. Prototype SEPs are specially designed and drafted plans, typically provided by attorneys and pension consulting firms. These SEP plans offer all the features of the basic Form 5305-SEP and some additional features which simply are not available with the IRS SEP document. Prototypes are typically submitted to the IRS for approval. This means that the form of the plan meets the requirements for a SEP established in the Internal Revenue Code and Treasury Regulations. Because of this special drafting and submission to the IRS, prototypes have administrative expenses which either the financial institution or the adopting employer must absorb. Prototypes can offer several benefits which are not included in Model SEPs. These benefits are discussed later.

31 31 Individually-Designed SEP Plans Certainly the least common of the different types of SEP plans, the individuallydesigned SEP is as it sounds individually designed for a particular employer. This is almost certain to be considerably more expensive than a prototype SEP, as the drafter, probably an attorney, must bill many hours of work to one employer. Social Security integration is permissible with the individually-designed SEP, if this feature is provided for in the plan. However, rather than incurring this expense for a nonqualified plan, employers are probably going to get more plan for their pension dollar by using either a prototype SEP or a qualified plan. Cost prohibitive IRS filing Fee.

32 The Role of the Financial Institution Important Determination Are you servicing the employer and the employee or just an employee? In some cases you will be servicing a person who works for a company which sponsors a SEP. You may have no relationship with the employer. An employer is required to furnish a copy of its SEP plan to every eligible employee. You will want to ask your customer to furnish you with a copy also. Be aware of section 1.12 of Article VIII which reads as follows: Special Terms Regarding SEP-IRA Contributions. Your IRA may accept SEP-IRA contributions which are made either by your employer or, if you are self-employed, by yourself. You hereby acknowledge that we have no responsibility or duty to determine your eligibility for such contributions or the correctness of the contribution amount. This is true even if we furnished you a copy of the IRS model Form 5305-SEP or Form 5305A-SEP or SEP prototype. You also acknowledge that you could well have excess IRA contributions if your employer (or you, as the employer) makes a mistake as to which employees of the sponsoring business are entitled to be allocated a share of the employer contribution and the amount of each allocation. Other administrative errors could also occur. Therefore, you agree to hold us harmless with respect to any and all adverse tax consequences (e.g. excess contributions) which arise or may arise as a result of your employer (or you, as the employer) making such administrative error(s). 32

33 33 The Role of the Financial Institution General approach the employer will look to a financial institution to provide a SEP plan document. A financial institution that is considering entering the SEP market needs to decide what type of SEP plan document they will make available to their employer customers and what role the institution will play in the administration of the SEP plan.

34 34 The Role of the Financial Institution Most financial institutions will not want to render administrative services. Most financial institutions choose to limit their role to being the IRA custodian. This is true for both one-person businesses and businesses with more than one person. Some institutions may choose to render administrative services.

35 35 The Role of the Financial Institution We strongly recommend that the institution at which the employer establishes the SEP plan use a SEP service agreement. The purpose of the agreement is to make clear to the customer exactly what your financial institution will do and to make clear the fact that your institution does not have the duty to make sure the business customer is administering the SEP correctly. A sample service agreement follows. The IRA custodian/trustee does have the duty to prepare the Form 5498 and Form 1099-R with respect to SEPs. Since 1996, there has been a check box added to Form 5498, Individual Retirement Arrangement (IRA) Information, to indicate if the IRA is part of a SEP. This enables the Service to match this information with an IRA owner s W-2, to identify employers maintaining SEPs.

36 CWF 702 IRS Form 5305-SEP or IRS Form 5305A-SEP 36

37 37 FAQs regarding SEPs What is a SEP? A SEP is a simplified employee pension plan. A SEP plan provides employers with a simplified method to make contributions toward their employees retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account of Annuity (IRA) set up for each employee (a SEP-IRA). Note: The IRS has a system of correction programs for sponsors of retirement plans, including SEPs, which are intended to satisfy Internal Revenue Code requirements but have not met the requirements for a period of time. This system, the Employee Plan Compliance Resolution System (EPCRS), permits employers to correct plan failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis.

38 38 How is a SEP established? A SEP is established by adopting a SEP agreement and having eligible employees establish SEP-IRAs. There are three basic steps in setting up a SEP, all of which must be satisfied. A formal written agreement must be executed. This written agreement may be satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, Simplified Employee Pension Individual Retirement Accounts Contribution Agreement. A prototype SEP that was approved by the IRS may also be used. Approved prototype SEPs are offered by banks, insurance companies, and other qualified financial institutions. Finally, an individual designed SEP may be adopted. Each eligible employee must be given certain information about the SEP. If the SEP was established using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. If a prototype SEP or individually designed SEP was used, similar information must be provided. A SEP-IRA must be set up for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SEP-IRA is owned and controlled by the employee and the employer sends the SEP contributions to the financial institution where the SEP-IRA is maintained.

