Pension Tension
Don't let your business's retirement plan get nabbed by the IRS.
It's a well-known fact: If you want to receive tax benefits
from the IRS, you must comply with a host of requirements. This is
especially true when dealing with qualified retirement plans. To be
considered tax-qualified and enjoy the tax benefits that go with
that, retirement plans must adhere to a laundry list of
regulations.
Therein lies the problem. Many retirement plans, especially
those offered by small and midsized businesses, don't meet all
the plan requirements. The IRS found, for example, that about half
the qualified plans examined in 1997 were not in compliance, says
Pat Navin, a principal in charge of the employee benefit specialty
tax group for Deloitte & Touche.
If you know your plan has defects or you suspect it may have
problems, beware. You are not only running the risk of being hit
with a huge tax bill, but the IRS could disqualify the plan
altogether. When the IRS disqualifies a plan, it no longer enjoys
tax-favored status. For business owners, that means you lose the
deduction you received for contributions made on behalf of your
employees. Also, the tax-deferred earnings in the plan become
taxable.
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Take the case of a podiatrist in Long Island, New York, who was
glad he could finally set up a profit-sharing retirement plan for
himself and his employees. However, his satisfaction quickly turned
to disgust when the IRS decided to audit the plan.
The plan's administrator was a large and reputable brokerage
firm, but it didn't alert the podiatrist of changes, resulting
in the plan not being amended to reflect changes in the law
regarding eligibility and vesting rules. As a result, the IRS
expected the podiatrist to pay taxes owed on the plan's
earnings, says Seymour Goldberg, a CPA and senior partner in the
law firm Goldberg & Goldberg PC in Garden City, New York, and
author of Goldberg Reports, an online pension distribution plan
information service. After lengthy negotiations with the IRS, in
which Goldberg represented the individual, the podiatrist paid
$12,000 instead of the $21,000 originally assessed.
Joan Szabo is a writer in Great Falls, Virginia, who has
reported on tax issues for more than 13 years.
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