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    V. Preparing Your Tax Return(s) and Information Returns     XI. Alerts and Tutorials |
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Hiring Employees Retirement plans are savings plans that offer you taxadvantages to set aside money for your and your employees' retirement. SEP, SIMPLE and qualified plans offer you and youremployees a tax favored way to save for retirement. You can deduct contributionsyou make to the plan for you and your employees. The contributions and earningsare generally tax free until you or your employees receive distributions fromthe plan in later years. In general, individuals who are employed can also set upand contribute to individual retirement arrangements (IRAs). All retirement plans have important tax, business andother implications for employers and employees. Therefore, you may want todiscuss any retirement savings plan with a tax or financial advisor. See the IRS website at http://www.irs.gov/bus_info/ep/index.html.
SimplifiedEmployee Pension (SEP) A Simplified Employee Pension (SEP) is a written plan thatallows you to make contributions toward your own and your employees' retirementwithout getting involved in a more complex qualified plan. Under a SEP, you makethe contributions to an individual retirement arrangement (called a SEP-IRA) setup for each eligible employee. SEP-IRAs are owned and controlled by theemployee, and you make contributions to the financial institution where theSEP-IRA is maintained. You generally do not have to file annual retirement planinformation reports with the government. Under a SEP, you must contribute a uniform percentage ofpay to each eligible employee's SEP-IRA. You are not locked into makingcontributions every year. You can decide how much to put into a SEP each year -offering you some flexibility when business conditions vary. Employercontributions are limited to the lesser of 15 percent of an employee's annualsalary or $25,500. (Note: this amount is indexed for inflation and will vary). You can set up a SEP by completing an IRS model SEP using Form5305-SEP. See the instructions to the form for exceptions. No IRS approvalis required. Keep the original form. Follow its terms and instructions. Do notfile it with the IRS. You must also set up a SEP-IRA for each eligible employee.SEP-IRAs can be set up with banks, insurance companies, or other qualifiedfinancial institutions. You send SEP contributions to the financial institutionwhere the SEP-IRA is maintained. You can set up a SEP for a year as late as the due date(including extensions of your income tax return for that year.
Contributionlimits. A Savings Incentive Match Plan for Employees (SIMPLE)allows employees to contribute a percentage of their salary each pay check.Under a SIMPLE, employees can set aside up to $6,000 each year by payrolldeduction. Employers can either match employee contributions dollar for dollar -up to 3 percent of an employee's wage - or make a fixed contribution of 2percent of pay for all eligible employees instead of a matching contribution. You can set up a SIMPLE only if you had 100 or feweremployees who earned $5,000 or more in compensation during the preceding year.You cannot sponsor a SIMPLE if you currently sponsor another plan. You can use 5304-SIMPLEor Form 5305-SIMPLEto set up a SIMPLE. Each form is a model SIMPLE document. Which form you usedepends on whether you select the financial institution or your employees selectthe financial institution that will receive the contributions. Use Form5304-SIMPLE if you allow each plan participant to select the financialinstitution for receiving his or her SIMPLE contributions. Use Form 5305-SIMPLEif you require that all contributions under the SIMPLE be deposited initially ata designated financial institution. A SIMPLE is adopted when you have completed allappropriate boxes and blanks on the form and you have signed it. No IRS approvalis required. Keep the original form. Follow its terms and instructions. Do notfile it with the IRS. You generally do not have to file annual retirement planinformation reports with the government. A SIMPLE IRA must be set up for each eligible employee. ASIMPLE IRA is the individual retirement account or annuity into which the SIMPLEcontributions are deposited. Form 5305-S and Form 5305-SA are model trust andcustodial account documents that the participant and the trustee (or custodian)can use to set up a SIMPLE IRA. Qualified Plans(Keogh Plans) There are two basic kinds of qualified plans -- definedcontribution plans and defined benefit plans -- and different rules apply toeach. A defined contribution plan provides an individual account for eachparticipant in the plan. It provides benefits to a participant largely based onthe amount contributed to that participant's account. Benefits are also affectedby any income, expenses, gains, losses, and forfeitures of other accounts thatmay be allocated to an account. In a profit-sharing plan, the contribution formula can beflexible and you do not have to make contributions out of net profits to have aprofit-sharing plan. A profit-sharing plan can also contain a cash or deferredarrangement - also known as a 401(k) plan - a plan that allows employees tocontribute a percentage of their salary each pay check. You can contribute toyour employee's 401(k) account by matching the amount of pay that your employeeshave deferred into the 401(k) plan, usually up to a percentage of the employee'spay. Defined benefit plans promise a specified benefit atretirement, for example, $100 a month at retirement. The amount of the benefitis often based on a set percentage of pay multiplied by the number of years theemployee worked for the employer offering the plan. Employer contributions mustbe sufficient to fund the promised benefit. Actuarial assumptions andcomputations are required to figure these contributions. Generally, you willneed continuing professional help to have a defined benefit plan. Most qualified plans follow a standard form of plan (amaster or prototype plan) approved by the IRS. Master or prototype plans aremade available by plan providers for adoption by employers (includingself-employed individuals). Under a master plan, a single trust or custodialaccount is established, as part of the plan, for the joint use of all adoptingemployers. Under a prototype plan, a separate trust or custodial account isestablished for each employer. A master or prototype plan can generally beobtained from one of the following organizations: banks (including some savingsand loan associations and federally insured credit unions), trade orprofessional organizations, insurance companies and mutual funds. Kinds ofQualified Plans IndividualRetirement Arrangements There are many factors to consider when deciding whichplan best fits your business. When determining which plan is right for you,consult a financial advisor. Also, see Selecta Retirement Plan web site for additional information. Important References Publication 535 Business Expenses
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