Archive for Archive for April 30th, 2008
Qualified Retirement Planning Services As a Fringe Benefit
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) added a new category of fringe benefit that is excludable from employees’ gross wages
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) added a new category of fringe benefit that is excludable from employees’ gross wages - - employer-provided qualified retirement planning services. This exclusion applies to qualified retirement planning services offered for years beginning after December 31, 2001.
Background
Before explaining what qualified retirement planning services are, how they can be used and what the tax advantages are, a general background of fringe benefits is useful.
Fringe benefits are non-compensation benefits provided by an employer to his or her employees. Because of the nature of the employer-employee relationship, such benefits are generally included in the employee’s taxable income when received. The employer is able to deduct the value of the fringe benefit, assuming that certain requirements are met. As with any business expense incurred by an employer for which a tax deduction is sought, the employer must be engaged in a trade or business, the expense must be incurred in that trade or business, and the expense must be ordinary and necessary.
Fringe benefits, being a form of compensation paid to the employee, generally meet the qualifications as a business expense, ensuring deductibility by the employer. However, Congress has added a special incentive to certain types of fringe benefits in that the receipt of the fringe benefit will not be taxable to the employee, even though the employer will still enjoy a deduction for providing the fringe benefit. These fringe benefits are specifically exempted from inclusion in the employee’s taxable income by IRC section 132:
no-additional-cost service; qualified employee discount; working condition fringe; de minimis fringe; qualified transportation fringe, qualified moving expense reimbursement; and qualified retirement planning services.
Qualified Retirement Planning Services Defined
The Internal Revenue Code defines “qualified retirement planning services” as “any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan.”
There are several interesting aspects to this definition. First, what kinds of information would an employee need in order to assess his or her retirement planning?
For any retirement plan participant, the following list would seem a basic starting point:
1. What are the distribution options? Examples are lump sum, installments, and annuities. 2. What is the impact of the benefit plan on social security payments, if any? 3. How long can receipt of the retirement benefits be postponed? 4. Do any excise taxes apply to the distribution? 5. What is the current balance and present value of the account? 6. What are the employee’s rollover options and what are the tax consequences for these options? 7. If the retirement plan was a defined benefit plan, what are the payment amounts for different types of annuity options?
It is this type of information that is likely to be provided to the employee by the employer and that is included within the context of “employer-provided qualified retirement planning services.”
The Employer Must Maintain a Qualified Employer Plan
The retirement planning advice must be provided by “an employer maintaining a qualified employer plan.” The Internal Revenue Code defines “qualified employer plan” to be “a plan, contract, pension, or account described in section 219(g)(5).” Essentially, plans described in section 219(g)(5) include:
1. pension, profit-sharing and stock bonus plans qualified under IRC section 401(a), 2. annuity plans described in IRC section 403(a), 3. plans established by the U.S. or state government for its employees, 4. Code section 403(b) annuity contracts, 5. simplified employee pensions within the meaning of Code section 408(k), 6. SIMPLE retirement accounts within the meaning of Code section 408(p), and 7. certain trusts described in IRC section 501(c)(18).
This is critical because the intent of Congress in adding qualified retirement planning services to the list of excluded fringe benefits is to encourage employers who had retirement plans in place to offer their employees advice as to how the employer’s plan fit into the individual’s overall retirement income plan. Clearly, Congress wants to encourage employers who offer retirement plans to also offer planning services to employees.
Though the employee has the advantage of the excluded fringe benefit, the employer also gets a deduction for providing the services. By making this particular fringe benefits exempt for the employee, Congress encourages the employee to ask his or her employer for the fringe benefit. This is a way of using tax policy to encourage certain behavior on the part of both employees and employers. If the employees attach a value to obtaining the fringe benefit, that benefits the employer as well since, as discussed above, the employer gets a tax deduction for providing these services.
What Constitutes Retirement Planning Advice or Information?
