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Newsletter
June
2002 Volume
19 - Number 2
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This newsletter is addressed to
our clients their attorneys, accountants and other professional advisors.
Citations may be included for those who want to refer directly to the source
material. IN THIS ISSUE:
CALIFORNIA FINALLY COMPLIES WITH 2002 TAX LAW
CHANGES: On May 8, 2002,
the Governor signed into law legislation to conform California State law to
Federal Tax law.
WHO ARE YOUR EMPLOYEES? The purpose of this article is to
enlighten our clients & their advisors as to who their employees are for
retirement plan purposes.
PARTICIPANT DISTRIBUTIONS: Reminders about
processing participant distributions from qualified retirement plans.
CALIFORNIA
COMPLIES WITH 2002 LAW CHANGES
On May 8, 2002, the Governor finally signed into law, legislation to conform California state law to federal tax law. The new law provides for full conformity with the federal retirement plan provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Some of the more important changes are: ·
The dollar limit for 401(k) deferrals is now $11,000. ·
An additional $1,000 401(k) catch-up deferral is now
allowed for individuals’ age 50 or older. ·
Rollovers to and from different types of retirement
accounts will be more readily available. ·
The deduction limit increases to 25% for SEPs & profit
sharing plans ·
401(k) deferrals are deductible in addition to the 25%
limit on employer contributions. ·
Sole-proprietors, partners, and S-corporation Shareholders
may take participant loans. A lawsuit has been filed by a taxpayer group to repeal California’s compliance with EGTRRA due to other tax increases tacked onto the law to offset revenue losses associated with the retirement provisions. However, until the lawsuit is resolved, EGTRRA is law in California. |
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WHO ARE YOUR EMPLOYEES?
The
purpose of this article is to enlighten our clients & their advisors as
to who their employees are for retirement plan purposes. Generally speaking, your employees are any
individuals who are common law employees, but not independent
contractors. Therefore, before we go
any further, let’s review these two terms: Common
Law Employees - Under common law rules, anyone who performs services
for you is your employee if you control what will be done and how it will be
done. This is so even when you give
the employee freedom of action. What
matters is that you have the right to control the details of how the services
are performed.
Independent
Contractors (IC) - There are many individuals who are incorrectly
classified as IC, who are actually common law employees. The general rule is that an individual is
an IC if you, the person for whom the services are performed, have the right
to control or direct only the result of the work and not the means and
methods of accomplishing the result.
However, whether such people are employees or IC depends upon the
facts in each case. If you are
switching a W-2 Employee to 1099 IC status, they are probably still an
employee. What matters isn’t whether
they are given a Form 1099 or a Form W-2, but is the degree of control the
employer has over the worker and over how the work is done. When determining whether an
individual is a common law employee or not, let’s set the stage by reviewing
what is NOT relevant or controlling when determining who your employees are: ·
Whose payroll they are on. This includes temp employees, leased employees & shared
employees. ·
Whether a Form W-2 or 1099 is issued to report their
income With that framework in mind, what follows are some specific instances and examples: Shared
Employees - Yes, they are your common law employees. If you have a shared office expense
situation with shared employees, they are your employees. If these employees work more 1,000 hours
per year for all businesses in the shared office, they are full time (FT)
employees of each business! For
example, if 5 doctors or dentists equally share office expenses including a
FT receptionist, each doctor has a FT employee for retirement plan
purposes. Therefore, each doctor
would recognize 20% of the receptionists pay and cover the receptionist in
their plan. If all five doctors have
retirement plans, then the receptionist would be covered by all five plans! Whose payroll they are on is irrelevant.
Employees
On Someone Else’s Payroll - If you reimburse another business for employee
expense, they are your employees. If
your employees are on another business’ payroll, they should not be covered
by the other business’ retirement plan (at least to the extent that you
reimburse their compensation).
Leased
Employees - A leased employee who is not your common law employee
must generally be treated as your employee for retirement plan purposes if he
or she does all of the following:
·
Provides services for you under an agreement between you
and a leasing organization ·
Has performed services for you on a substantially full
time basis for at least 1 year ·
Performs services under your primary control. Exception, a leased employee is not treated as your employee if all of the following conditions are met: ·
Leased employees are not more than 20% of your non-highly
compensated work force. ·
The employee is covered by the leasing organization under
its qualified pension plan. ·
The leasing organization’s plan is a money purchase plan
that provides for immediate participation, 100% vesting and a 10% of pay
contribution. However,
if the leased employee is your common law employee, that employee will be
your employee for all purposes, regardless of any pension plan of the leasing
organization. In a practical sense,
this convoluted definition has limited application, and therefore, leased
employees are probably your common law employees. Temp
Firms - True temp firms are not engaged in long term staff
leasing. A true temp employee works
at many different jobs for short periods of time throughout the year. Normally, under these circumstances, they
are the common law employees of the temp agency. On the other hand, if you end up hiring a temp employee on a
full time basis, you need to recognize service from the first day they
performed services for you, not the day they went on your payroll.
Professional
Employer Organizations (PEO) - provide long term staffing & payroll
arrangements for many businesses. In
this type of arrangement, you typically lease all your employees from the
PEO. They are your common law
employees, not the common law employees of the PEO.
Illegal
Aliens - Are common law employees. ERISA does not contain an exclusion for illegal aliens. They are not excluded by the provision
that excludes nonresident aliens without US source income. These workers should be included in a
retirement plan and need to be counted in the 70% coverage test. However, they can be excluded by plan
provision. For example, exclude
employees who are not U.S. citizens or
who do not
have a green
card.
Since they must be included in the 70% coverage test,
they can only be excluded if they represent less than 30% of the eligible
workforce.
Summary – If it
walks like a duck, it probably is.
Unless there are compelling reasons to the contrary, most individuals
should be treated as your employees, and included in your retirement plan,
subject to the eligibility requirements.
If you do not include all of your eligible common law employees in
your retirement plan, then your plan runs the risk of being disqualified by
the IRS and/or subject to penalties from the Department of Labor.
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PARTICIPANT
DISTRIBUTIONS
The following rules apply to all eligible rollover distributions from a qualified retirement plan: ·
A participant must be provided with a special tax notice
and information describing the various distribution options offered by the
plan. Such a participant must then
submit a written election to receive a plan distribution before they can be
paid out of the plan. A distribution
package, that contains the notice, information and election forms should be
prepared by our office. ·
A participant with an account balance of $5,000 or less
can be cashed-out of the plan if he or she does not return a distribution
election. Such a cash-out would
require Federal Income Tax withholding.
Check with your State for any State Tax withholding requirements. ·
If an eligible rollover distribution is not rolled over to
an IRA or another retirement plan, 20% must be withheld for Federal Income
Tax. ·
If an eligible rollover distribution is not rolled over to
an IRA or another plan, 2% must be withheld for California State Tax unless the
participant completes a written waiver of California withholding. Check with
other States for any State Tax withholding requirements. ·
Income Tax withheld must be deposited immediately, or the
IRS and/or State will assess interest & penalties. The Federal withholding must be
transmitted electronically to the IRS via a Federal Depository Bank. If a check is sent directly to IRS, IRS
will assess a penalty. ·
If Federal tax is withheld from distributions during the
calendar year, IRS Form 945 must be filed.
Check with your State for any filing requirements when State tax is
withheld. |
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