Having a qualified default investment alternative relieves you and plan fiduciaries of certain liabilities. Click through to enhance 401(k) plans by providing investments with potential for long-term growth regardless of how engaged employees are.

You want your retirement plan to attract and retain key personnel, lower overall costs, and contain appropriate and competitive investments. When coming up with the lineup, you may choose a QDIA as a safe-harbor option. A QDIA is an investment fund or option designated as a default fund for investment contributions when employees fail to make an election.

Developed by the Pension Protection Act of 2006, QDIAs seek to increase participation through automatic enrollment but can be applied to any participant enrolled in your plan who hasn’t confirmed any investment choices.

A QDIA, if properly selected and implemented, provides you and your plan sponsors with protective relief regardless of the investment outcome of the fund. Some firms see it as a silver bullet to increase plan participation while keeping owners and sponsors better protected.

QDIAs must meet the Employee Retirement Income Security Act’s criteria for protective relief, which includes, but may not be limited to, the following:

• Providing employees opportunities to move assets out of a QDIA just as they do with other plan options.
• Giving plan participants all relevant materials.
• Making sure special communication is provided 30 days in advance of a potential investment in a QDIA.
• Giving participants annual notices describing the circumstances under which their assets may be invested in a QDIA as well as how elective investments are made on their behalf.
• Giving participants the opportunity to direct their own investments regardless of whether they do so.
• Providing participants with a full description of the QDIA, including fees, expenses, investment objectives and risk/return profile.

Know the details

When an employee contributes money to a 401(k) account but hasn’t made an investment election, the funds are automatically invested into a QDIA. The plan fiduciary — you or the 401(k) manager — is responsible for selecting the QDIA.

All 401(k) plans should have a QDIA so that you and employees aren’t saving without investment elections. Plans with automatic enrollment always need a QDIA, but other situations occur that also result in the need for QDIAs, such as:

• Employer contributions on behalf of an employee who isn’t contributing.
• Incomplete enrollment forms.
• Beneficiary or alternative payee balances.
• A qualified domestic relations order is in force.
• Removal of investment options.
• 401(k) rollovers.
• Missing persons.

There are four types of QDIAs:

1. A product with a mix of investments that takes into account the individual’s age or retirement date — like target date funds.
2. An investment service that provides an asset mix based on an employee’s current contributions and existing plan options and that takes into account the individual’s age or retirement date — like a managed account.
3. A product with a mix of investments that accounts for the demographic characteristics of all employees, rather than each individual — like a balanced fund.
4. A short-term, low-risk, low-return product for capital preservation for only the first 120 days of participation — like a money market fund.

A QDIA protects your employees from missing out on potential long-term growth when they don’t make an investment selection. It simplifies investment decision-making by selecting the 401(k) investments for them — money will automatically be invested in long-term retirement savings.

Call us at 631-474-2500 now to discuss how we can formulate an effective tax strategy for you or your business. You can also request your free consultation online.

Any business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld taxes in a timely manner will find itself in trouble with the IRS.

The IRS may levy a penalty, known as the trust fund recovery penalty, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person?

Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.

The IRS states that a responsible person may be:

• An officer or an employee of a corporation
• A member or employee of a partnership
• A corporate director or shareholder
• Another person with authority and control over funds to direct their disbursement
• Another corporation or third-party payer
• Payroll service providers
• The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.

Working With the IRS

If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to a tax advisor if you need to know more about the requirements.

Are you an individual or business owner who’s interested in lowering your tax burden? Call us at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.

Business owners who travel out of town on business sometimes like to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic Travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities.¹ Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, are deductible.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

Foreign Travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

• The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
• Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
• The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip.
• For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

As this brief overview suggests, with smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.

Are you an individual or business owner who’s interested in lowering your tax burden? Call Newton Sankey & Co. at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.

Source/Disclaimer:

¹Under The Tax Cuts and Jobs Act of 2017, employees may no longer deduct unreimbursed employee business expenses as a miscellaneous deduction, effective with the 2018 tax year.

Periodically, the Internal Revenue Service issues a notice describing changes in its qualification requirements for retirement plans, including deadlines. Are you up to date? Click through to see the list of required amendments.

The IRS annually releases its Required Amendments (RA) list, which includes changes that individually designed retirement plans may need to make in order to remain qualified under the Internal Revenue Code. The most recent RA list was released via Notice 2017-72, which contains changes not only to the qualification requirements for individually designed plans but also to the deadline for amending the plans. There are two categories: Part A and Part B.

Part A: Likely Amendments

Part A consists of qualification changes that generally require amendments by most individually designed plans or most types of plans impacted by the change. Below are the two required changes for 2017:

Cash balance/hybrid plans must be amended to the extent necessary to comply with the IRS final rule pertaining to market rates of return and other applicable requirements. Published on November 16, 2015, the final rule covers plan years starting January 1, 2017, and thereafter.

Under the regulations, plan sponsors of defined benefit plans with above-market interest rates can now amend their plan so that it meets the market rate of return, without breaching anti-cutback rules. A cash balance plan is a type of defined benefit plan, though it also has characteristics of a defined contribution plan.

Eligible cooperative plans or eligible charity plans that were not subject to the benefit restrictions of IRC Section 436 must now meet those restrictions, effective January 1, 2017.

Ordinarily, if a defined benefit plan is underfunded by more than a specific percentage, the plan will have limited benefit options as a result. For instance, a plan sponsor cannot amend its defined benefit plan to increase benefits if the plan’s adjusted funding target attainment percentage is less than 80 percent.

Eligible cooperative plans or eligible charity plans that were excluded from those (and other) limitations under Section 436 in 2016 are now subject to them.

Part B: Unlikely Amendments

Part B of the RA list involves changes that the IRS does not expect to make for most plans. However, an amendment might be necessary if the plan has an unusual provision.

The RA list for 2017 has only one subject for Part B: partial annuity distribution for defined benefit pension plans, which indicates that in instances where a defined benefit plan allows benefits to be paid partly in the form of an annuity and partly as a single sum (bifurcated distributions), the plan must do so in a manner that complies with the § 417(e) regulations.

The IRS’s 2016 final regulations explain the different acceptable approaches for making bifurcated distributions for plan years starting January 1, 2017, and thereafter. You would need to amend your plan only if there’s an applicable provision.

Amendments to comply with Part A and Part B must be made by the final day of the second year following the release of the list — which would be December 31, 2019, for the 2017 list.

Are you an individual or business owner who’s interested in lowering your tax burden? Call Newton Sankey & Co. at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.