Another aspect of the definition of qualified retirement planning services is that it includes “any retirement planning advice or information provided.” On its face, this is a very broad definition that could conceivably include a wide range of services. Before pricing out those deductions, however, it is important to note that Congress has given the Secretary of the Treasury orders to write regulations to carry out Congress’ intent. Because of the way in which Congress did this, the Treasury has a great deal of latitude in writing the regulations. Treasury usually does not give away the shop to taxpayers when given this type of latitude. Often in such situations, the regulation writers will look to the legislative history of the provision to see what Congress intended and then take a turn or two in narrowing what will actually be provided.
In this case, the legislative history shows that Congress intended to limit the broad services suggested by the plain words of the Code. We have already discussed Congressional intent for this provision generally, but Congress has added this limitation as well: “the exclusion does not apply to services that may be related to retirement planning, such as tax preparation, accounting, legal or brokerage services.”
Where the fringe benefit might have been to offer limited accounting, legal or financial advice to an employee, apparently the employer will be limited to offering advice consistent with that provided by retirement plan advisor. The likely application is that the employer will have his retirement plan advisor provide the employee with information similar to the list provided above, but without necessarily taking into account all the factors in that particular employee’s life.
It is a valuable and worthy service, but does not reach the “any advice or information” hope that was provided in the Code itself. Had the broader language of the Code been left alone, the employer might have been encouraged to allow the employee to sit down with an employer-provided attorney, for example, to discuss estate planning and how the employer’s retirement plan might be maximized for the particular employee, taking into account the employee’s particular needs and desires. As it stands, however, the employer will be limited to providing advice on how the pay-out of the retirement plan can be done in the most effective manner. This is useful information, but taken in isolation is not as valuable as it might have been.
It will be interesting to monitor the regulations that are put in place for this fringe benefit and to observe how the Treasury will interpret the Code and legislative history and, especially, to see what kinds of services Treasury is willing to allow the employer to provide.
Application of the Nondiscrimination Rules
An additional hurdle has also been added by the Code. In essence, the nondiscrimination rules from pension law have been imported to this particular fringe benefit. While the nondiscrimination rules are beyond the scope of this article, in the context of a small business, the shareholders or executive class cannot get these benefits to the exclusion of the regular employees.
The exemption for qualified retirement planning services applies to “highly compensated employees only if such services are available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan.” If the advice and information only goes to highly compensated individuals, then the provision of the services will not be exempt.
Congress did attempt to provide some latitude to employers by stating that “the Secretary, in determining the application of the exclusion to highly compensated employees, may permit employers to take into consideration employee circumstances other than compensation and position in providing advice to classifications of employees. Thus, for example, the Secretary may permit employers to limit advice to individuals nearing retirement age under the plan.” On the one hand, this is good news for employers since they can, apparently, limit the information provided to a class of those people nearing retirement age. On the other hand, it would be better for the employees if this type of advice was available much earlier in the process, rather than within sight of retirement.
Any employer looking to offer retirement planning services would do well to inquire about the nondiscrimination rules or to apply the retirement planning services in the same manner as the employer plan.
Conclusion
It makes a great deal of tax sense for employers with retirement plans to offer their employees retirement planning. With Congress’ generous treatment of this fringe benefit, employees will no doubt desire such information. Congress has the ability to make such benefits a win-win situation and has done so here. Many middle-class Americans do not have any tax or estate plan in place and this fringe benefit could provide an impetus for them to plan their retirement in a tax-efficient manner. Business owners will also benefit from the same type of planning, and will be able to achieve the planning in a tax-efficient manner, assuming that they are able to accommodate the nondiscrimination rules. Feel free to contact us, and we’ll be more than happy to help you decide how the new law’s opportunities might help your business - - and your employees.
About the Author
Thomas M. Connolly (B.S., Carroll College; M.B.A., DePaul University; and J.D., DePaul University) is an Associate Attorney with The Law Offices of Marc J. Lane, a Professional Corporation. He is a Certified Public Accountant.
