Do you want to go into business for yourself?
Many people who launch small businesses start out as sole
proprietors. Here are nine tax rules and considerations involved in operating
as that entity.
1. You may qualify for the pass-through
deduction. To the extent your business generates qualified business income,
you are eligible to claim the 20% pass-through deduction, subject to
limitations. The deduction is taken “below the line,” meaning it reduces
taxable income, rather than being taken “above the line” against your gross
income. However, you can take the deduction even if you don’t itemize
deductions and instead claim the standard deduction.
2. Report income and expenses on Schedule C
of Form 1040. The net income will be taxable to you regardless of whether you
withdraw cash from the business. Your business expenses are deductible against
gross income and not as itemized deductions. If you have losses, they will
generally be deductible against your other income, subject to special rules
related to hobby losses, passive activity losses and losses in activities in
which you weren’t “at risk.”
3. Pay self-employment taxes. For 2020,
you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on
your net earnings from self-employment of up to $137,700, and Medicare tax only
at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of
3.8%) is imposed on self-employment income in excess of $250,000 for joint
returns; $125,000 for married taxpayers filing separate returns; and $200,000
in all other cases. Self-employment tax is imposed in addition to income tax,
but you can deduct half of your self-employment tax as an adjustment to income.
4. Make quarterly estimated tax payments. For 2019, these are due
April 15, June 15, September 15 and January 15, 2021.
5. You may be able to deduct home office
expenses. If you work from a home office, perform management or
administrative tasks there, or store product samples or inventory at home, you
may be entitled to deduct an allocable portion of some costs of maintaining
your home. And if you have a home office, you may be able to deduct expenses of
traveling from there to another work location.
6. You can deduct 100% of your health
insurance costs as a business expense. This means your deduction
for medical care insurance won’t be subject to the rule that limits medical
expense deductions.
7. Keep complete records of your income and
expenses. Specifically, you should carefully record your expenses in
order to claim all the tax breaks to which you’re entitled. Certain expenses,
such as automobile, travel, meals, and office-at-home expenses, require special
attention because they’re subject to special recordkeeping rules or
deductibility limits.
8. If you hire employees, you need to get a
taxpayer identification number and withhold and pay employment taxes.
9. Consider establishing a qualified
retirement plan. The advantage is that amounts contributed to the plan are
deductible at the time of the contribution and aren’t taken into income until
they’re are withdrawn. Because many qualified plans can be complex, you might
consider a SEP plan, which requires less paperwork. A SIMPLE plan is also available
to sole proprietors that offers tax advantages with fewer restrictions and
administrative requirements. If you don’t establish a retirement plan, you may
still be able to contribute to an IRA.
Seek assistance
If you want additional information regarding the tax aspects of
your new business, or if you have questions about reporting or recordkeeping
requirements, please contact us.
© 2020
Look closely at your company’s concentration risks
The word “concentration” is usually associated with a strong
ability to pay attention. Business owners are urged to concentrate when
attempting to resolve the many challenges facing them. But the word has an
alternate meaning in a business context as well — and a distinctly negative one
at that.
Common problem
A common problem among many companies is customer concentration. This
is when a business relies on only a few customers to generate most of its
revenue.
The dilemma is more prevalent in some industries than others.
For example, a retail business will likely market itself to a broad range of
buyers and generally not face too much risk of concentration. A commercial
construction company, however, may serve only a limited number of clients that
build, renovate or maintain offices or facilities.
How do you know whether you’re at risk? One rule of thumb says
that if your biggest five customers make up 25% or more of your revenue, your
customer concentration is high. Another simple measure says that, if any one
customer represents 10% or more of revenue, you’re at risk of elevated customer
concentration.
In an increasingly specialized world, many types of businesses
focus only on certain market segments. If yours is one of them, you may not be
able to do much about customer concentration. In fact, the very strength of
your company could be its knowledge and attentiveness to a limited number of
buyers.
Nonetheless, know your risk and explore strategic planning
concepts that might enable you to lower it. And if diversifying your customer
base just isn’t an option, be sure to maintain the highest levels of customer
service.
