If you’re an adviser who works with business owners, you know that the “retirement plan season” is the end of the year. It’s that time when many business owners decide to set up a retirement plan before the yearend deadline.
It’s not that business owners aren't usually aware of what a qualified plan retirement plan can accomplish, but procrastination is part of human nature - and sometimes a business owner's nature. The owner (and maybe even the accountant) believes that setting up a retirement plan at year end can accomplish his or her tax planning objectives.
But that’s now always the case. With tax time approaching, it might be timely for you to point out to the business why now the time to set up a retirement plan is.
1. Not enough compensation for a shareholder-employee of an S corporation.
Many owners will minimize W-2 compensation for payroll tax reasons. The balance of their income goes on their K-1s. However, only W-2 compensation can count for retirement plan purposes. Minimizing W-2 income can also minimize retirement benefits.
2. Not enough time to maximize 401(k) contributions.
Adopting a 401(k) in the latter part of the year may not give an employee enough time to maximize his or her own contributions. Remember 401(k) contributions must be elected in advance and withheld by the employer. A December plan adoption only provides December payroll as a basis for employee deferral.
3. Not sufficient notice given to employees to change from SIMPLE to 401(k) plan
For example, an employer sponsoring a SIMPLE who wants to change to a 401(k) plan, notice must be given to employees at least 60 days prior to the start of the next calendar year. Thus, November 1, 2013 is the target date for the notice for a new 401(k) plan in 2014.
Timing can be everything.
This information should be considered general in nature and does not constitute legal or tax advice. Taxpayers should always consult their tax advisor before making a decision regarding their 401(k) account.
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