2016 IRA Year- End Reminders

Whether you are still working or retired, you should periodically review your IRAs. Here are few things to remember about year end IRA tips for 2016.


IRA Contribution limits

If you’re still working, review the 2016 IRA contribution and deduction limits to make sure you are taking full advantage of the opportunity to save for your retirement. You can make 2016 IRA contributions until April 18, 2017.


IRA Excess contributions

If you exceed the 2016 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account.

IRA Required minimum distributions

If you are age 70½ or older this year, you must take a 2016 required minimum distribution by December 31, 2016 (by April 1, 2017, if you turned 70½ in 2016). You can calculate the amount of your IRA required minimum distribution by using our Worksheets. You must calculate the required minimum distribution separately for each IRA that you own other than any Roth IRAs, but you can withdraw the total amount from one or more of your non-Roth IRAs. Remember that you face a 50% excise tax on any required minimum distribution that you fail to take on time.

2017 401k Contribution Limit and 2017 IRA Contribution Limit

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the saver’s credit all increased for 2017. Taxpayers looking to contribute to workplace 401ks, Roth IRAs, and Traditional IRAs should be aware of the new limits in 2017. These limits could affect the ability for some people to make contributions to their retirement accounts in 2017


Rules that Remain Unchanged

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $18,000. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,000. The limit on annual contributions to an IRA remains unchanged at $5,500.  The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.



2017 401k Contribution Limits

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $18,000. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,000.


2017 IRA Contribution Limits

The limit on annual contributions to an IRA remains unchanged at $5,500.  The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.


2017 Saver’s Credit Limit

The income limit for the saver’s credit (also known as the retirement savings contributions credit) for low- and moderate-income workers is $62,000 for married couples filing jointly, up from $61,500; $46,500 for heads of household, up from $46,125; and $31,000 for singles and married individuals filing separately, up from $30,750.


2017 Roth IRA Income Limit for Contributions

The income phase-out range for taxpayers making contributions to a Roth IRA is $118,000 to $133,000 for singles and heads of household, up from $117,000 to $132,000.  For married couples filing jointly, the income phase-out range is $186,000 to $196,000, up from $184,000 to $194,000.  The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.


2017 Tax Deductible IRA Contribution Limits

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions.  If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)    Here are the phase-out ranges for 2017:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $62,000 to $72,000, up from $61,000 to $71,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $99,000 to $119,000, up from $98,000 to $118,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $186,000 and $196,000, up from $184,000 and $194,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.


Most Retirees Need to Take Required Retirement Plan Distributions by Dec. 31

The  IRS reminded taxpayers born before July 1, 1945, that they generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by Dec. 31.


Taking required minimum distributions (RMDs)

Known as required minimum distributions (RMDs), these payments normally must be made by the end of 2015. But a special rule allows first-year recipients of these payments, those who reached age 70½ during 2015, to wait until as late as April 1, 2016 to receive their first RMDs. This means that those born after June 30, 1944, and before July 1, 1945, are eligible for this special rule. Though payments made to these taxpayers in early 2016 can be counted toward their 2015 RMD, they are still taxable in 2016.

When do you take requirement minimum distributions (RMDs)?

This is the second in a series of weekly tax preparedness releases designed to help taxpayers begin planning to file their 2015 return.

The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.


IRA Brokerages Report RMDs to the IRS

An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2015 RMD, this amount is on the 2014 Form 5498 normally issued to the owner during January 2015.


April 1 RMD Deadline

The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, for example, a taxpayer who turned 70½ in 2014 (born after June 30, 1943 and before July 1, 1944) and received the first RMD (for 2014) on April 1, 2015 must still receive a second RMD (for 2015) by Dec. 31, 2015.


How to Calculate RMDs?

