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IRS Announces Retirement Plan Limitations for 2013

Posted 12:00 PM by

The Internal Revenue Service (IRS) recently announced the annual Cost-of-Living Adjustments (COLA) for retirement plans and related limitations for the 2013 tax year. Several of the following limits have changed for 2013 compared to the 2012 limits.

 2013 

2012

Social Security Taxable Wage Base

$113,700 

$110,100

Medicare Taxable Wage Base

No Limit

 

No Limit

Compensation (Plan Limit)

$255,000 

$250,000

Compensation (SEP)

$550 

$550

Defined Benefit Limit (415)

$205,000

 

$200,000

Defined Contribution Limit (415)

$51,000 

$50,000

401(k) and 403(b) Contribution Limit

$17,500 

$17,000

401(k) and 403(b) Catch Up Contribution Limit (over age 50)

$5,500 

$5,500

SIMPLE Contribution Limit

$12,000 

$11,500

SIMPLE Catch up Contribution Limit (over age 50)

$2,500 

$2,500

Highly Compensated Employee Definition (prior year)

$115,000 

$115,000

Maximum Deduction (% of Compensation) P/S and SEP Plans

25% 

25%

IRA Contribution Limit (Traditional & Roth)

$5,500 

$5,000

IRA Catch Up Contribution Limit (Over Age 50)

$1,000 

$1,000


For questions regarding your retirement plan, please contact any of the members of our Employee Benefit Plan Services Group.

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2012 Gift Planning - Time Is Running Out!

Posted 12:00 PM by

The gift, estate and generation-skipping transfer tax exemptions are currently $5.12 million for transfers made through the end of 2012. Unless Congress takes action otherwise, the exemptions revert back to $1 million in 2013. Before 2011, the gift tax exemption was only $1 million. This means that taxpayers can gift up to $5.12 million, less whatever portion of their exemption they have used in prior years, gift-tax free in 2012. For example, if a taxpayer used his $1 million gift tax exemption in prior years, he would still be able to gift up to $4.12 million in 2012, gift-tax free. The exemptions are $5.12 million per person or $10.24 million per married couple.

Thus, now is an excellent time for taxpayers to consider making gifts. When a taxpayer makes a gift, this not only gets the value of the gifted property out of the taxpayer's estate for estate tax purposes, but it also gets the appreciation on the gifted property out of the taxpayer's estate for estate tax purposes. Plus, this opportunity may be short-lived depending on what happens to the law after 2012. If the exemption amount decreases next year, as it is scheduled to do, taxpayers will have lost an opportunity to pass wealth down to their heirs (or to trusts for their heirs) gift- and estate-tax free.

Many taxpayers may not feel comfortable making large gifts now. Using a trust that can benefit a spouse may give them the comfort they need. However, trusts for spouses can have traps for the unwary. Alternatively, they may want to use at least some of their $5.12 million exemption, or perhaps one spouse may want to use his or her exemption even if the other spouse doesn't use any of his or her exemption.

Taxpayers should carefully consider whether or not to use their gift tax exemptions by making gifts in 2012.

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Have You Considered an Automatic Enrollment Feature for Your 401(k) Plan?

Posted 12:00 PM by

Do you want to offer a retirement plan that provides a high level of employee participation and makes it easy for you to withhold employee contributions and select the investments for those contributions? Do you currently have a plan that fails to meet its annual non-discrimination testing requirements? If so, then you may want to consider an automatic enrollment feature for your 401(k) plan.

Approximately 30 percent of eligible employees do not participate in their employer's 401(k) plan. Many employees are intimidated by their employer’s 401(k) plan and all the decisions (contributions, investments, etc.) needed to participate. Whether you already have a 401(k) plan or are considering one, an automatic enrollment feature offers the following advantages:

  • Increased plan participation  
  • Allows for the certain investments if employees do not select their investments
  • Simplifies the selection of investments appropriate for long-term savings for participants
  • Helps employees begin saving for their future
  • Offers significant tax advantages (including deduction of employer contributions and deferred taxation on contributions and earnings until distribution)
  • Permits distributions to employees who opt out of participation in the plan within the first 90 days

A basic automatic enrollment 401(k) plan must state that employees will be automatically enrolled in the plan, unless they elect otherwise, and must specify the percentage of an employee's wages that will be automatically deducted from each paycheck for contribution to the plan. The document must explain that employees have the right to elect not to have salary deferrals withheld or to elect a different percentage to be withheld.

