If you've got an IRS letter on your desk right now, you have a decision to make, and the clock matters. I'm Darrin Mish. I've spent 32 years helping people with exactly this kind of situation. Here's what you should do.<\/p>\n
If you are a small business owner, you should take advantage of the tax law that allows you to draw up a retirement benefit scheme for your employees.\u00a0 This is because you can claim tax deductions from it if you have such a scheme.<\/p>\n
The most commonly known retirement scheme is the 401(k) retirement scheme.\u00a0 But the cost of setting up and maintaining a 401(k) can be a deterrent to some small business owners.\u00a0 Here\u2019s where the tax code comes in.\u00a0 Certain provisions of the tax code allows you as a small business owner to establish a retirement scheme other than a 401(k), called a Simplified Employee Pension or SEP.\u00a0 Although the SEP is not maintenance free, it is a viable option to the 401(k).<\/p>\n
Setting up a Simplified Employee Pension is a three-step process.\u00a0 Firstly, you need to fill up and execute Form 5305-SEP.\u00a0 Then you serve notice to your employees who are eligible for the SEP and set up an IRA account for each of them.\u00a0 This account is to receive each of their contributions.\u00a0 Annual contributions are not obligatory but in years when the contribution is made an employee must receive an amount proportional to his or her salary but not more than 25% of eligible compensation or $49,000 whichever is less.\u00a0 Employee contributions are not permitted for SEP IRAs but employees are immediately vested in their full account balance.<\/p>\n
The final step is to maintain the SEP once you have established it.\u00a0 The most important thing to do in maintenance is to keep your plan current.\u00a0 The quickest way to do this would be to check your adopted Form 5305-SEP against the latest version available on the IRS website www.irs.gov.\u00a0 Plan rules may be changed and you need to ensure that your plan document is updated continuously.<\/p>\n
As an employer, it is you responsibility to conduct an annual review to see that the plan is being implemented according to the rules and any issues are nipped in the bud.\u00a0 One common issue is inadvertent exclusion of eligible employees.\u00a0 This is especially common in the cases of part-time employees and employees of associated companies.\u00a0 You should review payroll records against plan eligibility for each employee before giving out annual contributions.<\/p>\n
If a contribution was missed for an eligible employee, a replacement contribution must be made.\u00a0 On the other hand, if a contribution was made in excess of what should have been made, then contributions exceeding IRS limits, along with earnings on the excess, should be withdrawn from the plan and returned to the employer.\u00a0 The rules state that the distribution must be reported on a Form 1099-R for the employee concerned.<\/p>\n