The RMD for 2015 is based on the taxpayer’s life expectancy on Dec. 31, 2015, and their account balance on Dec. 31, 2014. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Use the online worksheets on IRS.gov or find worksheets and life expectancy tables to make this computation in the Appendices to Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. So for a taxpayer who turned 72 in 2015, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than 10 years younger and is the taxpayer’s only beneficiary.

RMD Rules for IRA Accounts

Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulations in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

Find more information on RMDs, including answers to frequently asked questions, on IRS.gov.

Surviving Spouse Beneficiary of IRA Account

What happens when a surviving spouse inherits an IRA account?

A surviving spouse can roll over the balance from a deceased spouse’s eligible retirement plan into his or her own eligible retirement plan account. He or she can also elect to treat a deceased spouse’s IRA as his or her own. In such a case, the IRA distribution rules are applied with the surviving spouse as the owner. These options are available whether the participant died before or after minimum required distributions (RMDs) had begun.


Example of Spouse Inheriting IRA Account

For example, a surviving spouse/administratrix was allowed to roll over a decedent’s (husband’s) previously withdrawn IRA distributions to a new IRA established in the name of the decedent within sixty days of the withdrawal. However, since the decedent had not posthumously named the surviving spouse as a beneficiary of the newly established IRA, the surviving spouse was not eligible to treat the IRA as her own. A surviving spouse who neither rolls distributions over nor elects to treat the IRA as his or her own must take distributions from the account based on the RMD rules.

Surviving Spouse Inheriting IRA

The surviving spouse can elect the roll over option even after receiving minimum required distributions (RMDs) in more than one year. The ruling also stated that even though the surviving spouse was under age 591/2 when the RMDs were received, the later election to roll over the IRA did not subject the distributions to the early distribution penalty. The IRA was treated as a continuation of the deceased spouse’s IRA until the actual rollover was made. After the rollover, it was treated as the surviving spouse’s IRA.


Naming Spouse as Beneficiary of an IRA Account

A surviving spouse must generally be named as the direct beneficiary of the account to qualify for rollover treatment. If the surviving spouse receives the distribution through the decedent’s estate (i.e., the decedent named his or her estate as the beneficiary), the distribution may be treated as received from a third party. Generally, this prevents the surviving spouse from taking advantage of the special rollover provisions. However, the IRS has made some exceptions.

Surviving Spouse Inherited IRA

For example, the IRS privately ruled that a surviving spouse who (1) was the named beneficiary for 75% of an IRA, (2) received the remaining 25% through the decedent’s estate, and (3) was the sole executrix of the estate could treat the entire account as being received from the decedent with none from the estate. The same outcome was reached where the surviving spouse was the sole executrix and beneficiary of the decedent’s residuary estate. The rollover must occur no later than the 60th day after the date of distribution to the estate.


Excess contributions to a Roth IRA

Excess contributions to a Roth IRA, including improper conversion amounts (i.e., nonqualified rollover contributions) and failed conversions, are subject to a nondeductible 6 percent excise tax until the excess is corrected. No matter what the reason, contributing beyond the IRS limit could trigger a tax penalty if you don’t take steps to handle the excess. There are various ways you could find yourself with an excess contribution to a Roth IRA


For Roth IRA purposes, excess contributions are the sum of:

1. Contributions in excess of the amount allowed as a regular contribution to a Roth IRA, plus

2. Excess Roth IRA contributions for the preceding tax year, reduced by:

a. Roth IRA distributions for the preceding tax year, plus

b. The excess, if any, of the maximum allowable Roth IRA contribution over the amount actually contributed by the individual to all individual retirement plans for the tax year.

Qualified rollover contribution to a Roth IRA

A qualified rollover contribution to a Roth IRA is not taken into account for purposes of determining whether there are excess Roth IRA contributions that are subject to the 6 percent excise tax.


