Advanced Underwriting Consultants

Ask the Experts – May 1

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: Does a 401(k) plan participant have until April 15, 2014, to make an elective deferral on behalf of 2013?

Answer: No. Elective deferrals are contributions made by an employee, and while such deferrals are typically made as payroll deductions (e.g., monthly, biweekly, etc.), nothing requires this schedule.

However, the IRS says that the employee must make the election by the end of the year for which the deferral is being made, or the date of the employee’s last paycheck of the year if the deferrals are automatic. Therefore, for 2013, the deadline is generally December 31, 2013.

The Department of Labor requires the employer to deposit deferrals to the trust as soon as possible, but in no event can the deposit be later than the 15th business day of the following month.

Therefore, if the employee is also the owner of the business, he can theoretically deposit the deferral money as late as mid-to-late January, 2014. However, the 15th day of the following month rule is not a safe harbor rule. That is, if 15th of the next month isn’t “as soon as the employer can” deposit the deferral money into the 401(k), then the deposit isn’t timely, and the mistake could give rise to plan disqualification.

The safest bet is to plan ahead and deposit the deferral funds by the end of the year.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Ask the Experts – April 30

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client is the executor of an estate, and the estate itself is the beneficiary of an IRA and a deferred annuity. How does an executor decide when and to whom to make distributions from these retirement accounts?

Answer: Since the estate is the beneficiary of the deferred annuity, the deferred annuity must be liquidated within 5 years from the original owner’s death. The same rule applies to the IRA if the deceased was younger than 70 ½ at her death. If older, the estate has the option to stretch distributions over the life expectancy of the deceased based on her age at her death using the single life table published by the IRS.

The executor should make sure these distribution rules are met to ensure that these two accounts aren’t hit with RMD penalties. Additionally, the estate is liable for income taxes on these distributions, and estates are typically taxed at higher rates than individuals.

The next step is getting the annuity and IRA funds from the estate to the estate’s beneficiaries. The executor must work with the probate court to figure out who receives what portion of these distributions. Once it’s determined, the executor can make the proper distributions.

On a related note, estates often incur various bills. The executor can seek permission from the probate court to apply estate funds to such bills.

This may seem troublesome and potentially costly, but it could have been avoided by not naming the estate as beneficiary of the deceased’s IRA and annuity. Keep in mind that this choice was made when the deceased named her estate as the beneficiary to her retirement accounts.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Ask the Experts – March 12

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have a client who participates in both his employer-sponsored 403(b) annuity and a simplified employee pension (SEP) for his own side-business. Can he make the full contribution limits for both, or are there restrictions?

Answer: His SEP contribution limit could be reduced by the amount he contributes to his 403(b) account.

In 2014, the limit on elective deferrals is $17,500 for 403(b) annuities. This limitation is per individual—not per plan. The contribution limit for any pension or profit-sharing plan maintained by the same employer is $52,000. SEP plans are slightly different, where the contribution limit is the lesser of $52,000 or 25 percent of the individual’s income.

An employee can generally contribute the full $17,500 in elective deferrals to one employer’s plan, and also make the maximum $52,000 contribution to another employer’s pension or profit-sharing plan. However, Section 415(k)(4) provides for a special rule between 403(b) annuities and SEP plans that essentially treats both plans as maintained by the same employer for purposes of the contribution limits.

Therefore, the $52,000 SEP limit would be reduced by the amount the participant contributes to his 403(b) annuity. If he contributes the maximum $17,500 elective deferrals to the 403(b) annuity, the $52,000 limit decreases to $34,500. In other words, he can now only contribute the lesser of $34,500 or 25 percent of his income.

This reduction from $52,000 to $34,500 will only affect an individual who earns more than $138,000 in his self-employed business because if his self-employment income is $138,000 or less, such contributions would be limited to 25 percent of his income (i.e. $34,500 is 25 percent of $138,000)—in other words, the $34,500 limit is irrelevant for such individuals. If he earns more than $138,000, he’s limited to $34,500 instead of $52,000.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.