Tax Credit for New Pension Plans – IRS Form 8881

Small business owners who establish pension plans may be eligible to receive an IRS tax credit to offset expenses incurred in establishing the plan.  Pawleys Investment Advisors does not provide tax or legal advice, but over the years I have found that most business clients are unaware of this credit.  Eligible plans include SEP IRA’s, SIMPLE IRA’s and qualified plans including 401(k) plans, profit sharing plans, money-purchase plans and defined benefit plans.  The annual credit is 50% of the first $1,000 in expenses, so it is limited to $500, and is available for 3 years.  Qualified expenses include those incurred in establishing the plan, administrative fees, and costs to provide employee education.  Employers may choose to claim the credit or use it as a deductible business expense. This credit is in addition to any tax deduction you may receive for making company contributions for your employees.  The credit applies to companies with no more than 100 employees who have received at least $5,000 in compensation.  Companies that qualify that later grow beyond 100 employees who receive at least $5,000 in compensation may be grandfathered, depending on the current tax code.  The established plan must cover at least one non-highly compensated employee as defined by the IRS.  Additionally, control-group aggregation rules apply, so be sure to consult with your tax and legal advisors or Third Party Administrator.  If you established a plan, your advisor should have provided you with information regarding Form 8881 to discuss with your tax professional.  If you have not yet established a retirement plan for your business, please call Pawleys Investment Advisors.  You will be surprised about the relative ease and low cost of setting up a new plan.  It will help you better prepare for retirement and, if you have employees, help improve their satisfaction and better prepare them for retirement.

Click to access f8881.pdf

© 2012 Pawleys Investment Advisors, LLC.  All rights reserved.

Four Tips for 401(k) Fiduciaries

Business owners who provide retirement plans for their employees are responsible for adhering to ERISA (The Employee Retirement Income Security Act of 1974) guidelines.  As popularity of pension plans has shifted from defined benefit plans to defined contribution plans, employers find themselves responsible to meet the minimum standards set forth by the act.  The act does not dictate who must establish such plans, but it does delineate minimum requirements for those employers who do.   The Department of Labor sets the standards for compliance and record keeping.  Anyone who performs functions which relate to the administration or management of a retirement plan may be classified as a fiduciary if they exert discretion or control over the plan.  Here are four quick tips for retirement plan fiduciaries:

1.  Have a written plan document (Summary Plan Document or SPD), trustee services to custody assets, record keeping to monitor the flow of funds, and general plan information to provide to participants.  If plan participants direct their own investments, be sure to provide them with sufficient information to make those decisions.

2.  Identify fiduciaries and monitor responsibilities to ensure they are following the “prudent man” rule and acting in the best interest of the plan participants, following plan documents, diversifying plan investments, and paying only reasonable expenses.  The new 2012 Fee Disclosure rules require additional transparency.

3.  Be thorough in selecting service providers (Investment Advisors and Third Party Administrators or TPA’s).  Due diligence is especially important if joining a Multiple Employer Plan, to ensure that the plan is solvent (check the DOL website for additional guidelines) and meets any plan structural requirements unique to your company.

4.  Establish a monitoring system and, at a minimum, an annual comprehensive review of the plan structure, service providers, record keeping and participant education programs.  Annual plan testing and filing requirments may vary, so check with your TPA.  Be sure to check your plan versus any recent regulatory updates to ensure compliance.

401(k)’s and other business retirement plans offer a great vehicle for employers to help employees supplement their retirement savings.  With this benefit comes added responsibility.  By implementing a systematic process to hire the right partners, build a structurally compliant plan, select a list of quality diversified investment choices and provide employee education, business owners can better position themselves to meet their fiduciary obligations.


© 2012 Pawleys Investment Advisors, LLC.  All rights reserved.

Control Groups Affect your Retirement Plan Structure and Testing Requirements

Business owners: many existing business retirement plans have some type of structural issue which needs to be corrected.  One of the most common mistakes companies make when establishing a new 401(k) or other business retirement plan is failing to identify that a control group exists within the ownership of the company.  Ownership of businesses can be complex, and directly affects how you are allowed to structure your business retirement plan.  There are 3 ways in which control groups may exist: parent-subsidiary, brother-sister, and a combination of the two.  Please see this link for important information from the IRS about control groups, and check with your CPA to determine if you have any type of control group relationship.  Pawleys Investment Advisors is happy to coordinate with your tax professional and Third Party Administrator to conduct a comprehensive evaluation of your existing plan, or provide recommendations for the structuring and investment selection for a new plan.  Often business owners act as the plan sponsor, so it is important to have the right team in place to support the fiduciary requirements (unlike broker dealers or registered representatives at the large national investment chains, Registered Investment Advisors can act as a fiduciary over IRA, 401(k) and other retirement assets).  Improve the satisfaction of your employees and your preparedness for a Department of Labor audit!

© 2012 Pawleys Investment Advisors, LLC.  All rights reserved.