39 39 If an employer sets up a SEP plan for its employees, can each employee choose different financial institutions for his or her SEP-IRA? That depends on the SEP plan the employer chooses. Each employee (including the business owner) eligible to participate in the SEP generally must establish his or her own SEP-IRA to receive employer contributions. Although the law does not require each participant s SEP-IRA to be at the same financial institution, the institution that offers or administers the SEP may require the employer to deposit SEP contributions initially into SEP-IRAs maintained at that institution. Employers should read the SEP plan document carefully and make sure they understand the plan s terms before signing.

40 40 What types of employers can establish a SEP? Any employer can establish a SEP.

41 41 If an employer has a SEP can it also have other retirement plans? An employer can maintain both a SEP and another plan. However, unless the other plan is also a SEP, the employer cannot use Form 5305-SEP, the employer must adopt either a prototype SEP or an individually designed SEP.

42 42 If an employee participates in his or her employer s retirement plan, can he or she set up a SEP for self-employment income? Yes. A SEP can be set up for a person s business even if he or she participates in another employer s retirement plan.

43 43 Is there a deadline to set up a SEP? A SEP can be set up for a year as late as the due date (including extensions). Of the business s income tax return for that year.

44 44 Can each partner in a partnership maintain a separate SEP plan? No. Only an employer can maintain and contribute to a SEP plan for its employees. For retirement plan purposes, each partner or member of an LLC taxed as a partnership is an employee of the partnership. The Partnership: Deducts plan contributions for employees other than the partners as a business expense on Form U.S. Return of Partnership income (instructions). Reports plan contributions for partners on each partner s Schedule K-1 (Form 1065), Partner s Share of Income, Deductions, Credits, etc. (instructions).

45 45 What happens if an employee elects not to participate? The employer may establish a SEP-IRA on behalf of an employee who is entitled to a contribution under the SEP if the employee is unable or unwilling to establish a SEP- IRA.

46 46 How much may be contributed to a SEP? Annual contributions an employer makes to an employee s SEP-IRA cannot exceed the lesser of: 1. 25% of compensation, or 2. $52,000 for 2014 and $53,000 for 2015 (subject to annual cost-of-living adjustments for later years). The limits in the preceding sentence apply in the aggregate to contributions an employer makes for its employees to all defined contribution plans, which includes SEPs. Only up to $260,000 in 2014 and $265,000 in 2015 (subject to annual cost-ofliving adjustments for later years) of an employee s compensation may be considered. Contributions must be made in cash. Property cannot be contributed.

47 47 What is considered compensation? Are bonuses and overtime included? Compensation considered is defined by the Internal Revenue Code and would include bonuses not overtime.

48 48 How much may a self-employed individual contribute? The same limits on contributions made to employees SEP-IRAs also apply to contributions made to a self-employed individual s SEP-IRA. However, special rules apply when figuring out the maximum deductible contribution. See Publication 560 for details on determining the contribution amount.

49 49 Must the same percentage of salary/wages be contributed for all participants? Most SEPs, including the IRS model Form 5305-SEP, require that allocations to all employees SEP-IRA be proportional to their salary/wages. A self-employed owner s contribution is based on net profit minus one-half self-employment tax for him or herself. See IRS Publication 560 on determining the contribution amount.

50 50 Can SEP plan participants make tax-deductible IRA contributions to their SEP- IRAs? Employers contribute under a SEP plan to each participant s SEP-IRA, and a SEP- IRA is generally no different from any traditional IRA. Employer SEP contributions do not affect the amount a participant can contribute to an IRA. SO, assuming the SEP- IRA permits non-sep contributions, regular IRA contributions can be made by the participant to his or her SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that can be deducted on the employee s income tax return may be reduced or eliminated due to the employee s participation in the SEP plan. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on contribution and deduction limits.

51 51 Can catch-up contributions be made to a SEP? No. SEPs are funded by employer contributions only. However, catch-up contributions can be made to the IRAs that hold the SEP contributions if the SEP-IRA documents allow. The catch-up IRA contribution amount (for employees age 50 and older) is $1,000.

52 52 Can a contribution be made to a SEP-IRA of a participant over age 70 ½? Contributions must be made for each eligible employee in a SEP, even if over age 70½. Such an employee must take minimum distributions, however.

53 53 Must contributions be made to the SEP every year? No. Contributions are not required to be made every year, but in years contributions are made to the SEP, the must be made to the SEP-IRA of all eligible employees.

54 54 Do contributions have to be made for a participant who is no longer employed on the last day of the year? A SEP cannot have a last-day-of-the-year employment requirement. If the employee is otherwise eligible, they must share in any SEP contribution. This includes eligible employees who die or quit working before the contribution is made.

