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Remember Plan Tax Credits for 2021

“Can you remind me of the special tax credits available for small businesses who set up qualified retirement plans, please?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Arizona is representative of a common inquiry related to incentives for setting up retirement plans.

Highlights of Discussion

My pleasure! Small business owners (with fewer than 100 employees) are eligible for additional tax credits for setting-up retirement plans and/or adding an automatic enrollment feature. The credits are available if the owner establishes a 401(k), a SEP or a SIMPLE IRA plan. The business must

• Have had fewer than 100 employees who received at least $5,000 in compensation for the preceding year;
• Have at least one plan participant who was a nonhighly compensated employee; and
• Not have maintained a plan in the past.

The “Startup Credit” is up to $5,000 (a formula applies), available for the first three years the plan is in existence and offers real benefits to owners by freeing up tax dollars for other important business purposes. The credit was greatly improved as part of the Setting Every Community Up for Retirement Enhancement of 2019 Act (SECURE Act), effective January 1, 2020 (increasing the maximum credit from $500 to $5,000). It is intended to encourage owners to establish retirement plans by helping make the plan more affordable during the startup process. In addition, the owners receive full tax deductions for all contributions made to the plan.

On top of that, if an owner elects to add an automatic enrollment feature to the plan, an additional $500 credit (for the first three years) is also available. The automatic enrollment feature calls for newly eligible participants to be enrolled automatically in the plan with a specified default deferral rate. The IRS provides additional details about the startup and auto deferral credits here.

Eligible businesses may claim the credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs.

See the Instructions for Form 8881 for more details.

Conclusion
Tax credits for setting up a plan and having an automatic enrollment feature are great tools to help small businesses defray the initial costs of starting and maintaining a plan. Business owners should discuss the credits with their accountants and advisors to determine if it makes sense for them to establish a plan.

 

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EINs for Qualified Retirement Plan Trusts

“Can a business owner use the company’s employer identification number (EIN) to identify the firm’s 401(k)?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Florida is representative of a common inquiry related to qualified retirement plan trusts.

Highlights of Discussion

No, it is not recommended that a company use the same EIN number for the retirement plan trust as it uses for the business. An EIN is a 9-digit number (for example, 12-3456789) assigned to sole proprietors, corporations, partnerships, estates, trusts, and other entities for tax filing and reporting purposes. The business and the qualified plan trust are separate legal tax entities in the eyes of the IRS; therefore, each needs its own EIN.

To obtain an EIN for a retirement plan trust, the plan trustee can either apply online, mail or fax a copy of Form SS-4, Application for Employer Identification Number to the IRS.[1]  For additional details on the process, please see the IRS’s post How to Obtain or Re-Establish an EIN for a Retirement Plan Trust.  The Instructions for Form SS-4 explain how to complete the SS-4 when seeking an EIN for a qualified plan trust.  Additional information on EIN’s for retirement plans in contained in IRS Publication 1635, Employer Identification Number.

Conclusion

The IRS is clear that it wants qualified retirement plans—even for plans for owner-only businesses—to use a separate EIN for plan reporting purposes.

[1] Instructions for Form SS-4

 

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Group of Plans or Defined Contribution Group Plans

“Are there any new plan types for 2022?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from New York is representative of a common inquiry related to types of retirement plans. The advisor asked: “Are there any new plan types for 2022?”

Highlights of Discussion

Yes, there is. Thanks to The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Pub. L. 116–94, effective for the 2022 plan year the industry now has Groups of Plans (GoPs) (a.k.a., Defined Contribution Group Plans). Technically, it is a simplified mechanism for filing a single Form 5500 information return for a collection of defined contribution plans that have the same

• Trustee,
• Named fiduciary (or named fiduciaries),
• Plan administrator,
• Plan year, and
• Investment options.

If you are thinking Multiple Employer Plan (MEP) or Pooled Employer Plan (PEP), think again. Generally, MEPs and PEPs allow more than one employer to participate in a single retirement plan. In contrast, GoPs allow several employers each with their own defined contribution plan to file a single Form 5500 for the collection of plans, if they have the same trustee, named fiduciary, administrator, plan year and investment options.

While the industry received some information on GoPs in the Department of Labor’s (DOL) proposed Form 5500 changes released in September 2021, more was anticipated in the DOL’s final Form 5500 regulations and news release issued December 29, 2021. Unfortunately, none was present—just a promise that the consolidated filing option for certain groups of defined contribution retirement plans would be the subject of one or more later final notices.

Conclusion
The SECURE Act created a consolidated Form 5500 filing option for GoPs beginning with the 2022 plan year. The devil is in the details, as they say, and the industry anxiously awaits them.

© Copyright 2022 Retirement Learning Center, all rights reserved