Other forms
There are other forms of concentration. For instance, vendor concentration is when
a company relies on only a handful of suppliers. If any one of them goes out of
business or substantially raises its prices, the company relying on it could
find itself unable to operate or, at the very least, face a severe rise in
expenses.
You may also encounter geographic
concentration. This can take a couple forms. First, if your customer base is
concentrated in one area, a dip in the regional economy or a disruptive
competitor could severely affect profitability. Small local businesses are, by
definition, dependent on geographic concentration. But they can still monitor
the risk and look for ways to mitigate it (such as online sales).
Second, there’s geographic concentration in the global sense.
Say your company relies on a foreign supplier for iron, steel or another
essential component. Tariffs can have an enormous impact on cost and
availability. Geopolitical and environmental factors might also come into play.
Major risk
Yes, concentration is a good thing when it comes to mental
acuity. But the other
kind of concentration is a risk factor to learn about and address as the year
rolls along. We can assist you in measuring your susceptibility and developing
strategies for moderating it.
3 best practices for achieving organic sales growth
Most business owners would probably agree that, when it comes to
sales, there’s always room for improvement. To this end, every company should
strive for organic
sales growth — that is, increases from existing operations unrelated to a
merger or acquisition.
That’s not to say a merger or acquisition is necessarily a bad
idea, but you can’t rely on major moves like this to regularly boost your
numbers. Let’s look at three best practices for achieving organic sales growth.
1. Attentive customer service
Premier customer service is more than just a smile and a
handshake. Are your employees really hearing clients’ problems and concerns? Do
their solutions not only fix the issue but also, whenever possible, exceed the
customers’ expectations?
The ability to conduct productive dialogues with your customers
is a key to growing sales. Maintaining a positive, ongoing conversation starts
with resolving any negative (or potentially negative) issues that arise as
quickly as possible under strictly followed protocols. It also includes simply
checking in with customers regularly to see what they may need.
2. Smart marketing
Do you often find yourself wondering why all your marketing
channels aren’t generating new leads for your business? Most likely, it’s
because some of those channels are no longer connecting with customers and
prospects.
Therefore, you might want to step back and reassess the nature
and strengths of your company. If you work directly with the buying public, you
may want to cast as wide a net as possible. But if you sell to a specific
industry or certain types of customers, you may be able to grow sales
organically by focusing on professional networking groups, social organizations
and trade associations.
3. Great employees
Ultimately, people are what make or break a company. Even the
best idea can fail if employees aren’t fully prepared and committed to
designing, producing, marketing and selling that product or service. Of course,
as you well know, employing talented, industrious staff requires much more than
simply getting them to show up for work.
First, you must train employees well. This means they need to
know both: 1) how to do their jobs, and 2) how to help grow sales. You might
ask: Does every worker really contribute to sales? In a sense, yes, because
quality work — from entry-level office staff to executives in corner offices —
drives sales.
Second, once an employee is trained, he or she must be
periodically retrained. Happy workers are more productive and more likely to
preach the excellence of your company’s products or services to friends and
family. Sales may occur as a result.
The right moves
These best practices are, obviously, general in nature. The
specific moves you need to make to boost your business’s sales numbers will
depend on your size, industry, market and focus. Our firm can help you identify
optimal strategies for organic sales growth and measure the results.
© 2020
Cents-per-mile rate for business miles decreases slightly for 2020
This year, the optional standard mileage rate used to calculate
the deductible costs of operating an automobile for business decreased by
one-half cent, to 57.5 cents per mile. As a result, you might claim a lower
deduction for vehicle-related expense for 2020 than you can for 2019.
Calculating your deduction
Businesses can generally deduct the actual expenses attributable
to business use of vehicles. This includes gas, oil, tires, insurance, repairs,
licenses and vehicle registration fees. In addition, you can claim a
depreciation allowance for the vehicle. However, in many cases depreciation
write-offs on vehicles are subject to certain limits that don’t apply to other
types of business assets.
The cents-per-mile rate comes into play if you don’t want to
keep track of actual
vehicle-related expenses. With this approach, you don’t have to account for all
your actual expenses, although you still must record certain information, such
as the mileage for each business trip, the date and the destination.
