John R. Bullis: Simplified Employee Pensions
Suppose you (or a someone you know) has business profits in 2015 but would like to save income taxes by doing a retirement plan contribution. However, they did not get around to setting up a standard Profit Sharing or Pension Plan before Dec. 31, 2015.
There still is a way for them to get a 2015 retirement plan contribution deduction, but they must also cover all employees, not just the owner.
There are many different kinds of retirement plans. The Simplified Employee Pension (SEP) is different in that it can be established after the year is over. The contribution to the SEP can be made in 2016, and be a 2015 income tax deduction, if it is made by the time the 2015 return is due to be filed, including the Extension of Time to File (Oct. 15, 2016).
A SEP is an arrangement under which the employer makes contributions to the IRAs of each of its employees. The annual contributions by an employer to a SEP are excluded from the employee’s gross (taxable) income to the extent the contributions do not exceed the lesser of 25 percent of the participant’s gross income (from wages or net profits) or $53,000 (for both 2015 and 2016). The maximum amount of compensation that can be considered for doing a SEP contribution is $265,000. If the business is an unincorporated employer, the compensation of the self employed participant (partner or sole owner of the business) is their earned income from the business (net profit).
Of course there are other rules to this. The employer decides each year whether or how much to contribute to a SEP. If any contribution is made to the SEP, nondiscriminatory employer contributions must be made for each employee who is at least age 21, who performed services for the employer during at least three of the immediately preceding five years, and received at least $600 in wages for 2015 (same amount for 2016 wages).
Also, the account owner of a SEP-IRA can make contributions after reaching age 70 1/2.
If the contributions are made and it is determined the contribution was more than 25 percent, any excess can be carried over and deducted in later years (subject to the same percentage limitation). But if the employer has another type of defined contribution plan (i.e. Profit Sharing), the contributions to the SEP must be taken into account to determine compliance with the annual limit imposed on deductible contributions to the plans (in total).
Most employers can establish a SEP plan by completing a form 5305-SEP. That form is not filed with the IRS. Instead, it is kept by the employer as evidence a SEP plan has been established. Each eligible employee must be given a copy of the form 5305-SEP.
Did you hear? “Taxpayer: a person who has the government on his payroll,” by Anonymous.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.