Collecting Houses for Retirement
This article discusses why it is imperative that we all start to take responsibility for creating a wealth base for our future, so we can be financially independent when we retire.
In Australia, as well as many other countries, we can no longer rely on the government to hand out an old aged pension cheque to us once we retire. We cannot take for granted that at the end of our working life we will be taken care of financially.
Our population is ageing, due to the baby boomer generation, and within 30 years there will be so many retired people, compared to the number of working age people, that it will be economically impossible for the government to afford to provide any reasonable source of monetary assistance for the elderly.
The Australian government has realised this, and that is why they introduced the compulsory employer paid superannuation scheme and are even now beginning to give financial incentives to Self-funded retirees.
Most of us have never sat down and even considered the ramifications of why the compulsory super was introduced and for many of us it is a matter of too little too late. Even for the young women in our society who have a full working life ahead of them, they still cannot rest assured of a comfortable retirement.
Why is this? It is because that unfortunately even with contributions at the current level of less than 10%, someone on an average wage who works continually for 30 years, is still going to find themselves trying to survive on an income equivalent to less than $20,000,00 per annum in todays dollars.
You will notice that I said continually working for 30 years. This is another reason why women are particularly disadvantaged, firstly because they often have to take up to ten years leave from the workforce to raise children, secondly because women in general earn less than their male counterparts and thirdly because an enormous proportion of the women in Australia, will never have received any previous superannuation contributions, prior to the compulsory superannuation being introduced, and will therefore not have had contributions made over their entire working life so far, giving them even less to fall back on by the time they retire.
Many women may previously not have thought of lack of superannuation contributions as being a problem, as their husbands may have been contributing to super since they first began work. Unfortunately though with the high number of divorces in this country, it is unwise to rely on the fact that your partners superannuation will be there for you in your retirement years and even if a large proportion is awarded in a settlement that it will be sufficient to sustain a comfortable retirement for any length of time.
All of these factors are why women now more than ever, need to begin taking action to build up a source of ongoing income, that will grow to such an extent, as to be able to provide a secure and happy future for themselves and their children.
It needs to be a source of income that is unrelated to physical workthat is an income that is generated from income producing assets and not from our personal efforts. One of the best sources of creating this ongoing income stream is to begin building an investment portfolio property, also aptly paraphrases as bricks and mortar.
We need to start collecting income producing assets now, so that they will have time to grow and develop so that we will be financially independent for our retirement years.
Property is one of the best types of income producing assets, mainly because through gearing, which is borrowing other peoples money to supplement our own, we are able to control assets of a far greater value, and benefit from the growth on the overall value, including the borrowed portion, in contrast to only benefiting from the growth on the small portion of our own money contributed.
For example, if you have $10,000.00 invested at 7% compounding, then in ten years it will grow to around $20,000.00. If on the other hand you have used that $10,000.00 as 5% deposit on a $200,000.00 property, which grows in value by 7% per year, then after ten years the property would have grown in value to nearly $400,000.00 giving you a profit of almost $190,000.00 instead of a profit of $10,000.00 had you just invested your own money. After 30 years your money alone would have grown to just over $76,000.00 and the geared property would have grown to more than $1.5 million.
This example of course has not taken into account the initial purchasing costs involved to secure the investment property, nor has it taken into account the rental income that you would also be receiving.I have simply used it to demonstrate that the more assets that you can get working for you, the better off you will be.
Furthermore, if you already have equity built up in your own home, it is possible to purchase an income producing property, without even having to outlay any cash whatsoever.
I would like to explain to you the miracle of compounding interest because this is the major factor that allows an average person to create a source of immense wealth. It is a little understood concept that can have a huge bearing on your future, once you understand how it can best be utilised.
Compounding is the effect of letting something grow, and then rather than taking away the newly created amount, you leave the whole thing in tact, and allow further growth to take place on the entire amount, and so on. Effectively making it grow exponentially.