An eligible automatic contribution arrangement (EACA) is similar to the basic automatic enrollment plan, but has specific notice requirements. An EACA can allow automatically enrolled participants to withdraw their contributions within 30 to 90 days of the first contribution.

A qualified automatic contribution arrangement (QACA) is a type of automatic enrollment 401(k) plan that automatically passes certain kinds of annual required testing. The plan must include certain required features, such as a fixed schedule of automatic employee contributions, employer contributions, a special vesting schedule, and specific notice requirements.

Disclosure Requirements

Employers must notify employees who are eligible to participate in the plan about certain benefits, rights and features. Employees must receive an initial notice prior to automatic enrollment in the plan and receive a similar notice annually. 

The notice should include information about the automatic contribution process, including the opportunity to elect out of the plan. In addition, the notice must describe the default investment used by the plan, the participants' right to change investments, and where to obtain information about other investments offered by the plan.

An annual notice must be provided to participants and all eligible employees at least 30 days, but not more than 90 days, prior to the beginning of each subsequent plan year.

If the participant, after receiving the initial or annual notice, does not provide investment direction, the participant is considered to have decided to remain in a default investment.

Participation

Employees are automatically enrolled in the plan and a specific percentage will be deducted from each participant's salary unless the participant opts out or chooses a different percentage.

Contributions

Basic and Eligible Automatic Enrollment 401(k) Plans – As with any 401(k) plan, in addition to employee contributions, you decide on your business' contribution (if any) to participants' accounts in your plan. If employers decide to make contributions to an automatic enrollment 401(k) plan for employees, there are additional options. Employers can match the amount their employees decide to contribute (within certain limits), or contribute a percentage of each employee's compensation (called a nonelective contribution) – or both. Employers have the flexibility of changing the amount of matching and nonelective contributions each year, according to business conditions.

Qualified Automatic Contribution Arrangements – If a plan is set up as a QACA with certain minimum levels of employee and employer contributions, it is exempt from the annual testing requirement that applies to a traditional 401(k) plan. The initial automatic employee contribution must be at least three percent of compensation. Contributions may have to automatically increase so that, by the fifth year, the automatic employee contribution is at least six percent of compensation.

The automatic employee contributions cannot exceed 10 percent of compensation in any year. The employee is permitted to change the amount of his or her employee contributions or choose not to contribute, but must do so by making an affirmative election.

The employer must at least 1) make a matching contribution of 100 percent for salary deferrals up to one percent of compensation and a 50 percent match for all salary deferrals above one percent, but no more than six percent of compensation; or 2) make a nonelective contribution of three percent of compensation to all participants.

Contribution Limits – Employees can make salary deferrals of up to $17,000 for 2012. This includes both pre-tax employee salary deferrals and after-tax designated Roth contributions (if permitted by the plan). An automatic enrollment 401(k) plan can allow catch-up contributions of $5,500 per year for 2012 for employees age 50 and over.

Vesting

Automatic employee contributions are immediately 100 percent vested.

Employer contributions are vested according to the plan's vesting schedule. However, the required employer contributions under a QACA must be fully vested by the time an employee has completed two years of service.

Nondiscrimination

Basic automatic enrollment 401(k) plans and most EACAs are subject to annual testing to ensure the amount of contributions made on behalf of rank-and-file employees is proportional to contributions made on behalf of owners and managers. Automatic enrollment typically increases participation, thereby making it more likely that a plan will pass the test. Automatic enrollment 401(k) plans set up as QACAs are not subject to this annual testing.