Using the mileage rate is also popular with businesses that
reimburse employees for business use of their personal vehicles. Such
reimbursements can help attract and retain employees who drive their personal
vehicles extensively for business purposes. Why? Under the Tax Cuts and Jobs
Act, employees can no longer deduct unreimbursed employee business expenses,
such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, be aware that you must
comply with various rules. If you don’t, the reimbursements could be considered
taxable wages to the employees.
The rate for 2020
Beginning on January 1, 2020, the standard mileage rate for the
business use of a car (van, pickup or panel truck) is 57.5 cents per mile. It
was 58 cents for 2019 and 54.5 cents for 2018.
The business cents-per-mile rate is adjusted annually. It’s
based on an annual study commissioned by the IRS about the fixed and variable
costs of operating a vehicle, such as gas, maintenance, repair and depreciation.
Occasionally, if there’s a substantial change in average gas prices, the IRS
will change the mileage rate midyear.
Factors to consider
There are some situations when you can’t use the cents-per-mile
rate. In some cases, it partly depends on how you’ve claimed deductions for the
same vehicle in the past. In other cases, it depends on if the vehicle is new
to your business this year or whether you want to take advantage of certain
first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding
whether to use the mileage rate to deduct vehicle expenses. We can help if you
have questions about tracking and claiming such expenses in 2020 — or claiming
them on your 2019 income tax return.
© 2019
New rules will soon require employers to annually disclose retirement income to employees
As you’ve probably heard, a new law was recently passed with a
wide range of retirement plan changes for employers and individuals. One of the
provisions of the SECURE Act involves a new requirement for employers that sponsor
tax-favored defined contribution retirement plans that are subject to ERISA.
Specifically, the law will require that the benefit statements
sent to plan participants include a lifetime income disclosure at least once
during any 12-month period. The disclosure will need to illustrate the monthly
payments that an employee would receive if the total account balance were used
to provide lifetime income streams, including a single life annuity and a
qualified joint and survivor annuity for the participant and the participant’s
surviving spouse.
Background Information
Under ERISA, a defined contribution plan administrator is required to provide benefit statements to participants. Depending on the situation, these statements must be provided quarterly, annually or upon written request. In 2013, the U.S. Department of Labor (DOL) issued an advance notice of proposed rule making providing rules that would have required benefit statements provided to defined contribution plan participants to include an estimated lifetime income stream of payments based on the participant’s account balance.
Some employers began providing this information in these
statements — even though it wasn’t required.
But in the near future, employers will have to begin providing
information to their employees about lifetime income streams.
Effective Date
Fortunately, the effective date of the requirement has been
delayed until after the DOL issues guidance. It won’t go into effect until 12
months after the DOL issues a final rule. The law also directs the DOL to
develop a model disclosure.
Plan fiduciaries, plan sponsors, or others won’t have liability
under ERISA solely because they provided the lifetime income stream
equivalents, so long as the equivalents are derived in accordance with the
assumptions and guidance and that they include the explanations contained in
the model disclosure.
Stay Tuned
Critics of the new rules argue the required disclosures will
lead to confusion among participants and they question how employers will
arrive at the income projections. For now, employers have to wait for the DOL
to act. We’ll update you when that happens. Contact us if you have questions
about this requirement or other provisions in the SECURE Act.
© 2019
How business owners and execs can stay connected with staff
With the empty bottles of bubbly placed safely in the recycling
bin and the confetti swept off the floor, it’s time to get back to the grind.
The beginning of the year can be a busy time for business owners and
executives, because you no doubt want to get off to a strong start in 2020.
One danger of a hectic beginning is setting an early precedent
for distancing yourself from rank-and-file staff. After all, a busy opening to
the year may turn into a chaotic middle and a frantic conclusion. Hopefully
all’s well that ends well, but you and your top-level executives could wind up
isolating yourselves from employees — and that’s not good.
Here are some ways to stay connected with staff throughout the
year:
Solicit Feedback
Set up an old-fashioned suggestion box or perhaps a more contemporary email address where employees can vent their concerns and ask questions. Ownership or executive management can reply to queries with the broadest implications, while other managers could handle questions specific to a given department or position. Share answers through company-wide emails or make them a feature of an internal newsletter or blog.