For example. If you have $1,000.00 that is growing by 10% per year due to interest received. Then you have two options, you can withdraw the income of $100.00 that has been generated, or you can leave it where it is, and allow it to compound (earn interest on interest),
If you allow it to compound, then in the second year you will get an income of 10% of $1,100.00, which is $110.00, instead of $100.00. This may not sound like much, but the longer you leave the money to compound, the larger it will grow. As each year passes it will grow by a larger amount, in fact after 10 years it will be worth $2,593.75 and after 40 years it would be worth a massive $45,259.42. Remember that if you had withdrawn the $100.00 interest each year for the same period 40 years then you would have received only $4,000.00 and would still have the original $1000.00, being a total of only $5,000.00. This means that by letting it compound you would have earned more than an additional $40,000.00.
One of easiest ways to calculate how compounding interest works with different rates of return is to become familiar with the Rule of 72.
This rule states that The number of years that it will take for your money to double is 72 divided by the interest (growth) rate.
Therefore if you have $1,000.00 invested at 10% interest, then the number of years that it will take for your money to double to $2,000.00 is 7.2.
72 divided by 10 = 7.2
If your money is invested at 7% interest, then it will take approximately ten years to double in value. If it is invested at 5% it will double in just over fourteen years.
The two most important aspects of compounding are one: rate and two: time.
The higher the rate and the longer the time something is left to compound, the greater the final result will be.
This is why the sooner we start investing, the better.
About the Author
Debra has spent several years researching the powerful medium of property investment and speaking with hundreds of other property investors. She has discovered many different strategies that have been used and the ones that have worked best. Within the space of four years she was able to go from renting a house, to owning her own home and three investment properties. She now writes books and articles about property investment, goal setting, budgeting and how to create financial security for retirement
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Funding Your Retirement: The 401K and 403B Way
Budget
Saving for your retirement doesn’t have to be a nightmare as long as you are
aware of your options. For now, we’re focusing on 401K and 403B retirement
plans. These two plans are essentially the same except that for-profit
companies use 401Ks and non-profit companies, such as the government, use
403Bs.
An employee contributes to a 401K plan with pretax salary. This means that
this account appreciates without taxation until you retire or leave the
company. So, 401K contributions are not included in your reported income.
In essence, you receive an immediate tax deduction for your contribution.
Many employees offer an automatic payroll deduction, so there isn’t any extra
effort involved for you. Matching contributions or partial matching
contributions are other incentives offered by employers. For instance, my
employer matches every one of my dollars with a quarter. Sounds like small
potatoes, but remember the beauty of compound interest.
Of course, there are rules and regulations. You are typically limited to a
percentage of your income or $10,500 annually, whichever is less. So what
happens if you leave your company? You have 3 options: leave it as it is,
roll it over into another tax-deferred retirement account such as an IRA or
withdraw it all. However, early withdrawal penalties, that is before age
59-1/2, are stiff. Usually, it’s a 10% penalty plus any taxes owed. So, if at
all possible avoid withdrawing any funds before age 59-1/2.
Your 401K portfolio should be chosen carefully, weighing age and risk
factors. The older you are, the less stock you should have in your portfolio.
Many financial advisors suggest that your portfolio percentage of stocks
should be your age subtracted from 100. Therefore, a 25-year-old’ s portfolio
should consist of 75% stocks. However, if you’re not comfortable with that
level of risk, then simply chose fewer stocks. Do remember this: over the
last century the stock market has returned an average of 11% (this includes
all wars and the Great Depression). Your plan will most likely offer 4 to 7
investment options of mutual funds, stocks, bonds, etc. for your portfolio.
My company provides 10 options of which I have chosen 5.
Chose wisely and consider how much risk you are willing to take. Most of all,
you need to be comfortable with your choices. If you need further assistance
in choosing your investment options, check out www.morningstar.com or the