Investing the Contributions

You can automatically invest employee contributions in certain default investments that generally offer high rates of return over the long term and provide a greater opportunity for employees to save enough money to take them through retirement. If carried out properly, employers can limit liability as plan fiduciary for any automatic enrollment 401(k) plan losses that are a result of investing participants' contributions in these default investments. Note that employers are still responsible for prudently selecting and closely monitoring these default investments. There are conditions to obtain this relief from liability:

  • Plan sponsors place the participant's contributions in certain types of investments.
  • Before his or her first contribution is deposited, the participant receives a notice describing the automatic enrollment process; a similar notice is sent annually thereafter.
  • The participant does not provide investment direction.
  • The plan passes along to the participant material related to the investment.
  • The participant is given the opportunity periodically to direct his or her investments from the default investment to a broad range of other options.

Qualified Default Investment Alternatives – You can choose from four types of investment alternatives for employees' automatic contributions, called qualified default investment alternatives, or QDIAs. Three alternatives are diversified to minimize the risk of large losses and provide long-term growth. They are:

  • A product with an investment mix that changes asset allocation and risk based on the employee's age, projected retirement date, or life expectancy (for example, a lifecycle fund);
  • A product with an investment mix that takes into account a group of employees as a whole (for example, a balanced fund); and
  • An investment management service that spreads contributions among plan options to provide an asset mix that takes into account the individual's age, projected retirement date or life expectancy (for example, a professionally managed account).

There is an alternative that allows plans to invest in capital preservation products, such as money market or stable value funds, but only for the first 120 days after the participant's first automatic contribution. This option can be used only in EACAs that permit employees to withdraw their automatic contributions and earnings between 30 and 90 days (as specified in the plan) after the participant's first automatic contribution. Before the end of the 120-day period, if you receive no direction, you must redirect the participant's contributions in the capital preservation product to one of the long-term investments mentioned above.

Note that you do not have to select a QDIA for your plan. You may find that other default investment alternatives would be more appropriate for your employees.

Distributing the Contributions

Employees may not want to participate in the company retirement plan. If employers want to allow participants to withdraw their contributions within 30 to 90 days of the first contribution, your plan document must provide for this option and be set up as an EACA. Any distributed amounts, including earnings, are treated as taxable income in the year distributed. The distribution is reported on a Form 1099-R and are not subject to the 10 percent early withdrawal tax.

If an employee decides to withdraw investments within 30 to 90 days of the first contribution, a plan cannot impose restrictions, fees or expenses beyond standard fees for services, such as investment management and account maintenance. Further, participants should not be subject to penalties, such as surrender charges, liquidation fees, or market value adjustments.

For questions regarding your retirement plan, please contact any of the members of our Employee Benefit Plan Services Group.

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IRS Issues New Rules Under 263(a)

Posted 12:00 PM by

On Jan. 1, 2012 new rules became effective regarding when to deduct or capitalize amounts paid to acquire, produce or improve tangible property. These new rules will affect all taxpayers that acquire, produce or improve tangible property.

The question of when to deduct or capitalize amounts paid to acquire, produce or improve tangible property is frequently a point of disagreement between taxpayers and the Internal Revenue Service (IRS). Since 2004 the IRS has been developing guidance intended to reduce controversy related to this question. After issuing and withdrawing proposed regulations under §1.263(a) in 2006 and 2008, the IRS in December 2011 issued yet another round of temporary and proposed regulations, with §1.263(a)-1T providing general rules for capital expenditures, §1.263(a)-2T providing rules for amounts paid for the acquisition or production of tangible property, and §1.263(a)-3T providing rules for amounts paid for the improvement of tangible property. Also affected are guidelines under Regulations §1.162-3 regarding materials and supplies and other regulations indirectly affected by changes to Regulations §1.263(a). These regulations are effective on Jan. 1, 2012 and will expire on Dec. 23, 2014 if not made final.