55 55 What is the timeframe for depositing contributions into SEP IRAs? The employer must deposit contributions for a year by the due date (including extensions) for filing its Federal income tax return for the year. Note: If the employer extends its tax return the it has until the end of that extension period to deposit the contribution, regardless of when it filed the tax return. However, if the employer did not deposit the contribution timely, it must amend the tax return and pay any tax, interest and penalties that may apply.

56 56 Are employer contributions taxable to employees? No. Contributions to employee SEP-IRAs are not included in their gross income, unless they are excess contributions.

57 57 What are the consequences to employees if excess contributions are made? If contributions are made in an amount that is more than is allowed, there are tax implications for the employer and the employees. Excess contributions are included in the employees gross income. If an employee withdraws the excess contribution, and earnings on such amount, before the due date for filing his or her return, including extensions, the employee will avoid a 6% excise tax imposed in excess SEP contributions in an IRA. Excess contributions left in the employee s SEP-IRA after that time may result in adverse tax consequences to the employer and employee. If the employer contributes more than it may deduct, it may be subject to a 10% excise tax.

58 58 If a SEP fails to meet the SEP requirements, are the tax benefits for the employer and employees lost? Generally, tax benefits are lost if the SEP fails to satisfy the Internal Revenue Code requirements. However, the employer can retain the tax benefits if it uses one of the IRS Correction programs to correct a failure. In general, when correcting a failure under the program, the correction should put employees in the position they would have been had the failure not occurred.

59 59 Why is the 2013 contribution that was made in 2014 for the SEP-IRA shown on the 2014 Form 5498 and not on a 2013 Form 5498? The IRS requires that contributions to a SEP-IRA be reported on the Form 5498 for the year they are actually deposited to the account, regardless of the year for which they are made.

60 60 Can I contribute to both a SEP-IRA and a Roth IRA? A SEP-IRA is a traditional IRA that holds contributions made by an employer under a SEP plan. An employee can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA. Employer contributions made under a SEP plan do not affect the amount an employee can contribute to an IRA on the own behalf. Because a SEP-IRA is a traditional IRA, an employee may be able to make regular, annual IRA contributions to this IRA. Any such dollars contributed by the employee to his or her SEP-IRA will reduce the amount that could otherwise be contributed to other IRAs, including Roth IRAs, for the year.

61 61 Does a SEP have to be amended for the new law before it terminates? Generally, the IRS has not required SEPs to be amended for new law prior termination. Check with your plan professional.

62 62 Does a SEP have to be funded in the year of termination? SEPs can be terminated at any time. The employer can stop funding these plans once they are terminated.

63 63 What are the notification requirements to participants, etc., when a SEP terminates? When terminating a SEP plan, it is a good idea to notify the employees that the plan has been discontinued. The financial institution that was chosen to handle the plan may need to be notified that there will be no more contributions. The employer may also need to let the institution know that it will terminate the contract or agreement with it. The IRS should not be notified of the plan s termination.

64 64 If the employer goes out of business or the employee terminates service, can the amount in a SEP-IRA be left untouched? Yes.

65 SEP: Overview of Rules and Tax Regulations What amount can the employer deduct each year? The maximum amount is 25% of the eligible employees compensation paid to them during the year. Compensation for common-law employees is their income as shown on Form W-2. Compensation for a self-employed individual is defined to be his or her net earnings from self-employment as reduced by the deduction one is allowed for one-half of his or her self-employment tax and the deduction of contributions on his or her behalf to the plan. How much can be contributed on my behalf? In general, the lesser of $41,000 or 25% of compensation for 2004 $42,000 for 2005 $44,000 for 2006 $45,000 for 2007 $46,000 for 2008 $49,000 for $50,000 for

66 66 SEP: Overview of Rules and Tax Regulations What is meant by the term Self-Employed Person s Rate Table? Because a self-employed person s deduction amount and his or her compensation are each dependent on the other, the adjustment to net earnings can be made indirectly by using an adjusted contribution rate as determined from the chart on this page. What are net earnings from selfemployment? For SEP purposes, your net earnings are your gross income from your business minus allowable deductions for that business. Allowable deductions include contributions to your employees SEP-IRAs. You also take into account the deduction allowed for one-half of yourself-employment tax, and the deduction for contributions to your own SEP-IRA

67 67 SEP: Overview of Rules and Tax Regulations Include the following items in your net earnings. A. Foreign earned income and housing cost amounts. B. If you are a partner, your distributive share of partnership income or loss (other than separately treated items such as capital gains and losses). C. If you are a limited partner, guaranteed payments for services to or for the partnership. D. Elective contributions or deferrals under any of the following plans (k) plans (b) plans (tax-sheltered annuities). 3. SEP plans (salary-reduction arrangements). 4. Savings incentive match plans for employees (SIMPLE plans). 5. Cafeteria plans plans (plans of state and local governments and certain tax-exempt organizations). Do not include the following items in your net earnings. Tax-free items (or deductions related to them). If you are a limited partner, distributions of income or loss.