Hold a Company Meeting
At least once a year, hold a “town hall” with staff members to answer questions and discuss issues face to face. You could even take it to the next level by organizing a company retreat, where you can not only answer questions but challenge employees to come up with their own strategic ideas.
Be Social
All work and no play can make owners and execs look dull and distant. Hold an annual picnic, host an outing to a sporting event or throw a holiday party so you and other top managers can mingle socially and get to know people on a personal level.
Make Appearances
Business owners and executives should occasionally tour each company department or facility. Give managers a chance to speak with you candidly. Sit in on meetings; ask and answer questions. Employees will likely get a morale boost from seeing you take an active interest in their little corner of the company.
Learn a Job
For a potentially fun and insightful change of pace, set aside a day to learn about a specific company position. Shadow an employee and let him or her explain what really goes into the job. Ask questions but stay out of the way. Clarify upfront that you’re not playing “gotcha” but rather trying to better understand how things get done and what improvements you might make.
By staying visible and interactive with employees, your staff
will likely feel more appreciated and, therefore, be more productive. You also
may gather ideas for eliminating costly redundancies and inefficiencies. Maybe
you’ll even find inspiration for your next big strategic move. We can assist
you in assessing the potential costs and benefits of the strategies mentioned
and more.
© 2020
Tax Developments: Summary of the 2019 SECURE Act provisions affecting business and individual taxpayers
On December 20, 2019, the SECURE Act, a new tax law included
as part of the Further Consolidated Appropriations Act of 2020, was enacted.
The “Setting Every Community Up for Retirement Enhancement” (SECURE) Act
expands the ability for individuals to maximize their savings and makes
simplifications to the qualified retirement system. This article outlines
specific provisions of the act in summary form and explains the mechanics of
the rules under old and new law.
The changes to the Internal Revenue Code made by this act
apply to individuals who are participants in qualified retirement plans and to
sponsors (i.e. employers) that administer such plans.
The additional flexibility offered by these rules should
help certain individuals, especially those working longer, those working while
obtaining advanced degrees, and families looking to save for college obtain
flexibility in the accumulation and utilization of retirement funds. For
changes to stretch IRAs, many individuals are recommended to review their
estate planning to ensure that the distribution of any retirement accounts is
handled according to their wishes and in accord with new law.
The changes in the Kiddie Tax rules may be a planning
opportunity for families with children who have unearned (usually investment)
income. The ability to elect to apply these rules retroactively may be a place
to find tax savings if the changes under the TCJA had increased the family’s
tax liability in 2018 and 2019.
For employers, the flexibility in setting up a plan and the
expansion of credits available for new plans should make offering qualified
retirement benefits to employees much more attractive. The ability to combine
multiple plans for more efficient growth and investment results should benefit
retirees with increased returns over the life of the plan. At the same time,
increases in penalties means that employers who do administer plans should be
taking extra care that they are meeting all compliance and fiduciary
requirements.
Individuals
Repeal of the maximum age for traditional IRA contributions.
Before 2020, traditional IRA contributions were not allowed
once the individual attained age 70½. Starting in 2020, the new rules allow an
individual of any age to make contributions to a traditional IRA, as long as
the individual has compensation, which generally means earned income from wages
or self-employment.
Required minimum distribution age raised from 70½ to 72.
Before 2020, retirement plan participants and IRA owners
were generally required to begin taking required minimum distributions, or
RMDs, from their plan by April 1 of the year following the year they reached
age 70½. The age 70½ requirement was first applied in the retirement plan
context in the early 1960s and, until recently, had not been adjusted to account
for increases in life expectancy.
For distributions required to be made after Dec. 31, 2019,
for individuals who attain age 70½ after that date, the age at which
individuals must begin taking distributions from their retirement plan or IRA
is increased from 70½ to 72.
Partial elimination of stretch IRAs.
