A retirement plan can reduce the Company's and/or the employees' taxable income, and provide for retirement. There are many types of plans that are designed to accomplish different financial goals. See our blog for more information on retirement plan options. Please contact our office for more information and assistance with determining the best plan for you and your business.
Remember that you are responsible for compliance for your qualified retirement plan. This includes keeping the plan document current, determining eligibility to participate, making distributions, submitting employee contributions timely, discrimination testing, etc. These are complex issues and you should be using an expert to assist you. Usually the broker/dealer or fund manager is your plan provider and performs some or all of the administrative functions. We do not perform these functions in the tax preparation process. If you need assistance with compliance or have questions, contact your broker/dealer. If they cannot assist you, we will be glad to help you find an employee benefits expert. It is critical that you make sure you are in compliance as the IRS is stepping up enforcement in this area and the penalties for noncompliance can be substantial, including causing the entire retirement balance to be immediately taxable. If your plan has not been updated in the last 3 years, you may not be in compliance and should contact your plan provider.
If you provide disability insurance to your employees at no or reduced cost to them, then any future benefits they collect will be taxable, significantly reducing their benefits. However, if the employer includes the disability premium in the employee's taxable income, then the benefits are not usually taxable. The IRS has ruled that employees may elect on a year by year basis whether or not to include the premiums in their wage income. If the employee becomes disabled in that year and begins to receive benefits, then none of them are taxable, even if the premiums in previous years were not included in income. Consider having your employees make this irrevocable election each year prior to year end.
You can reduce your Company's and employees' taxes by providing certain benefits pre-tax through a company cafeteria plan. Common benefits include tax sheltered employee portion of health insurance premiums, dependent care and medical expense flexible spending accounts. If you are currently requiring employees to cover a portion of their health premium, you should do so under a cafeteria plan. Also, employees can fund spending accounts for dependent care and out of pocket medical expenses, which is a benefit to them at no cost to the Company and, in fact, it saves the Company payroll taxes. The employee agrees to reduce their taxable pay by the amount of the benefit, which the Company pays on behalf of the employee to the provider (insurance Company, dependent care provider, etc.). This reduces the employee's taxable income and the Company's payroll taxes. These cafeteria plans must be formally established in writing and administered and Company owners cannot participate. IRS has announced it will be looking more closely at these plans in the future.
Many small to mid-size companies are converting their traditional company health insurance plans to Health Savings Accounts. A Health Savings Account (HSA) is set up to exclusively pay for qualifying medical expenses. A Health Savings Account must be used in conjunction with a high deductible health insurance plan which costs less than traditional plans with a lower deductible. Employees and the employer may contribute to the plan. If the company has a Cafeteria Plan, then contributions by the employee and the employer can be 100% tax free (not subject to federal, state, social security or Medicare taxes). Additionally, employees are eligible to contribute amounts to the account at any time during the year, up to annual limits. Participants in an HSA are not eligible to participate in Flexible Spending Accounts. Any amounts in an HSA account at year end are eligible to be rolled over to the following year and remain in the HSA account, tax free, as long as the participant remains in the HSA plan. If the participant terminates their participation in the HSA, any unspent funds in the HSA account can be rolled to an IRA and remain tax free.