Common Examples of Excess IRA Contributions

There are several types of transactions that can create excess contributions in a Roth IRA. These include:

  • Making regular Roth IRA contributions in excess of the contribution limit in effect for the year
  •  Rolling over amounts that are not rollover-eligible.
  •  Making a Roth IRA conversion when one is ineligible to do so


Form 5329 and Excess IRA Contributions

The additional tax is figured on Form 5329. For information on filing Form 5329, see Reporting Additional Taxes, later in Pub. 590-A. If your total IRA contributions (both Traditional and Roth combined) are greater than the allowed amount for the year in your situation, and you have not withdrawn the excess contributions, you must complete Form 5329 to calculate a 6% penalty tax on the excess contribution. This penalty tax will continue to be assessed every year on ALL excess contributions (those from prior years along with any in the current year) until you withdraw the excess contributions.


Making a Corrective Distribution from Roth IRA

If an excess Roth IRA contribution is distributed, together with allocable income, before the due date (plus extensions) of the taxpayer’s tax return for the tax year in which the excess contributions were made, the excess is treated as though the contribution had never been made. Because a corrective distribution of excess Roth IRA contributions represents a return of nondeductible contributions, the distribution is not includable in the taxpayer’s gross income.


Fixing Over Contributions to Roth IRA

The allocable income that is distributed, on the other hand, is includable in the taxpayer’s gross income for the tax year in which the excess contribution is made. Aggregate excess contributions that are not distributed from the Roth IRA on or before the due date (with extensions) of the individual’s tax return for the tax year of the contribution are reduced as a deemed Roth IRA contribution for each subsequent tax year to the extent the Roth IRA owner does not actually make regular Roth IRA contributions for such years. 


Excess contributions to a Roth IRA Penalty

Remember, this tax can easily be 100%, or even more than 100%, of the amount of investment income generated by this excess amount in a year. It’s important to correct an excess contribution.

Recharacterize IRA Contribution or Roth Conversion

What if a taxpayer makes a failed conversion of a traditional IRA to a Roth IRA (e.g., because MAGI exceeds $100,000 in the year of conversion under the pre-2010 rules), or simply wishes to change the nature of the IRA contribution? This is known at an IRA Recharacterization and be a very effective retirement planning tool under certain circumstances.


Who can recharacterize an IRA?

The Roth IRA rules permit the taxpayer to recharacterize (e.g., to correct a failed conversion that otherwise would result in the excess contribution excise tax) all or any portion of an IRA contribution, including a regular Roth IRA contribution and a qualified rollover contribution. A taxpayer may elect to recharacterize a contribution made to one type of IRA by having it transferred in a trustee-to-trustee transfer to a different type of IRA, or by transferring IRA assets between two IRAs of a single financial institution. The contribution is treated as originally having been made to the transferee plan (and not the transferor plan) on the same date and for the same tax year that the contribution was made to the transferor plan.


What is an IRA Recharacterization transfer?

A recharacterization transfer must include net income attributable to the original contribution, and generally must be made on or before the due date (including extension) of the tax return for the year in which the original IRA contribution was made. However, a taxpayer may be able to make a recharacterization even after the due date for filing returns. The extension is available only if:

1. The taxpayer’s return was timely filed for the year the election to recharacterize should have been made; and

2. The taxpayer takes appropriate corrective action within this six-month period.

The appropriate corrective action consists of the action required for any recharacterization.The taxpayer must notify both the transferor and transferee IRA trustees of the intent to recharacterize the amount, and provide sufficient information for the trustee(s) to effect the recharacterization. The trustee must also make the actual transfer or account redesignation. A recharacterization is not a designated distribution.

If a taxpayer converts an amount from a traditional IRA to a Roth IRA and makes a recharacterization transfer back to a traditional IRA, the taxpayer may subsequently elect to reconvert that amount from the traditional IRA to a Roth IRA, but there are rules that limit how often and when reconversions can be made.


Deadline for recharacterizing a Roth conversion or IRA contribution

The deadline for recharacterizing a Roth conversion or IRA contribution is your tax-filing deadline plus extensions. If you file the tax return on time (generally by April 15), you receive an automatic six-month extension, which means your deadline to recharacterize a 2015 contribution is October 15, 2016.