For deaths of plan participants or IRA owners occurring
before 2020, beneficiaries (both spousal and nonspousal) were generally allowed
to stretch out the tax-deferral advantages of the plan or IRA by taking
distributions over the beneficiary s life or life expectancy (in the IRA
context, this is sometimes referred to as a “stretch IRA”).
However, for deaths of plan participants or IRA owners
beginning in 2020 (later for some participants in collectively bargained plans
and governmental plans), distributions to most nonspouse beneficiaries are
generally required to be distributed within ten years following the plan
participant s or IRA owner s death. So, for those beneficiaries, the
“stretching” strategy is no longer allowed.
Exceptions to the 10-year rule are allowed for distributions
to (1) the surviving spouse of the plan participant or IRA owner; (2) a child
of the plan participant or IRA owner who has not reached majority; (3) a
chronically ill individual; and (4) any other individual who is not more than
ten years younger than the plan participant or IRA owner. Those beneficiaries
who qualify under this exception may generally still take their distributions
over their life expectancy (as allowed under the rules in effect for deaths
occurring before 2020).
Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans.
A Section 529 education savings plan (a 529 plan, also known
as a qualified tuition program) is a tax-exempt program established and
maintained by a state, or one or more eligible educational institutions (public
or private). Any person can make nondeductible cash contributions to a 529 plan
on behalf of a designated beneficiary. The earnings on the contributions
accumulate tax-free. Distributions from a 529 plan are excludable up to the
amount of the designated beneficiary's qualified higher education expenses.
Before 2019, qualified higher education expenses didn't include
the expenses of registered apprenticeships or student loan repayments.
But for distributions made after Dec. 31, 2018 (the
effective date is retroactive), tax-free distributions from 529 plans can be
used to pay for fees, books, supplies, and equipment required for the
designated beneficiary s participation in an apprenticeship program. In
addition, tax-free distributions (up to $10,000) are allowed to pay the
principal or interest on a qualified education loan of the designated
beneficiary, or a sibling of the designated beneficiary.
Kiddie tax changes for gold star children and others.
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA,
P.L. 115-97), which made changes to the so-called “kiddie tax,” which is a tax
on the unearned income of certain children. Before enactment of the TCJA, the
net unearned income of a child was taxed at the parents' tax rates if the
parents' tax rates were higher than the tax rates of the child.
Under the TCJA, for tax years beginning after Dec. 31, 2017,
the taxable income of a child attributable to net unearned income is taxed
according to the brackets applicable to trusts and estates. Children to whom
the kiddie tax rules apply and who have net unearned income also have a reduced
exemption amount under the alternative minimum tax (AMT) rules.
There had been concern that the TCJA changes unfairly
increased the tax on certain children, including those who were receiving
government payments (i.e., unearned income) because they were survivors of
deceased military personnel (“gold star children”), first responders, and
emergency medical workers.
The new rules enacted on Dec. 20, 2019, repeal the kiddie
tax measures that were added by the TCJA. So, starting in 2020 (with the option
to start retroactively in 2018 and/or 2019), the unearned income of children is
taxed under the pre-TCJA rules, and not at trust/estate rates. And starting
retroactively in 2018, the new rules also eliminate the reduced AMT exemption
amount for children to whom the kiddie tax rules apply and who have net
unearned income.
Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.
Generally, a distribution from a retirement plan must be
included in income. And, unless an exception applies (for example, distributions
in case of financial hardship), a distribution before the age of 59-1/2 is
subject to a 10% early withdrawal penalty on the amount includible in income.
Starting in 2020, plan distributions (up to $5,000) that are
used to pay for expenses related to the birth or adoption of a child are
penalty-free. That $5,000 amount applies on an individual basis, so for a
married couple, each spouse may receive a penalty-free distribution up to
$5,000 for a qualified birth or adoption.
Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.
Before 2020, stipends and non-tuition fellowship payments
received by graduate and postdoctoral students were not treated as compensation
for IRA contribution purposes, and so could not be used as the basis for making
IRA contributions.
Starting in 2020, the new rules remove that obstacle by
permitting taxable non-tuition fellowship and stipend payments to be treated as
compensation for IRA contribution purposes. This change will enable these
students to begin saving for retirement without delay.
Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits.
