Consider an accountable plan. These arrangements let you reimburse your employees for expenses incurred on behalf of your company, such as driving to the post office or office supply store. With a properly administered plan, you can deduct the reimbursements on your business tax return, yet the payments are not considered income to your employees.
How can you make sure your plan qualifies? Here are three requirements.
● The reimbursements must be for allowable business expenses. For instance, you can repay employees for hotel and other travel expenses when traveling to a trade convention.
● Your employees need to keep records of the expenses, and provide those records to you.
● If you pay or advance your employees more than the actual amounts spent on business items, the excess must be returned to you. Amounts not returned are income to your employee, and are subject to payroll taxes.
Contact us to discuss your policies for repaying employees’ business expenses. We’ll help you make your plan accountable.
Count employees to avoid ACA penalties!
The IRS recently updated a web page explaining how to figure out if you’re an “applicable large employer,” or ALE. If you are, you may have to pay a penalty for not providing health insurance to your employees. For 2016, your business will generally meet the definition of an ALE if you employed an average of at least 50 full-time employees (including full-time equivalent employees) during 2015. A full-time employee for any calendar month is one who averages at least 30 hours of service per week or at least 130 hours of service during the month.
It’s not unusual for the IRS to conduct audits of qualified employee benefit plans, including 401(k)s. Plan sponsors are expected to stay in compliance with numerous, frequently changing federal laws and regulations.
For example, have you identified all employees eligible for your 401(k) plan and given them the opportunity to make deferral elections? Are employee contributions limited to the amounts allowed under tax law for the calendar year? Does your 401(k) plan pass nondiscrimination tests? Traditional 401(k) plans must be regularly tested to ensure that the contributions don’t discriminate in favor of highly compensated employees.
If the IRS uncovers compliance errors and the plan sponsor doesn’t fix them, the plan could be disqualified.
What happens if qualified status is lost?
Tax law and administrative details that may seem trivial or irrelevant may actually be critical to maintaining a plan’s qualified status. If a plan loses its tax-exempt status, each participant is taxed on the value of his or her vested benefits as of the disqualification date. That can result in large (and completely unexpected) tax liabilities for participants.
In addition, contributions and earnings that occur after the disqualification date aren’t tax-free. They must be included in participants’ taxable incomes. The employer’s tax deductions for plan contributions are also at risk. There are also penalties and fees that can be devastating to a business.
Finally, withdrawals made after the disqualification date cannot be rolled over into other tax-favored retirement plans or accounts (such as IRAs).
The good news is that 401(k) plan errors can often be voluntarily corrected. We can help determine if changes should be made to your company’s qualified plan to achieve and maintain compliance. Contact us for more information.