Top 10 tax strategies for 2013
By Nick Paleveda MBA J.D. LL.M
National Pension Partners
Here are 10 tax strategies that could benefit your clients in 2013:
1. Simplified employee pension plan (SEP) for 2012
Did you know that you still have time to set up a Simplified Employee Pension Plan (SEP) for 2012? Although the SEP is technically a defined contribution plan, and not a pension plan, it offers the participant the potential to establish the plan for the previous year up until April 15th. Contributions levels are 25 percent of each eligible employee’s compensation or $50,000, whichever is less for 2012. All individuals who have reached age 21, worked three of the last five years, and received at least $550 (for 2010 and 2011) in compensation during the year must be included.
2. Guaranteed defined benefit pension plans
Qualified plans for solutions to taxes include traditional, cash balance, 412(e)(3) guaranteed pensions, and 401(k) profit sharing plans with one census. Adding a pension may help reduce taxes for the highly compensated.
In the arena of 412(e)(3) guaranteed pensions, the carve out plan is used to provide benefits on a discriminatory basis. The combination plan can be a defined benefit (DB) pension plan with a 401(k) and/or profit sharing plan.
Small business owners are looking for a plan which primarily benefits them. In some cases, they are looking for 80 percent or more of all contributed dollars to be on behalf of the business owner(s) or key people. This gives the business owner/key person the ability to deduct an additional $50,000 to $200,000. Some of the benefits derived were enabled through the passage of legislation under The Pension Protection Act of 2006.
Unlike 401(k) contributions, DB contributions are made by the business, thereby avoiding FICA, Medicare and Obamacare taxes. When feasible, these plans can be covered by the Pension Benefit Guarantee Corporation (PBGC). National Pension Partners includes the resource of a tax attorney and bonding.
3. Fully insured plans (Section 79) – Group carve out
The purpose of the Section 79 is to allow regular C-corporations to provide either term life insurance or permanent cash value life insurance to key employees and the owner. In the Section 79 plan, there are no requirements for annual administration. 4. Medical reimbursement plans (Section 105)
A small business owner who can demonstrate employable interest in the business through an employee benefit program can legally deduct 100 percent of family medical expenses. This includes all health and qualifying long-term care insurance premiums, as well as out-of-pocket medical, dental and vision costs. The Patient Protection and Affordable Care Act (PPACA) set new rules for complying. Sole proprietors, partnerships, C- and S-corporations are all eligible.
5. Non-qualified deferred compensation (Section 409, 457)
Advantages of on-qualified deferred compensation (NQDC) plans are that they can be selective, the number of participants can be unlimited, and participant contributions are made on a pre-tax basis.
409(A) plans offer distributions upon retirement, death, disability and separation from service as well as a variety of other potential events. C-corporations are perhaps the best candidates, as these plans do not benefit owners of pass-through entities. Plans can be set up as deferral plans, supplemental executive retirement plans (SERP), or combination plans. 457(b) or (f) plans can be used for non-governmental tax-exempt employers. These can be set up as a SERP or a defined contribution plan.
6. The “equity out plan”
This technique is being used affectively to fund buy-outs as an exit strategy from the business by CPA firms, dentists, veterinarians, physicians and pharmacists.
7. Solo 401(k) [one-k] and self directed 401(k) plans
A solo 401(k) is available for an individual client’s business. A self directed 401(k) enables the client to self direct all of the investments inside of the 401(k) plan. The participants can choose traditional investments or non-traditional investments. 8. 401(k) plans
A vendor can act as a 3(21)(A) ERISA fiduciary and for a fee, that vendor can act as a 3(38) ERISA fiduciary. This helps protect the plan providers from many of their fiduciary liabilities. A wide variety of investment choices are available.
In order to serve the business owner, we offer to help execute the following areas:
- evaluate the current plan,
- determine if steps are being utilized to mitigate personal liability,
- determine if the current education program is adequate,
- benchmark plan providers
- determine if local servicing of the plan is meeting needs and
- conduct detailed investment reviews.
9. 403(b)(7) or (9) plans and tax sheltered annuities [TSAs]
A variety of investment choices are offered through annuity contracts or custodial accounts used to fund traditional 403(b)(7) plans. 403(b) plans offer retirement savings for public education organizations, some non-profit, cooperative hospital service organizations and self-employed ministers. If you are interested in a wider variety of investment choices, you have that capability though a 403(b)(9) plan.
10. Other traditional retirement plans
The IRA can be either an employer-sponsored IRA or an individual IRA plan. In addition to the plans covered above, there is also the traditional IRA, Roth IRA and simple IRA.