Converting a traditional IRA to a Roth IRA

Beginning in 2000, an IRA owner who converts a traditional IRA to a Roth IRA during any tax year, and who then makes a recharacterization transfer from the Roth IRA back to the traditional IRA, may not reconvert the traditional IRA to a Roth IRA before the later of:

1. The beginning of the tax year following the tax year in which the original conversion to a Roth IRA was made; or

2. The end of the 30-day period that begins on the day on which the IRA owner makes the recharacterization transfer from the Roth IRA to a traditional IRA (regardless of whether the recharacterization occurs during the tax year in which the traditional IRA was first converted, or the following tax year).


What if I recharacterize a Roth rollover or a conversion that I already reported on my income tax return?

If you have already filed your return, you can file an amended return and subtract the amount recharacterized from the taxable amount of the rollover or conversion reported on your original return. Form 1040XAmended U.S. Individual Income Tax Return can be used to amend your return. Generally, for a credit or refund, you must file Form 1040X by the later of:

  • three years (including extensions) after the date you filed your original return, or
  • within two years after the date you paid the tax.

Proper calculation of a self-employed person’s retirement plan deduction

Proper calculation of a self-employed person’s retirement plan deduction can be really difficult. We had kind of planned on this being a really more involved discussion of it, but we had so much that came out new this year that the slide on this kept getting smaller, and now it’s kind of tiny. During my audit days, I did not look forward to the audits involving self-employed plan sponsors, but I frequently ran across them.


Self-Employed Retirement Plans

Many had trouble with the calculation for the owner’s contribution and that related deduction, and I’ll say I also had trouble with it. It can be kind of difficult and with such a large group of people and only part of an hour, it’s going to be almost impossible to keep everybody awake to do a complete discussion. So, what we’re going to do is talk about some of the issues that we would see on audits mainly.


IRS Issues with Self-Employed Retirement Plans

First, the number one issue really had nothing to do with the self-employed plans. These plans had the same issue that we regularly find. Nearly half of them that I had seen had not been timely amended for these required law changes. Now, the majority of these really small plans use pre-approved plan documents. And remember you have until April 30, 2016, to update those pre-approved prototype documents on these defined contribution plans – that’s profitsharing and 401(k)-type plans.


Common Issues on IRS Audits of Self-Employed Retirement plans.

Now, another common issue we saw was also just leaving employees out of the plan that had met the eligibility requirements. Self-employed plans do tend to be very small employers, and I think a lot of times they look at some of their people as part-time employees and they don’t realize how easy it is to meet the plan’s eligibility requirements. All they have to have is 1,000 hours.


Taking Deduction on Self Employed Retirement Plan

The question is where should you take the deduction for contributions to the plan? I know that’s been kind of an issue also. For the employees that are participants in the plan, these are the employees, the contributions are deducted on the owner’s Schedule C. For the owner, the deduction for a contribution to them was taken on page one of the Form 1040. That’s kind of the easy part really; it’s just getting to that contribution amount that can be a little tricky. Now, to calculate the plan compensation for that owner, you get to reduce their net earnings from self-employment by the deductible portion of the self-employment tax from page one of the Form 1040 and also the amount of the contribution made for the owner.


Owner’s Contribution to Retirement Plan

The amount of the owner’s contribution is dependent on how much the owner is contributing on their own behalf. It’s a real circular calculation here, and there are a couple of methods that you can use to find that amount. One way is you can use the rate table that is in Publication 560, or you can compute the reduced plan contribution rate yourself. You do that by dividing the plan contribution rate by one plus the plan contribution rate.


Example of Owner’s Contribution to Retirement Plan

For example, if the rate the other employees received was 10 percent, you divide 0.10 by 1.10 and you get the owner’s contribution percentage of 9.0909 percent. You take the Schedule C net profit, deduct half the SE tax and you multiply that by 9.0909 percent to find the amount of the owner’s contribution in that little example.