§1.162-4T of the temporary regulations states that a taxpayer may deduct amounts paid for repairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized. §1.263(a)-1T provides that no deduction is allowed for (1) any amount paid for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, or (2) any amount paid in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. The ongoing dilemma for taxpayers has been the application of these rules to business activity. What constitutes an “incidental” repair? What is “maintenance”? How does one discern when an asset has increased in value or had its useful life extended?

The temporary regulations generally divide asset types into (1) buildings and structural components thereof, and (2) assets other than buildings and structural components thereof (i.e., everything else). The temporary regulations further categorize expenditures into (1) amounts paid to produce or acquire tangible property and (2) amounts paid to improve tangible property. Underlying any analysis of whether to deduct or capitalize an expenditure is the concept of the “unit of property” (UOP). 

In the case of property other than buildings, the UOP for real and personal property includes all functionally interdependent components of the property. Components are functionally interdependent if placing one component in service depends upon placing the other component in service. For example, a tractor trailer in its entirety (inclusive of all components such as the motor, the cab, the transmission, the tires, etc.) is the unit of property. In the case of buildings, the UOP concept is clarified and expanded to separately consider important functional systems of a building. 

Under the new regulations, the building UOP consists of (1) the building and structural components; (2) heating, ventilation and air conditioning systems; (3) plumbing systems; (4) electrical systems; (5) all escalators; (6) all elevators; (7) fire protection and alarm systems; (8) security systems; (9) gas distribution system, and; (10) any other system defined in published guidance. This is a significant change compared to previously issued proposed regulations, given that under prior guidance taxpayers treated the entire building, inclusive of the now separately identified systems, as a single unit of property. For example, under prior guidance an expenditure related to heating, ventilation, and air conditioning (HVAC) systems may have been deducted based on the analysis that the UOP, the building, was not improved. Now, the analysis must look at only the HVAC system as the UOP, in which case the position for deducting or capitalizing the expenditure may change.

Temporary regulations under §1.263(a)-2T regarding the acquisition or production of property retain most generally understood rules regarding capitalization of expenditures. Expenditures directly or indirectly incurred that result in the production or acquisition of a UOP must be capitalized. Amounts paid to move and reinstall a UOP already placed in service by the taxpayer are generally not amounts paid to acquire or produce a unit of property. All work performed on a UOP prior to the date placed in service is required to be capitalized. In general, all expenditures that facilitate the acquisition or production of real or personal property, such as permitting or title searches, must be capitalized.

The temporary regulations continue to provide a de minimis rule regarding the amounts paid to acquire or produce tangible property (e.g., deducting amounts paid under $500). However, the general rule prohibiting a distortion of income is replaced with a bright-line ceiling rule. Taxpayers may not deduct otherwise capital expenditures in excess of the lesser of 0.1 percent of the taxpayer’s gross receipts for the tax year, or 2 percent of the taxpayer’s total depreciation and amortization for the tax year. Additionally, taxpayers are eligible to use a de minimis rule only if they have an “applicable financial statement” (i.e., an audited financial statement).

Acquired materials and supplies are discussed under the temporary regulations. Materials and supplies that are incidental (for which no inventories or records of consumption are maintained) are deductible in the year purchased. Materials and supplies that are non-incidental are not deductible until the year in which they are used or consumed. In general, materials and supplies include property acquired to maintain, repair, or improve a unit of tangible property owned, leased or serviced by the taxpayer and that are not acquired as part of any single unit of property. Examples might include air filters for use in a building’s HVAC system, or brake pads for use on a tractor trailer. The proposed regulations add descriptions of material and supplies to include fuel, lubricants, water and similar items reasonably expected to be consumed in 12 months or less, beginning when used in the taxpayer’s operations.

Proposed regulations under §1.263(a)-3T address amounts paid to improve tangible property. In general, amount paid related to a UOP already in service that (1) result in a betterment to the UOP; (2) restores the UOP; or (3) adapts the UOP to a new or different use must be capitalized. The application of these standards to amounts paid will likely remain a source of contention between taxpayers and the IRS, but the temporary regulations provide numerous examples of typical transactions and their treatment under the new rules. Of particular note are changes to regulations that specifically allow the disposition of structural components of a building or building systems. This will allow the adjusted basis of the retired component (e.g., an old roof) to be recovered when replaced. 