Many home healthcare workers do not have taxable income
because their only compensation comes from “difficulty-of-care” payments that
are exempt from taxation. Because those workers do not have taxable income,
they were not able to save for retirement in a qualified retirement plan or
IRA.
For IRA contributions made after Dec. 20, 2019 (and
retroactively starting in 2016 for contributions made to certain qualified
retirement plans), the new rules allow home healthcare workers to contribute to
a retirement plan or IRA by providing that tax-exempt difficulty-of-care
payments are treated as compensation for purposes of calculating the
contribution limits to certain qualified plans and IRAs.
Businesses
Unrelated employers are more easily allowed to band together to create a single retirement plan.
A multiple employer plan (MEP) is a single plan maintained
by two or more unrelated employers. Starting in 2021, the new rules reduce the
barriers to creating and maintaining MEPs, which will help increase
opportunities for small employers to band together to obtain more favorable
investment results, while allowing for more efficient and less expensive
management services.
New small employer automatic plan enrollment credit.
Automatic enrollment is shown to increase employee
participation and higher retirement savings. Starting in 2020, the new rules
create a new tax credit of up to $500 per year to employers to defray start-up
costs for new 401(k) plans and SIMPLE IRA plans that include automatic
enrollment. The credit is in addition to an existing plan start-up credit, and
is available for three years. The new credit is also available to employers who
convert an existing plan to a plan with an automatic enrollment design.
Increase credit for small employer pension plan start-up costs.
The new rules increase the credit for plan start-up costs to
make it more affordable for small businesses to set up retirement plans.
Starting in 2020, the credit is increased by changing the calculation of the
flat dollar amount limit on the credit to the greater of (1) $500, or (2) the
lesser of: (a) $250 multiplied by the number of nonhighly compensated employees
of the eligible employer who are eligible to participate in the plan, or (b)
$5,000. The credit applies for up to three years.
Expand retirement savings by increasing the auto enrollment safe harbor cap.
An annual nondiscrimination test called the actual deferral
percentage (ADP) test applies to elective deferrals under a 401(k) plan. The
ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum
matching or non-elective contributions under either of two safe harbor plan
designs and meets certain other requirements. One of the safe harbor plans is
an automatic enrollment safe harbor plan.
Starting in 2020, the new rules increase the cap on the
default rate under an automatic enrollment safe harbor plan from 10% to 15%,
but only for years after the participant's first deemed election year. For the
participant's first deemed election year, the cap on the default rate is 10%.
Allow long-term part-time employees to participate in 401(k) plans.
Currently, employers are generally allowed to exclude
part-time employees (i.e., employees who work less than 1,000 hours per year)
when providing certain types of retirement plans—like a 401(k) plan—to their
employees. As women are more likely than men to work part-time, these rules can
be especially harmful for women in preparing for retirement.
However, starting in 2021, the new rules will require most
employers maintaining a 401(k) plan to have a dual eligibility requirement
under which an employee must complete either a one-year-of-service requirement
(with the 1,000-hour rule), or three consecutive years of service where the
employee completes at least 500 hours of service per year. For employees who
are eligible solely by reason of the new 500-hour rule, the employer will be
allowed to exclude those employees from testing under the nondiscrimination and
coverage rules, and from the application of the top-heavy rules.
Loosen notice requirements and amendment timing rules to facilitate adoption of nonelective contribution 401(k) safe harbor plans.
The actual deferral percentage nondiscrimination test is
deemed to be satisfied if a 401(k) plan includes certain minimum matching or
nonelective contributions under either of two plan designs (referred to as a
“401(k) safe harbor plan”), as well as certain required rights and features,
and satisfies a notice requirement. Under one type of 401(k) safe harbor plan,
the plan either (1) satisfies a matching contribution requirement, or (2)
provides for a nonelective contribution to a defined contribution plan of at
least 3% of an employee's compensation on behalf of each nonhighly compensated
employee who is eligible to participate in the plan.