IRS pre-approved defined contribution plans

The IRS recently announced the opening of a new twoyear period to adopt restated pre-approved defined contribution plans. These are generally profit-sharing and 401(k) plans. Preapproved plans are master and prototype plans, standardized, nonstandardized. These types of plans are normally what you’ll find offered by banks, insurance companies, brokerage firms, and other financial institutions, plus plan document companies, third-party administrators – just about anyone in the business of retirement plans.


The IRS and Retirement Plans

These pre-approved plans make up the majority of all plans. The failure to update for current law is, and has always been since I’ve been in Employee Plans, the number one issue across all types of plans, across all types of employers. The two-year window for restating pre-approved plans for current law is open now until April 30, 2016. If you have one of these plans, pay close attention to any mail you receive regarding your plan.


What types of retirement plans?

Some companies may offer the newly-updated plan free. Most ask for several hundred dollars to update the plan. You’ll need to adopt the new document to keep the plan compliant with current laws to avoid being one of those non-amenders, to keep deducting contributions and for the plan assets to keep growing tax-deferred.


IRS pre-approved defined contribution plans

It sounds simple enough. You have a pre-approved plan that needs updating for current law. Your plan company sends you the new plan and adoption agreement for you to complete. You fill out the adoption agreement, sign it, and it’s done. That’s only partially true. Your plan may be properly updated, but now you have a new opportunity for more mistakes. First, the adoption agreement must be timely signed and dated. Over the years, we’ve seen many adoption agreements that were signed and not dated. If you have to adopt a new plan by April 30, 2016, and you do not date your signature, there could be a problem.


Retirement Plan Adoption Agreements

Some adoption agreements require you to put the date the amendment is effective. If you have a question about what to put where, follow the instructions for completing the adoption agreement. There can be a number of options on an adoption agreement. If you select an option that’s different from how you’ve been operating your plan, again, this could cause a problem. What we suggest is, pull out the old adoption agreement and compare it to the new one. Make sure your new selections match what you’ve selected in the previous adoption agreement, and it matches how you’re currently operating your plan


Submitting Retirement Plan Adoption Agreements

For example, if the eligibility requirements selected in the old adoption agreement were age 21 and one year of service with entry dates on January 1st and July 1st, make sure that’s what you select for the new adoption agreement. If you choose immediate eligibility in the new adoption agreement, but you continue to operate the plan using the old age 21 and one year of service requirement, the plan is no longer in compliance and may need to make corrective contributions for participants.

Retirement Plan Form 5500-EZ Return and Filing Form 5500-EZ

What is Form 5500-EZ?

The Form 5500 Series is a disclosure document for plan participants and beneficiaries. The Form 5500 Series is part of ERISA’s overall reporting and disclosure framework, which is intended to assure that employee benefit plans are operated and managed in accordance with certain prescribed standards and that participants and beneficiaries, as well as regulators, are provided or have access to sufficient information to protect the rights and benefits of participants and beneficiaries under employee benefit plans.


Who needs to file Form 5500-EZ

A retirement plan sponsor may file a Form 5500-EZ if the plan:

  • covers you or you and your spouse and you and your spouse own the entire business, or
  • covers only one or more partners and their spouses in a business partnership, and
  • doesn’t provide benefits for anyone except you and your spouse or one or more partners and their spouses.


Who cannot file Form 5500-Ez?

If you’re eligible to file a Form 5500-EZ, you’re only required to file it if the total assets of all of your one-person plans is $250,000 or more at the end of the plan year, or this is the final year of the plan. Please take care when you complete these returns. There’s much more information on them than 10 years ago, so it’s a lot easier to make a mistake. If you make a mistake on the 5500-EZ return, you increase the chances that IRS will send you a letter


What is the IRS Employee Plans Compliance Unit?