The temporary regulations will dispense of the plan of rehabilitation doctrine, which required that otherwise deductible repairs or maintenance be capitalized if performed in conjunction with a larger remodeling or construction project. Retailers and other taxpayers whose buildings or other physical premises are subject to periodic refreshing are given guidance, via examples, on when such costs may be deducted. Taxpayers will still lack bright-line tests that provide clear guidance in such circumstances, so the facts and circumstances of each project must be analyzed. Any expenditure incurred to improve a material condition or defect in property that existed prior to acquisition, or which arose during production, must be capitalized regardless of whether the taxpayer was aware of the problem.

The temporary regulations provide a routine maintenance safe harbor for tangible property other than buildings or building systems. Routine maintenance is a recurring activity and expenditure related to a UOP that a taxpayer expects to perform as a result of the taxpayer’s use of the property. The activity must keep (rather than put) the UOP in its ordinarily efficient operating condition. An activity is considered routine only if the taxpayer reasonable expects to perform the activities more than once during the class life of the UOP.

The temporary regulations under §1.263(a) are far reaching and the discussion above serves to touch on many, but not all, key points that taxpayers should understand when determining whether to capitalize or deduct an expenditure. Taxpayers determining whether to deduct or capitalize expenditures should refer to these temporary regulations, the examples provided, and their KSM advisor.

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Property Tax Reassessment: Property Owners Beware

Posted 12:00 PM by

2012 is a real estate tax reassessment year for Indiana real property taxes. This means that every parcel of property in the state will be examined by a county assessor to determine if the assessed value of the property should be increased. Considering the last Indiana property tax reassessment took place 10 years ago (in 2002), the Indiana assessment of property on thousands of parcels of commercial property across the state are expected to increase by the time reassessment is complete.

With this in mind, the first thing a property owner should do when they receive the Form 11 notice of assessment is to look at the assessed value and ask, "Could I sell my property for this price?" If the answer is "no," then it is possible that the property may be over-assessed. In this case, KSM's property tax calculator will estimate the amount of property taxes you may save by filing an appeal.

KSM's property tax leader Chad Miller has more than 12 years of experience in dealing with Indiana's difficult assessment system. Prior to joining KSM, Chad worked as the lead commercial assessor for one of the largest business corridors in the state. As a result, Chad has witnessed firsthand just about every argument an assessor or taxpayer can make for or against an Indiana property tax appeal. Since coming to KSM, Chad and his team have used this experience to lower the Indiana real property taxes for our clients, reducing their assessed value by more than $204,000,000. And that is just in the first six months in 2012.

If you are interested in a free review of your property's assessed value to determine if an appeal makes sense, please contact Chad at 317.580.2058 or cmmiller@ksmcpa.com.

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New W-2 Reporting Requirements for 2012

Posted 1:31 PM by

When the Patient Protection & Affordable Care Act (PPACA) was passed in March 2010, a number of mandates became law. While some of these mandates have been widely discussed – such as the employer requirement to provide affordable health coverage and the requirement for individuals to buy health insurance by 2014 – other directives are not as well known. One of the lesser known mandates is the act’s new Form W-2 reporting requirement. Effective for 2012 W-2s, employers must report the cost of coverage under an employer-sponsored group health plan.

More specifically, employers must report the total cost of all “applicable employer sponsored coverage” provided to an employee. Applicable employer sponsored coverage is defined as “coverage under a group health plan that the employer makes available to the employee that is non-taxable to the employee.” In other words, employers must report the costs of major medical insurance and similar plans on employees’ W-2s. The amount reported will be comprised of both employer and employee contributions. Employee contribution amounts must include both pre-tax and after-tax contributions.

