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Walter & Shuffain, P.C.

Certified Public Accountants & Business Advisors

Member of the Alliott Group

February 2009 Tax Tip:
It May Not Be Too Late To Set Up A Retirement Plan For Your Business

Let's assume the following scenario. You are an employer in the process of having your 2008 business income tax return prepared. You decide that you would like to make a retirement contribution for your employees, but your business did not have a retirement plan in place by December 31, 2008. Well, there still may be an option available to you - a Simplified Employee Pension (SEP) Plan.

Although most retirement plans need to be in place by the end of the tax year for which the contribution is being made, a corporation, partnership, sole proprietorship, or limited liability company may adopt a SEP for a particular year as late as the extended due date of that year's tax return. Employers can choose how much they contribute to the plan, but must follow specific rules related to eligibility and allocation of the contribution among employees.

Establishing the plan is fairly simple. You execute IRS Form 5305-SEP or a prototype SEP from a financial institution, provide each eligible employee a copy of the plan document and instructions, and set up a SEP-IRA for each eligible employee.

While not as complex as other retirement plans, employers can still get themselves in trouble with the operation of their plans. The IRS recently released a list of five common mistakes that employers make when it comes to SEPs:

  1. Failing to keep their plan document current. As noted above, SEPs are generally adopted simply by completing a short IRS Form 5305-SEP (or by completing a financial institution's prototype plan form). When the IRS issues a new Form 5305-SEP, employers need to update their plan by completing the new form.
  2. Failing to cover all eligible employees. In a recent court case, a SEP failed to qualify because one of two employees (the wife of the president of the company and the only other employee) didn't receive a contribution under the plan even though she was eligible.
  3. Failing to cover eligible employees in related businesses that are under common control.
  4. Failing to use the right compensation number for employees when calculating the amount of their contribution.
  5. Failing to limit contributions to a particular employee's account to no more than the maximum allowed (normally the lesser of 25% of covered compensation or, for 2008, $46,000).

If you already have a SEP and have any concerns about whether your plan is meeting all of the eligibility requirements, please contact us and we'd be happy to discuss this. If you currently don't offer a retirement plan, but would like to consider a SEP or another option, we're available to discuss that as well.