68 68 SEP: Overview of Rules and Tax Regulations In addition to the tax deduction limits, are there any limits on the amount an employer can contribute to one or more retirement plans on behalf of any one participant? Yes. In general, an employer, for 2002 and subsequent years, cannot contribute on behalf of any participant, more than the lesser of 100% of compensation, or $40,000. For 2001, the percentage limitation was 25%. The $40,000 increased to $41,000 for 2004, $42,000 for 2005, $44,000 for 2006, $45,000 for 2007, $46,000 for 2008 and $49,000 for $50,000 for $51,000 for Special tax rules will apply if the employer sponsors plans in addition to a SEP, such as a profit sharing, money purchase, or defined benefit plan.

69 69 SEP: Overview of Rules and Tax Regulations When can a SEP be established? SEPs can be established for a particular year after that year has ended. They can be established as late as the latest time prescribed by law for making deductible employer contributions (that is, no later than the due date, including extensions, of the employer s tax return for the year). This is more generous than the rule for qualified plans under IRC section 401(a). A qualified plan must be executed by the end of the taxable year for which the employer wants to take a deduction. What is the contribution deadline? The employer s contribution deadline is the due date of that year's business tax return, including any extensions. For many corporations, this is March 15, plus extensions. For most individuals, this is April15, plus extensions. Can an employer prohibit distributions from an employee s SEP-IRA? No. Also, an employer cannot condition its SEP contributions on the keeping of any part of them in the IRA.

70 70 SEP: Overview of Rules and Tax Regulations When must a person start to withdraw the money from the SEP-IRA? With certain exceptions, a person must begin distributions by the first day of April following the calendar year in which he or she attains age 70½, and December 31 of each year thereafter. Can an employee make regular IRA contributions into a SEP-IRA? The answer is generally Yes." However, the extent to which a deduction will be allowed for the contribution may be limited by participation in the SEP or any other qualified pension plan. The employee should consult with their tax advisor to determine the amount of deductible and nondeductible contribution(s) available to them. How will distributions be taxed? Distributions will be taxed as ordinary income. If the participant is under age 59½, penalties may apply.

71 71 SEP: Overview of Rules and Tax Regulations How do my employer s contributions affect my taxes? Your employer s contributions to your SEP-IRA are excluded from your income rather than deducted from it. Your employer s contributions to your SEP-IRA should not be included in your wages on your Form W-2 unless there are contributions under a salary-reduction arrangement. Unless there are excess contributions, you do not include any contributions in your gross income; nor do you deduct any of them. What are excess contributions? If your employer contributes more than is allowed, you must include the excess in your gross income, without any offsetting deduction. How do I correct an excess contribution? You should follow the instructions set forth in IRS Publication 590.

72 72 SEP: Overview of Rules and Tax Regulations What happens to a SEP-IRA when the participant dies? The funds in a SEP will be paid to a participant s beneficiaries. Depending on their relationship to the participant, they may have the potential to partially continue to shelter the funds from current taxation. The standard IRA rules apply. May a SEP be integrated with social security? Yes. An integrated SEP will permit a somewhat higher contribution percentage to be given to the more highly compensated employees. Integration may be permissible with a SEP prototype, but it is not permissible under the IRS Model Form 5305-SEP. Who is responsible to administer the SEP? The sponsoring employer is responsible for the SEP s administration. The employer may well need to consult with its tax and legal advisor. A financial institution s general role is to serve as the depository and not as the plan administrator.

73 73 SEP: Overview of Rules and Tax Regulations What is a Salary-Reduction SEP (SAR-SEP), and what advantages does it offer? An employer is not permitted to establish a salary-reduction SEP after December 31, SAR-SEPs established before January 1, 1997, can continue to receive contributions under present rules, and new employees of the employer, hired after December 31, 1996, can participate in the SAR-SEP in accordance with the rules. You should review IRS Publications 560 and 590 for additional information. Is a SEP deposit insured by the FDIC? If a SEP-IRA is invested in time deposits or savings instruments in an insured financial institution, it is insured by the appropriate government agency up to $250,000, aggregated with any traditional IRA, Roth IRA and any self-directed Keogh plan, eligible deferred compensation plans, and any individual account as defined in section 3(34) of ERISA. This $250,000 aggregate limit applies on a per-participant, per-institution basis. If the SEP-IRA is not invested in time deposits or savings accounts of an insured institution, then such investments are not insured by the FDIC.