The coverage costs of the following types of plans must be indicated on 2012 Form W-2s in box 12 with a code “DD” designation:

  • Medical plans;
  • Prescription drug plans;
  • Executive physicals;
  • On-site clinics, if they provide more than minimal care;
  • Medicare supplemental policies;
  • Employee assistance programs; and
  • Dental and vision plans, unless they are “stand-alone” plans.

It is important to note that the costs of coverage under health flexible spending accounts, health savings accounts, and long-term care insurance are excluded from the reporting requirement.

In interim guidance, the IRS remarked that this additional reporting is for informational purposes only. The PPACA does not cause any previously excludable employer-provided health coverage to become taxable. According to the service, the main purpose of this legislation is to notify employees about the true cost of their healthcare coverage.

If you are a business owner it will be important to track this cost of coverage data for the entire year. If your business uses a payroll company you may consider discussing this new reporting requirement with your payroll provider in order to be aware of any additional information the provider will need.  

Below is a quick reference chart provided for your convenience that contains the new requirements for 2012 and beyond. Items listed as “optional” may be changed by future IRS rules; however, any such change will not be applicable until the tax year beginning at least six months after the date the guidance is issued.

Coverage TypeReport on form W-2Do Not Report on Form W-2Optional
Reporting
Major medicalX  
Dental or vision plan not integrated into another medical or health plan  X
Dental or vision plan which gives the choice of declining or electing and paying an additional premium  X
Health Flexible Spending Arrangement (FSA) funded solely by salary-reduction amounts X 
Health FSA value for the plan year in excess of employee’s cafeteria plan salary reductions for all qualified benefitsX  
Health Reimbursement Arrangement (HRA) contributions  X
Health Savings Arrangement (HSA) contributions (employer or employee) X 
Archer Medical Savings Account (Archer MSA) contributions (employer or employee) X 
Hospital indemnity or specified illness (insured or self-funded), paid on after-tax basis X 
Hospital indemnity or specified illness (insured or self-funded), paid through salary reduction (pre-tax) or by employerX  
Employee Assistance Plan (EAP) providing applicable employer-sponsored healthcare coverageRequired if employer charges a COBRA premium Optional if employer does not charge a COBRA premium
On-site medical clinics providing applicable employer-sponsored healthcare coverageRequired if employer charges a COBRA premium Optional if employer does not charge a COBRA premium
Wellness programs providing applicable employer-sponsored healthcare coverageRequired if employer charges a COBRA premium Optional if employer does not charge a COBRA premium
Multi-employer plans  X
Domestic partner coverage included in gross incomeX  
Military plan provided by a governmental entity X 
Federally recognized Indian tribal government plans and plans of tribally charted corporations wholly owned by a federally recognized Indian tribal government X 
Self-funded plans not subject to Federal COBRA  X
Accident or disability income X 
Long-term care X 
Liability insurance X 
Supplemental liability insurance X 
Workers' compensation X 
Automobile medical payment insurance X 
Credit-only insurance X 
Excess reimbursement to highly compensated individual, included in gross income X 
Payment/reimbursement of health insurance premiums for 2% shareholder-employee, included in gross income X 
Other SituationsReportDo Not ReportOptional
Employers required to file fewer than 250 Forms W-2 for the preceding calendar year  X
Forms W-2 furnished to employees who terminate before the end of a calendar year and request, in writing, a Form W-2 before the end of that year  X
Forms W-2 provided by third-party sick-pay provider to employees of other employers  X

Please contact your Katz, Sapper & Miller tax advisor if you have any questions about this new reporting requirement.

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Unreimbursed Education Expenses Deduction

Posted 12:00 AM by

The state of Indiana recently released new legislation that entitles an individual tax deduction for up to $1,000 per dependent child for unreimbursed education expenditures. These expenditures include costs for tuition, fees, software, textbooks and school supplies for dependent children in grades K-12 enrolled in private school or who are homeschooled. This legislation is retroactive for year 2011 so the deduction can be made on the parent’s 2011 tax return.
 
For more information on this deduction, please see the information bulletin released by the Indiana Department of Revenue or contact your KSM advisor.

 

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