Starting in 2020, the new rules change the nonelective
contribution 401(k) safe harbor to provide greater flexibility, improve
employee protection, and facilitate plan adoption. The new rules eliminate the
safe harbor notice requirement, but maintain the requirement to allow employees
to make or change an election at least once per year. The rules also permit
amendments to nonelective status at any time before the 30th day before the
close of the plan year. Amendments after that time are allowed if the amendment
provides (1) a nonelective contribution of at least 4% of compensation (rather
than at least 3%) for all eligible employees for that plan year, and (2) the
plan is amended no later than the last day for distributing excess
contributions for the plan year (i.e., by the close of following plan year).
Expansion of portability of lifetime income options.
Starting in 2020, the new rules permit certain retirement
plans to make a direct trustee-to-trustee transfer to another
employer-sponsored retirement plan, or IRA, of a lifetime income investment or
distributions of a lifetime income investment in the form of a qualified plan
distribution annuity, if a lifetime income investment is no longer authorized
to be held as an investment option under the plan. This change permits
participants to preserve their lifetime income investments and avoid surrender
charges and fees.
Qualified employer plans barred from making loans through credit cards and similar arrangements.
After Dec. 20, 2019, plan loans may no longer be distributed
through credit cards or similar arrangements. This change is intended to ensure
that plan loans are not used for routine or small purchases, thereby helping to
preserve retirement savings.
Nondiscrimination rules modified to protect older, longer service participants in closed plans.
Starting in 2020, the nondiscrimination rules as they
pertain to closed pension plans (i.e., plans closed to new entrants) are being
changed to permit existing participants to continue to accrue benefits. The
modification will protect the benefits for older, longer-service employees as
they near retirement.
Plans adopted by filing due date for year may be treated as in effect as of close of year.
Starting in 2020, employers can elect to treat qualified
retirement plans adopted after the close of a tax year, but before the due date
(including extensions) of the tax return, as having been adopted as of the last
day of the year. The additional time to establish a plan provides flexibility
for employers who are considering adopting a plan, and the opportunity for
employees to receive contributions for that earlier year.
New annual disclosures required for estimated lifetime income streams.
The new rules (starting at a to-be-determined future date)
will require that plan participants' benefit statements include a lifetime
income disclosure at least once during any 12-month period. The disclosure will
have to illustrate the monthly payments the participant would receive if the
total account balance were used to provide lifetime income streams, including a
qualified joint and survivor annuity for the participant and the participant s
surviving spouse and a single life annuity.
Fiduciary safe harbor added for selection of annuity providers.
When a plan sponsor selects an annuity provider for the
plan, the sponsor is considered a plan “fiduciary,” which generally means that
the sponsor must discharge his or her duties with respect to the plan solely in
the interests of plan participants and beneficiaries (this is known as the
“prudence requirement”).
Starting on Dec. 20, 2019 (the date the SECURE Act was
signed into law), fiduciaries have an optional safe harbor to satisfy the
prudence requirement in their selection of an insurer for a guaranteed
retirement income contract, and are protected from liability for any losses
that may result to participants or beneficiaries due to an insurer's future
inability to satisfy its financial obligations under the terms of the contract.
Removing ambiguity about the applicable fiduciary standard eliminates a
roadblock to offering lifetime income benefit options under a plan.
Increased penalties for failure-to-file retirement plan returns.
Starting in 2020, the new rules modify the failure-to-file
penalties for retirement plan returns.
The penalty for failing to file a Form 5500 (for annual plan
reporting) is changed to $250 per day, not to exceed $150,000.
A taxpayer's failure to file a registration statement incurs
a penalty of $10 per participant per day, not to exceed $50,000.
The failure to file a required notification of change
results in a penalty of $10 per day, not to exceed $10,000.
The failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year. For planning opportunities or to learn more about these changes, please contact our office at 617-651-0531 or by using our contact us form below.
New law helps businesses make their employees’ retirement secure
A significant law was recently passed that adds tax breaks and
makes changes to employer-provided retirement plans. If your small business has
a current plan for employees or if you’re thinking about adding one, you should
familiarize yourself with the new rules.
The Setting Every Community Up for Retirement Enhancement Act
(SECURE Act) was signed into law on December 20, 2019 as part of a larger
spending bill. Here are three provisions of interest to small businesses.