74 74 Trustee-to-Trustee Transfer Move IRA Asset from one IRA to another, one IRA custodian/trustee to another IRA custodian/trustee, on a Tax-Free Basis Requirements: Check/Draft/Wire made payable to new IRA Custodian/trustee ABC Financial Institution as Custodian/Trustee for John Jones (traditional, SEP, SIMPLE, Roth) IRA No IRS Limit Reasonable Custodian/trustee restrictions allowed Not Reportable to IRS Federal Income Tax withholding rules do not apply

75 75 Trustee-to-Trustee Transfer Transfer must be from same type of IRA Traditional IRA to Traditional IRA Traditional IRA to SEP IRA SEP IRA to SEP IRA SEP IRA to Traditional IRA Roth IRA to Roth IRA SIMPLE IRA to SIMPLE IRA SIMPLE IRA to Traditional IRA (SIMPLE 2 Year Holding Period)

76 CWF Form # 56 CWF Form # 56-R 76

77 77 IRA to IRA Rollovers Purpose Usually to move IRA assets from one IRA to another IRA Rollover can be brought back to the same IRA Requirements One rollover per IRA, per 12 month period Not one per investment Check/Draft/Wire is made payable to or for the IRA accountholder IRA Assets must be deposited into IRA within 60 calendar days Must be same type of IRA Traditional IRA to Traditional IRA Traditional IRA to SEP IRA SEP IRA to SEP IRA SEP IRA to Traditional IRA Roth IRA to Roth RIA SIMPLE IRA to SIMPLE IRA SIMPLE IRA to Traditional IRA (SIMPLE 2 Year Holding Period)

78 78 IRA to IRA Rollovers Requirements (Continued) Rollovers are reportable to the IRS Distributions for Form 1099-R Regular IRA Reporting Codes Rollover contributions on Form 5498 Box 2 60 Day Rule

79 79 Summary of Reporting Duties for SEPs Form 5498, IRA Contribution Information, must be submitted to the Service by the trustee or issuer of a SEP-IRA to report contributions to the SEP-IRA under a SEP plan. A separate Form 5498 must be submitted for each SEP-IRA. Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., is used to report distributions from a SEP- IRA.

80 80 Reporting Contributions Reporting SEP contributions continues to be an unnecessarily complex problem. The procedure is actually quite logical and easy. The problem is that software has not caught up with the 1996 change. SEP contributions are reported on the IRS Form 5498 based on the calendar year of receipt by the custodian/trustee, not based on the tax year the contribution is for. Said another way, SEP contributions are reported IN the year they are received NOT FOR the year they are received. Even though the custodian/trustee must report the contributions in the year they are received, the employer can deduct the SEP contributions in the proper tax year on their tax returns, as long as the contributions were made correctly and timely.

81 81 Reporting Contributions One of the problems seems to be in the limited number of transaction codes and transaction explanations that are available in many IRA reporting systems. The term Prior-Year Contribution is much too general and does not get reported the same way for SEPs as it does for traditional and Roth IRAs. If prior-year SEP contributions are made, the amounts in Box 8 will not agree with the amounts the SEP-IRA accountholders are expecting; an IRA custodian/trustee may find it beneficial to furnish a written explanation to its SEP accountholders The 2014 Form 5498

82 82 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 7 IRA SEP The IRS instructions indicate to check the IRA box if it is a traditional IRA and to check the SEP box if it is a SEP-IRA. The instructions are silent if the account has both traditional and SEP contributions. X

83 83 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 8 SEP Contributions Insert the aggregate amount of employer contributions made from January 1 to December 31, 2014, regardless of the tax year for which the contribution(s) were made. X

84 84 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 1 IRA Contributions An individual may make his or her regular contribution for the 2014 year between January 1, 2014, and April 15, 2015, to the same IRA to which the employer s SEP contribution is made. Because the making of the SEP contribution results in the person being an active participant, the proper MAGI test will need to be used to determine what portion of the contribution, if any, qualifies to be deducted.

85 85 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 2 Rollover contributions If there are any rollovers into the SEP-IRA during the period of January 1 - December 31, 2014, the amounts are reported here.

86 86 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 4 Recharacterizations It is possible for a SEP-IRA to also have traditional IRA contributions. Therefore it is possible to have a recharacterization in an IRA that has both SEP and traditional IRA contributions. However, SEP contributions cannot be recharacterized.

87 87 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 5 Fair market value of account The December 31, 2014, FMV is reported here. It must agree with the year-end FMV statement sent to the accountholder in January 2015.

