queenschamber.org THIS IS QUEENSBOROUGH A PROFIT SHARING PLAN MAY BE A BETTER BUSINESS PLAN By Andie Perlmutter Forest Hills Financial Group A Profit Sharing Plan (PSP) may be a better retirement plan strategy than a Simplified Employee Pension 6 Plan (SEP Plan) for you and your business. For many years, business owners have taken the path of least resistance by establishing a SEP instead of a PSP. SEP plans are simple and easy to understand and there are no burdensome reporting requirements. However, in the changing economic environment, you and your employees may no longer be able to meet your long range retirement goals with a SEP Plan. Both PSP and SEP contributions are flexible year to year. The maximum deductible contribution allowed in a SEP is 25% of participating payroll. All contributions to a SEP Plan are made directly to each participant’s IRA. For example, a business owner with no employees, earning $100,000, could set up a SEP-IRA, make a maximum tax-deductible contribution of $25,000 and have no additional requirements. What if the business has one or more full-time or part-time employees? The SEP rules require that once eligible, all employees who earn $550 or more--whether fulltime, part-time or seasonal--must be included in the plan. Additionally, all contributions are generally made proportionate to salary and are immediately 100% vested. But Profit Sharing Plans allow for the exclusion of part-time employees who work less than 1,000 hours for the year. Also, employee allocations may be made based on age and salary. A “6-year graded” vesting schedule may be used, and that may help retain valuable employees. Any employee who is not 100% vested in the plan forfeits the unvested amounts back to the PSP to be reallocated to the rest of the plan participants, including yourself. PSPs can also allow employees to defer their own money; a SEP cannot. Another advantage to a PSP is the availability of plan loans, allowing pre-retirement access to Plan funds. Loans are not allowed in SEP Plans. Once any money comes out of a SEP Plan, it is taxed as ordinary income, and subject to penalty taxes if the participant is under 59 ½ years of age. Of course a SEP Plan may be appropriate for a business, e.g., the business owner who wants to make a smaller contribution or doesn’t have employees. But a Profit Sharing Plan offers greater flexibility. GOVERNMENT’S DECISION EXPANDS RETIREMENT FLEXIBILITY By Vlad Shafir, New York Life It’s not often the federal government makes a decision that nearly everyone is happy with, but that’s what happened with a regulation that was recently finalized by the U.S. Treasury Department. Changes to the regulations under Internal Revenue Code section 401(a)(9) allow individuals the ability to defer the distribution of their qualified assets beyond age 70½ through the purchase of a Qualifying Longevity Annuity Contract (QLAC). Generally, the new rules provide an exception to Required Minimum Distributions (RMDs) by allowing a QLAC to start making payments as late as age 85, meaning people can defer paying taxes on money that they may not need in early retirement. This is big news for those people who have been taking RMDs because they have to, not because they want to. A QLAC can provide more flexibility for your retirement planning by allowing you to better match your retirement income to your needs, and giving you the ability to control when taxes can be paid on your qualified assets. A QLAC will also ensure that you will not outlive your money, because as an annuity it provides guaranteed income for life. There are some limitations to QLACs that you should know. Most importantly, there is a cap on how much of your qualified money you can put into a QLAC. Contributions are limited to the lesser of $125,000 or 25% of the owner’s qualified account balances, less previous QLAC contributions. The 25% limit applies on a plan by plan basis and to IRAs on an aggregate basis. Also, QLACs can only be established through a deferred income annuity with no liquidity features. Other important rules you should be aware of include: Eligible accounts include 401(a), 401(k), 403(b), governmental 457(b) or IRA, Income payments must begin no later than the first day of the month following the owner’s attained age 85. The contract must state from inception that it is intended to be a QLAC. Once income starts, the payments must satisfy RMD rules. The contract cannot have any cash surrender value or commutation benefit A QLAC can be a powerful tool for those who want more control of how and when they start taking money out of their qualified retirement accounts. With people living longer than ever before, the government has taken an important step in allowing people to have more flexibility with regard to their retirement assets. This is an opportunity that should be a serious consideration for many people nearing, or even in, retirement. Contact your tax/legal advisor for implications to your specific situation. For additional information, please contact Vlad Shafir at [email protected].
QB112016
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