For instance, we have an Employee Plans Compliance Unit. They don’t do audits, but they’ll check returns. And if there’s a trend that they see, they will send out compliance letters to you or to your clients and say, “Hey, we saw this on the return. This doesn’t look right. Can you please explain it?” And then you send a letter back saying, “Here’s the answer,” whether “It is wrong, we’ll correct it” or whatever the situation may be, and then they work with you to resolve it. We have a website that lists all the different projects that are ongoing and the ones that have been completed.


IRS Audit of Self Employed Retirement Plans

I strongly urge that if you or your clients receive a letter, please answer that letter, because most of the time what happens for people who don’t respond is we do switch it into an examination of a plan. We just had a project from this unit. The plans were marked as a final return and also showed that assets remained in the plan. The final year of the plan means that the plan has been terminated and all the assets should have been distributed, so we sent letters out when we saw those issues. Or maybe you’ve entered the wrong business code or tried to use one of the codes used on the Schedule C; you must use a business code as listed in the 5500-EZ instructions. If not, again, you might get a letter.


Common Problems with Form 5500-EZ

One problem area we’ve noticed on examinations of 5500-EZ filers is that you and your spouse must own the entire business to be eligible to file a 5500-EZ. If the plan is a RoBS, and that’s a plan where you transfer or rollover funds to your retirement plan and use that money to buy stock in the company, the plan owns that stock. Since you and your spouse don’t own the entire business, you cannot file the Form 5500-EZ. The 5500-EZ is an IRS form and you must file using a paper copy. Forms 5500 and 5500-SF are Department of Labor forms, and they must be filed electronically. In some cases, a 5500-EZ filer may electronically file using the 5500-SF. On our website, www.irs.gov/retirement, we have a web page called the Form 5500 Corner that helps explain the plan’s filing requirements. If you do a search for “Form 5500 IRS” or “Form 5500 Corner,” it should take you to that page.


Problems Filling Out Form 5500

On the Form 5500 Corner, you’ll find links that take you to fillable 5500-EZ forms and instructions. Just download the form, complete it, print it, and mail it to the IRS per the instructions. For Form 5500 and 5500-SF filers, we have links to the instructions and to EFAST 2, which is Department of Labor’s electronic filing system. Over the years, the two reasons I heard most often for not filing their Form 5500-EZ return were, “I didn’t realize the assets had reached $250,000” and “I thought someone else was filing it.” Generally, plan sponsors expect their tax advisor might be filing the return, or maybe the prototype sponsor, the insurance agent, the stock broker. As a tax practitioner, if you notice your client’s taking a deduction for a retirement plan, you should ask to see a copy of their 5500-EZ for that year. If the response is, “Didn’t you file it?” they might have a problem. You all have probably heard that a few times, I’m sure. If you miss filing a Form 5500 series return with the IRS, there’s a penalty of $25 per day up to $15,000 per missed return and it takes, like, 600 days to reach that $15,000. And in the case of a really large corporation, $15,000 may not mean that much to them, but if you’re a one-person plan that didn’t file a Form 5500-EZ for that year, $15,000 could be a huge burden. And if you missed filing the return for three separate years, now you’re up to $45,000. That’s going to be a severe blow to just about any business. Now, IRS may abate penalties for reasonable cause, and I’ll say even on the camera that we often do, but there are no guarantees that you’ll get that.


Penalties for Failure to File Form 5500

Also DOL’s penalty for a delinquent 5500 or 5500-SF; that’s up to something, like, $1,100 a day now, so it’s pretty serious when you miss filing these returns. For that Form 5500 or the 5500-SF, those are filed with the Department of Labor. If you missed one of those filings with Department of Labor, you can enter the DOL’s Delinquent Filer Voluntary Correction Program. That’s available to file any missed returns and have those DOL penalties waived. However, to be eligible for relief from IRS penalties, you still need to file a Form 8955-SSA with the IRS. And remember that’s with the Form 5500 and the 5500- SF. And like Mikio said a while ago, you can get more information by going to the Form 5500 Corner on our web page.


