This Issue - May 2017

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Jeff Goins, CPA

With Retirement Plans, SIMPLE May Be Better

In 2017, if a company sponsors a profit-sharing plan, the company could make a contribution on behalf of the business owner of as much as $54,000. With a SIMPLE IRA, the maximum amount this year is $31,000. If that’s the case, why would you consider the latter choice?


One reason can be found in the plan’s name; a SIMPLE (savings incentive match plan for employees) IRA has less paperwork as well as lower start-up and operating costs, compared with many other types of retirement plans. As long as your company is eligible (it must have no more than 100 employees and must not sponsor another retirement plan), you can set up the plan by filling out IRS Form 5304-SIMPLE or 5305-SIMPLE.


Subsequently, there is no annual filing requirement and no testing for discrimination in favor of highly-compensated employees. The only other requirement is annual notification, which you can meet by sending each employee a copy of the original 5304-SIMPLE or 5305-SIMPLE.


A SIMPLE IRA also can work if you are just starting a company and have no employees. With other retirement plans, adding workers may require some extensive paperwork. With a SIMPLE IRA, the company just sets up an IRA for each employee who joins the plan. A SIMPLE IRA must be offered to all employees who were paid at least $5,000 in any prior two years and who are expected to earn that much in the current year.


Contribution considerations


Eligible employees can defer up to $12,500 of their compensation in 2017, deferring the income tax as well. Those 50 or older can defer up to $15,500.


With a SIMPLE IRA, employers must make certain contributions to employees’ accounts; options are stated below. All money that goes into a SIMPLE IRA is immediately 100% vested for the employee.


Option 1: The employer can opt to match each employee’s contribution, up to 3% of pay. (An employer may instead choose to match as little as 1% of employees’ contributions, for one or two years during the five-year period that ends with and includes the year for which the employer chooses the lower match percentage.)


Example: Sue Taylor, who works for ABC Corp., earns $60,000 per year. She contributes $6,000 to her SIMPLE IRA in 2017. ABC, which chose the matching option, contributes $1,800 (3% of $60,000). Therefore, the total amount moving into Sue’s account in 2017 is $7,800.


Continuing with the ABC Corp. example, suppose that Richard Palmer, the chief shareholder, is 54 years old. Richard defers the maximum $15,500 of his salary to his SIMPLE IRA. If he earns more than $516,667 in 2017, a 3% match would be another $15,500, bringing Richard the maximum $31,000 SIMPLE IRA contribution this year.


Option two: instead of matching, a company sponsoring a SIMPLE IRA can make non-elective contributions of 2% of pay for each eligible employee, even for those who don’t contribute.


Example: Walt Vincent works for XYZ Corp., where he earns $50,000 per year. XYZ has chosen to make non-elective contributions to its employees’ SIMPLE IRA. Even though Walt does not contribute this year, XYZ must make a contribution of $1,000 (2% of $50,000) to Walt’s SIMPLE IRA. These non-elective contributions are capped by an annual compensation limit, which is $270,000 in 2017. As a result, with this method a company’s contribution to any employee’s SIMPLE IRA can’t exceed $5,400 this year (2% of $270,000).


Fine points


During the first two years they are in the plan, SIMPLE IRA participants will face a 25% penalty for in-service withdrawals before age 59½. After two years have passed, the regular 10% early withdrawal penalty applies. Also during those first two years, rollovers from a SIMPLE IRA to a traditional IRA are prohibited.


Eligible companies generally must establish a SIMPLE IRA by October 1 in order to have the plan in effect for the current year. However, different rules apply to new companies that came into existence after October 1, and existing companies that previously maintained a SIMPLE IRA plan.


Contact one of our experienced advisors at 248-258-8900 to discuss a SIMPLE IRA or another retirement plan.



Tax Alerts
Tax Briefing(s)

President Trump on April 26th, just before his “100 days” in office, unveiled his highly-anticipated tax reform outline –the “2017 Tax Reform for Economic Growth and American Jobs.” The outline calls for dramatic tax cuts and simplification: lower individual tax rates under a three-bracket structure, doubling the standard deduction, and more than halving the corporate tax rate; along with changing the tax treatment of pass-through businesses, expanding child and dependent incentives, and more. Both the alternative minimum tax and the federal estate tax would be eliminated. The White House proposal does not include spending and tax incentives for infrastructure; nor a controversial “border tax.”

The Treasury Department is to undertake a review and re-evaluation of tax regulations issued by the IRS since January 1, 2016. President Trump signed an Executive Order 13789 (“Identifying and Reducing Tax Regulatory Burdens”) ordering this action on April 21. Following its review and re-evaluation, the Treasury Department will make recommendations.

The IRS processed more than 128 million returns and issued some 97 million refunds without hitting any major roadblocks by the end of the filing season. As in past years, the vast majority of returns were filed electronically. Likewise, most refunds were deposited electronically. Although the filing season has ended for most individuals, millions are on extensions.

Audit coverage rates are at low levels, the IRS has reported. According to the IRS, the audit coverage rate for individuals fell 16 percent from FY 2015 to FY 2016. The 0.7 percent audit coverage rate for individuals was the lowest coverage rate in more than a decade, the agency added.

Although the employee may end up with the same amount whether something is designated a tip or a service charge, the IRS reporting requirements for the employer do differ. Basically, any amount required to be paid by a customer rather than at the customer’s discretion is considered a service charge by the IRS.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2017.


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