88 88 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 6 IRAs. Life insurance cost included in box 1 This box is not used for SEP-

89 89 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 7 IRA SEP The IRS instructions indicate to check the IRA box if it is a traditional IRA and to check the SEP box if it is a SEP-IRA. The instructions are silent if the account has both traditional and SEP contributions. X

90 90 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 8 SEP Contributions Insert the aggregate amount of employer contributions made from January 1 to December 31, 2014, regardless of the tax year for which the contribution(s) were made. Any elective deferral contributions made under a SAR-SEP are deemed to be employer contributions. X

91 91 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 10 Roth IRA contributions Since Roth IRA contributions cannot be made into a traditional or SEP-IRA, this box is not used for SEP-IRAs.

92 92 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Box 11 Check if RMD for 2015 SEP-IRA accountholders are subject to the RMD rules so this box must be checked for all accountholder in their 70½ year or older.

93 93 The 2014 Form 5498 boxes to be used in reporting SEP contributions are the following: Boxes 12a through 14b Any of the transactions that apply to traditional IRAs, can also apply to SEP-IRAs. Consequently any of these boxes can be used with SEP- IRAs. Example 1: James Smith, self-employed consultant, contributes his 2014 SEP contribution, in the amount of $5,000, on April 15, This must be reported by the custodian/trustee on the , NOT THE However, Mr. Smith is allowed to deduct the contribution on his 2014 tax return. Example 2: James Smith, self-employed consultant, contributes his 2014 SEP contribution, in the amount of $4,000, on August 15, This must be reported by the custodian/trustee on the

94 94 Reporting Distributions Trustees and custodians of IRAs must keep track of SEP-IRA activity and also report when there are distributions from the SEP-IRA. Form 1099-R is used to report all distributions from the SEP-IRA. There is no specific distribution code for distributions from a SEP-IRA.

95 95 Special Explanation for Your SEP Customers Reporting SEP Contributions to the IRS An IRA custodian may use the following explanation (by making a copy) to explain to your SEP customer how SEP contributions are reported to the IRS. The purpose of this explanation is to detail how an IRA custodian is required to report contributions to an employer s SEP-IRA to the IRS on Form When an IRA custodian receives a contribution to an employer s SEP-IRA, the custodian is to consider the contribution made by the employer for benefit the employee. If a business is unincorporated, the employer is considered to be selfemployed, and will either be an individual (i.e. sole proprietor) or a partnership. When an individual is self-employed, he/she is both the employee and the employer. The SEP-IRA custodian reports the SEP-IRA contribution in Box 8 of the Form 5498 for the year in which the contribution is received, regardless of the employer s tax year for which it was contributed. The reason for this is that the employer s deadline for making its SEP contribution is its tax-filing dead-line plus extensions. The April 15 deadline which applies to traditional and Roth IRAs does not apply to SEP-IRA contributions. The plus extension rule means that a business (i.e. the employer) may make its contribution for the prior year after May 31 of the current year (e.g. on August 13, 2015, an employer may contribute funds for the 2014 tax year).

96 96 The IRS instructions to the participant for Box 8 of the 2014 Form 5498 read as follows: Shows SEP contributions made in 2014 including contributions made in 2014 for 2013, but not including contributions made in 2015 for If made by your employer, do not deduct on your income tax return. If you made the contributions as a self-employed person (or partner), they may be deductible. See Publication 560. Tax Reporting by the Employer The business entity is entitled to claim a tax deduction on the tax return for which the contribution was designated. The Form 5498 does not inform the IRS of the employer s tax year for which the contribution was made. It merely informs the IRS of the fact that an employer made a contribution on behalf of an employee during a specific calendar year.

97 97 Special Rules for Self-Employed Individuals Special rules apply for self-employed individuals. A self-employed individual does take a deduction for his or her SEP contribution. That is, the contribution amount is not excluded from their gross income, as their gross income includes their business income. It appears that a self-employed person is required to pay FICA (selfemployment, too) on the amount of his or her pension contributions. However, a special calculation is used to determine the compensation that a self-employed individual uses to determine his or her contributions. The person must reduce their earned income by the amount of the contribution to be made for himself or herself and by the deduction they are permitted for a portion of the self-employment tax they pay. The mathematical formula to be used for net earnings is: Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Self-Employed Earned Income Minus ½ Self-Employment Tax Minus Pension Contribution for the Self-Employed Individual Equals Adjusted Earnings Multiplied by Contribution Percentage Per Plan Equals Pension Contribution for Self-Employed Individual

98 98 Special Rules for Self-Employed Individuals In general, the deduction amount for self-employment taxes equals 50% of the amount which he or she must pay in self-employment taxes. Most financial institutions leave it up to the self-employed individual and his or her tax advisor to determine the maximum deductible contribution. Because the deduction amount and the net earnings amount are each dependent on the other, this adjustment can present a problem. To solve this problem, adjustments are made indirectly by reducing the contribution rate called for in the plan, in figuring the maximum deduction. Internal Revenue Code section 1401 and 1402 define the assessment of the selfemployment tax. Section 1402(a) defines net earnings as gross income from a trade or business, less related business expenses, less the deduction provided by 1402(a)(12). Subsection (12) provides for a special deduction equal to the net earnings (determined without regard to this paragraph) times 50% of the sum of the tax rates of section 1401(a) and (b) for such year.

