Small businesses may now make IRA deposits for employees

by Tony Novak, CPA, MBA, MT
,last updated on 11/30/2011

The IRS issued new proposed regulations this week of May 21, 2003 that make it easier for a small business to make contributions directly to an IRA account of an individual employee. The plans are commonly referred to as “Simplified Employee Pensions” in Section 408 of the Tax Code. These new rules further reduce the employer’s responsibility and administrative requirements. Essentially all the employer needs to be concerned with now is the deductibility of the contributions as ordinary business expenses and not as wages that would be subject to wage taxes and current income taxes. These new rules are part of a series of actions Congress is taking to make it easier for small businesses to offer retirement plans and encourage individuals to save for retirement.

One practical use of these new rules would be where a small business negotiates to have a year-end bonus paid directly into an employee’s existing IRA account rather than paid as wages and then deducted on the individual’s tax return. This would save wage taxes for both the employer and the employee.

The new regulations will be effective August 1, 2003 and retirement plan documents can be amended so that the new rules apply retroactively to wages from January 1, 2003.

The employer must adopt or amend a SEP plan document before the end of this year in order to take advantage of these new provisions. Prototype amendments will be available free of charge online at www.FreedomBenefits.org for Freedom Benefits customers with existing SEP plans.

Investment firms are not expected to amend their prototype SEP documents for sponsored plans because the change means that the sponsor might lose control of investment assets in the accounts. For this reason, the IRS has always allowed two basic types of SEP plans; those that direct investments (known as “sponsored plans”) and those that do not direct investments (known as “non-sponsored plans”). Most large investment firms use sponsored SEP plans simply because their primary business is providing investment management. So to take advantage of the new rules, a business will probably need a non-sponsored SEP plan. Freedom Benefits uses non-sponsored SEP plans to give employees unrestricted flexibility in choosing investments.

Opinions expressed are the solely those of the author and do not represent the position of any other person, company or entity mentioned in the article. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Tony Novak operates as an independent adviser under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator" but is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier. He has no financial position in any stocks mentioned. Novak does work as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to other companies including the companies listed in the articles on this web site.

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