Form 5500-EZ

Now, Form 5500-EZ is an IRS form that’s filed with the IRS and if you miss filing it, IRS now has a temporary program that’s available to correct that missed filing. Revenue Procedure 2014-32 established the Pilot Penalty Relief Program. It’s a one-year pilot program providing relief for plan administrators and plan sponsors for penalties that are related to failing to file the Form 5500-EZ. This program is only open until June 2, 2015. To be eligible for this program, you must have been eligible to file a Form 5500-EZ and not have received a penalty notice from the IRS for that delinquent 5500-EZ return. You’ll be required to file any late returns along with the required schedules and any attachments for those years. You are not required, however, to pay any penalties or fees under this program. However, in the top margin on that first page of each late Form 5500-EZ, you need to write in red above the title there, “Delinquent Return Submitted under Rev. Proc. 2014-32, Eligible for Penalty Relief.” And if you don’t write that on the return, it’ll be processed as a late return. There’s also a transmittal schedule that you’ll need to attach, and you’ll find all this in the Form 5500 Corner. Again, that’s www.irs.gov. You have until June 2, 2015, to uncover all your clients’ delinquent 5500-EZ returns. It really does appear to be a big problem, and this is our first relief program, I think, we’ve had on the EZs. What we really need is your help to get the word out on this new program. Next time you’re in a restaurant, like tonight, we want you to stand up and tell everybody about this 5500-EZ penalty relief program or you could share it with your peers, because I’m sure they have clients that have failed to file that return and this is a pretty good opportunity to get it straight going forward.




Lump-sum distribution-ten year averaging option for older employees

An income averaging option that may be available to some of your older employees who are eligible, upon retirement or other separation from service, for lump-sum distributions from a profit-sharing plan.

Under this income averaging option, lump-sum distributions paid to certain older employees may be eligible for special tax treatment. If a retiring employee’s entire balance in your profit-sharing plan is distributed to the employee within one tax year (the employee’s tax year, not the company’s tax year) because of his or her separation from service under your company’s retirement program, the distribution qualifies as a lump-sum distribution.

Lump-sum distribution-ten year averaging option for older employees

Retiring employees who reached age 50 before ’86, that is, employees who turned 59-1/2 before ’95, may elect ten-year averaging on the entire amount of the taxable portion of the distribution. Or, they can make this ten-year election on that portion of the distribution that isn’t eligible for capital gain treatment (that is, the portion of the distribution attributable to post-’73 participation in the plan), with the portion eligible for capital gain treatment taxed at a flat 20% rate. Ten-year averaging treats the lump sum distribution as if it were received over ten years. Before ’74, lump sum distributions were taxed as capital gains, and this treatment continues for that portion of a distribution that is attributable to pre-’74 participation in the plan.


IRS ten-year averaging

Not all employees who are eligible for ten-year averaging may benefit from having their lump sum distribution taxed under this method. That is because if an employee chooses the ten-year averaging method, the tax on the portion of the lump sum distribution that is not eligible for taxation at the capital gains rate will be taxed at special 1986 tax rates. These ’86 rates may be higher than the income tax rates currently in effect. Thus, the benefits of averaging may be offset, at least in part, by higher tax rates being imposed on the averaged portions of the lump sum distribution. The employee’s individual circumstances will dictate whether the employee should elect ten-year averaging for his lump-sum distribution, if applicable. You must use the greatest care in explaining this ten-year averaging option and its tax consequence to your older employees. They should also be made aware of their option to roll over tax-free the lump sum distribution to an IRA in order to further defer the tax on the lump-sum. These are major, once-in-a-lifetime decisions for your older employees, and you will want to guard against the possibility that an employee who misunderstands and makes the “wrong” decision for him or her will seek to hold you legally responsible.