99 99 Special Rules for Self-Employed Individuals Set forth below is a an example of how the formula works. Net earnings are $100,000. This example assumes the self-employment tax to be $13,266. Thus, the $100,000 is to be reduced by $6,633 (50% of $13,266 and then multiplied by the special percentage of 20.00%). The proper contribution amount is then $18, $100, (Net Income) -6, (½ of Social Security Tax) $93, X.20 (Equivalent of 25%) $18, (SEP Contribution) This chart can be used to determine steps 2 and 3 of the calculation. Although the above paragraphs have discussed calculating the permissible SEP contribution for a self-employed individual, it is desirable to have the customer assume the responsibility of determining the proper contribution after consulting with his/her tax advisor. The IRS has devised the following worksheet as shown in Publication 560, Retirement Plans for Small Businesses.

100 100 SEP Contributions and IRA Contributions for the Same Year A person may make both a traditional IRA contribution and a SEP contribution for the same tax year, or a person may make a traditional IRA contribution even though his or her employer has made a SEP contribution for the same tax year. The general rule, however, is that the SEP contribution will make a person an active participant for IRA deduction purposes. Whether or not the person will be able to claim a tax deduction will depend upon applying the appropriate modified adjusted gross income limits. A person may also make a Roth IRA contribution and a SEP contribution for the same tax year. A person is eligible to make a Roth IRA contribution even though a SEP contribution is also made.

101 SEP Contributions = Active Participant for Traditional IRA Purposes 101

102 102 SEP Contributions = Active Participant Calculating the amount of the IRA contribution which cannot be deducted. The amount equal to or in excess of the AGI phase-out level. Non-deductible amount = $5,500 X MAGI- Threshold Level (or $6,500) $10,000 or $20,000 As applicable As applicable Deductible amount = $5,500 - Nondeductible amount (or $6,500) As applicable

103 SEP Contribution = Active Participant Income Restriction - Active Participants ONLY Year AGI Threshold Level AGI Phase-out Level Single 2008 $53,000 $63, $55,000 $65, $56,000 $66, $58,000 $68, $59,000 $69, $60,000 $70, $61,000 $71,000 Married, Joint Return 2008 $85,000 $105, $89,000 $109, $90,000 $110, $92,000 $112, $95,000 $115, $96,000 $116, $98,000 $118,000 Married, Separate Return 1997 to Present $0 $10,

104 SEP Contribution = Active Participant Income Restriction - Non-Active Participant Spouse One Spouse Active Participant One Spouse NOT Active Participant Year AGI Threshold Level AGI Phaseout Level 2008 $159,000 $169, $166,000 $176, $167,000 $177, $169,000 $179, $173,000 $183, $178,000 $188, $181,000 $191, $183,000 $193,

105 105 SEP Contributions and IRA Contributions for the Same Year Set forth below are five situations. They will illustrate the applicable rules. Situations #1 to #3 illustrate the tax analysis for someone who is an employee. Situations #4 & #5 illustrate the tax analysis for someone who is self employed. Situation #1. David, age 48, works for ABC, Inc. His filing status is single. His compensation is $30,000. His modified adjusted gross income is $30,000. David made a contribution of $5,000 to his traditional IRA on October 15, 2013, for On February 26, 2014, ABC, Inc. contributed $7,500 to David s SEP-IRA for tax year This was 25% of his compensation. ABC Inc. also contributed 25%to every other eligible employee. The $7,500 SEP contribution is excluded from David s income for federal income tax and social security tax purposes. David will be able to claim a tax deduction for his $5,000 contribution to a traditional IRA, since his MAGI is less than the threshold level.

106 106 SEP Contributions and IRA Contributions for the Same Year Set forth below are five situations. They will illustrate the applicable rules. Situations #1 to #3 illustrate the tax analysis for someone who is an employee. Situations #4 & #5 illustrate the tax analysis for someone who is self employed. Situation #2. Ann, age 55, works for ABC, Inc. Her filing status is single. Her compensation is $50,000. Her modified adjusted gross income is $98,000. Ann made a contribution of $6,000 to her traditional IRA on September 15, 2012, for On January 26, 2013, ABC, Inc. contributed $5,000 to Ann s SEP-IRA for tax year This was 10% of her income. ABC Inc. also contributed 10% to every other eligible employee. The $5,000 SEP contribution is excluded from Ann s income for federal Income tax and social security tax purposes. Ann will NOT be able to claim a tax deduction for her $6,000 contribution to a traditional IRA, since her MAGI of $98,000 is greater than the phaseout level.