- Employers that are unrelated will be able to join together to create one retirement plan. Beginning in 2021, new rules will make it easier to create and maintain a multiple employer plan (MEP). A MEP is a single plan operated by two or more unrelated employers. But there were barriers that made it difficult to setting up and running these plans. Soon, there will be increased opportunities for small employers to join together to received better investment results, while allowing for less expensive and more efficient management services.
- There’s an increased tax credit for small employer retirement plan startup costs. If you want to set up a retirement plan, but haven’t gotten around to it yet, new rules increase the tax credit for retirement plan start-up costs to make it more affordable for small businesses to set them up. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit to: The greater of $500, or the lesser of: a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or b) $5,000.
- There’s a new small employer automatic plan enrollment tax credit. Not surprisingly, when employers automatically enroll employees in retirement plans, there is more participation and higher retirement savings. Beginning in 2020, there’s a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. This credit is on top of and existing plan start-up credit described above and is available for three years. It is also available to employers who convert an existing plan to a plan with automatic enrollment.
These are only some of the retirement plan provisions in the
SECURE Act. There have also been changes to the auto enrollment safe harbor
cap, nondiscrimination rules, new rules that allow certain part-timers to
participate in 401(k) plans, increased penalties for failing to file retirement
plan returns and more. Contact us to learn more about your situation.
4 new law changes that may affect your retirement plan
If you save for retirement with an IRA or other plan, you’ll be
interested to know that Congress recently passed a law that makes significant
modifications to these accounts. The SECURE Act, which was signed into law on
December 20, 2019, made these four changes.
Change #1: The maximum age for making
traditional IRA contributions is repealed. Before 2020,
traditional IRA contributions weren’t allowed once you reached age 70½.
Starting in 2020, an individual of any age can make contributions to a
traditional IRA, as long he or she has compensation, which generally means
earned income from wages or self-employment.
Change #2: The required minimum distribution
(RMD) age was raised from 70½ to 72. Before 2020, retirement
plan participants and IRA owners were generally required to begin taking RMDs
from their plans by April 1 of the year following the year they reached age
70½. The age 70½ requirement was first applied in the early 1960s and, until
recently, hadn’t been adjusted to account for increased life expectancies.
For distributions required to be made after December 31, 2019,
for individuals who attain age 70½ after that date, the age at which
individuals must begin taking distributions from their retirement plans or IRAs
is increased from 70½ to 72.
Change #3: “Stretch IRAs” were partially
eliminated. If a plan participant or IRA owner died before 2020, their
beneficiaries (spouses and non-spouses) were generally allowed to stretch out
the tax-deferral advantages of the plan or IRA by taking distributions over the
beneficiary’s life or life expectancy. This is sometimes called a “stretch
IRA.”
However, for deaths of plan participants or IRA owners beginning
in 2020 (later for some participants in collectively bargained plans and
governmental plans), distributions to most non-spouse beneficiaries are
generally required to be distributed within 10 years following a plan
participant’s or IRA owner’s death. That means the “stretch” strategy is no
longer allowed for those beneficiaries.
There are some exceptions to the 10-year rule. For example, it’s
still allowed for: the surviving spouse of a plan participant or IRA owner; a
child of a plan participant or IRA owner who hasn’t reached the age of
majority; a chronically ill individual; and any other individual who isn’t more
than 10 years younger than a plan participant or IRA owner. Those beneficiaries
who qualify under this exception may generally still take their distributions
over their life expectancies.
Change #4: Penalty-free withdrawals are now
allowed for birth or adoption expenses. A distribution from a
retirement plan must generally be included in income. And, unless an exception
applies, a distribution before the age of 59½ is subject to a 10% early
withdrawal penalty on the amount includible in income.
Starting in 2020, plan distributions (up to $5,000) that are
used to pay for expenses related to the birth or adoption of a child are
penalty-free. The $5,000 amount applies on an individual basis. Therefore, each
spouse in a married couple may receive a penalty-free distribution up to $5,000
for a qualified birth or adoption.
Questions?
These are only some of the changes included in the new law. If
you have questions about your situation, don’t hesitate to contact us.
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