107 107 SEP Contributions and IRA Contributions for the Same Year Summary. The purpose of this section has been to discuss the various tax rules which apply to making SEP contributions and traditional IRA contributions. Of course, the IRA custodian is not to be a tax advisor. However, if you wish to receive SEP and IRA deposits, the likelihood of receiving such deposits increases the more you understand the applicable tax rules.

108 108

109 109

110 110 SEP Data Processing Capabilities IRA/SEP software should be designed to allow an employer to make a SEP contribution into an employee s traditional IRA when that person has already made an annual traditional IRA contribution into such IRA. A SEP-IRA is simply a traditional IRA to which an employer makes a SEP-IRA contribution. The employee is allowed to make his or her annual traditional IRA contribution into the same IRA. It appears that some large software providers have not written their software to have this capability. In fact, when one such software provider asked by their customer why this capability was not available, the company asked to be furnished the authority for being able to make a SEP-IRA contribution to the same traditional IRA to which traditional IRA contributions have been made or vice versa. One of the cardinal rules of IRA/pension law is that the plan document controls. This rule applies to this situation. Article I of the IRS model From 5305-A defines the rules applying to IRA contributions. The main purpose of Article I is to define the permissible types of contributions and the amounts which are eligible to be contributed. Article I indicates there are four permissible types of contributions: 1. Annual contributions(s); 2. Rollover contributions; 3. SEP contributions; and 4. Recharacterized contributions.

111 111 SEP Data Processing Capabilities Article I clearly contains a limit as to how much the annual contributions may be. This limit is $5,000 or $6,000 for The IRA custodian may not accept any amount in excess of the annual contribution limit. However, such limits do not apply to a rollover contribution, an employer SEP contribution or a recharacterized contribution. The annual limit as to the SEP contributions is incorporated by referencing Code section 408(k). It is $46,000 for 2008, and $49,000 for 2009 and A contribution qualifies to be rolled over only if the rollover rules have been met. All four of the contribution types described above may be made to an individual s traditional IRA. In addition, most IRA plan agreements are written to also authorize the receipt of a transfer contribution of annual and/or SEP contributions. Note there is no language in Article I stating a SEP contribution is impermissible when there has already been an annual contribution made or vice versa. Obviously, such contributions are to be reported in different boxes on the From Box 1 is used to report annual traditional IRA contributions; Box 2 is used to report rollover contributions; Box 4 is used to report recharacterized contributions Box 8 is used to report SEP contributions.

112 112 SEP Data Processing Capabilities Note that Article I of the From 5305-A does not contain any discussion of SIMPLE- IRA contributions. This is as it should be since a person is not authorized to make a SIMPLE-IRA contribution to a traditional IRA. The plan document does not permit it because the law does not authorize it. Similarly, the Form 3505-SA does not authorize a person to make traditional IRA contributions or SEP contributions to a SIMPLE-IRA.

113 113 SEP Distributions A SEP must permit employees to withdraw employer contributions at any time. Employer contributions to an employee s SEP-IRA cannot be conditioned on the retention in such SEP-IRA of any amount contributed. Since IRAs are the funding vehicles for SEPs, the rules governing distributions from SEP-IRAs are similar to the rules for regular IRAs. (See Publication 590 for details on IRA distribution rules.) In a SAR-SEP, transfer or rollover of contributions is prohibited before a determination as to whether the deferral percentage test has been satisfied, see IRC section 408(d)(7).

114 114 SEP Reports and Disclosure to the IRS, DOL, Participants and Beneficiaries IRS Model SEP Rules for Disclosures to Employees. The IRS requires an employer who adopts a Form 5305-SEP to furnish each participant with information about the SEP and the SEP agreement. This requirement will be satisfied by furnishing the participant with a copy of the completed Form 5305-SEP contribution agreement, the questions and answers that are printed on Form 5305-SEP, and a statement each year showing any contribution made to the participant s individual retirement account or annuity (IRA). The employer should retain the original Form 5305-SEP agreement. It should not be sent to the IRS. Remember, all SAR-SEP plans had to be adopted by December 31, 1996.

115 This concludes this Webinar If you have any questions regarding the subject covered in this Webinar please feel free to call us at or send an to or visit us on the Internet at We thank you for attending Copyright 2015 Collin W. Fritz & Associates, Ltd. The Pension Specialists All rights reserved. No part of this presentation may be reproduced in any form and by any means without prior written permission from Collin W. Fritz & Associates, Ltd.