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February 1, 2007
Mark E. Battersby
The pension protection act of 2006, a massive 900-page reform of U.S. pension laws that was signed into law last summer, contains few provisions that directly impact refuse collectors, landfill operators and recycling businesses. However, tucked away among the provisions that strengthen traditional pension plans are new rules that may make it possible for every waste operation to establish and benefit from a 401(k) plan.
Although not quite as popular — or as rewarding — as they once were, 401(k) plans remain a sought-after fringe benefit. And they are not only for businesses with large numbers of employees. In fact, 401(k) plans can benefit employees working at waste companies of all sizes, as well as their owners, partners or shareholders.
A 401(k) plan allows employees to contribute pre-tax earnings to a company pool. That pool, usually managed by a firm retained by the business, is invested in stocks, bonds or money market instruments. In addition to investing income before taxes have taken their bite, workers benefit from non-taxable contributions made by their employer.
Employer contributions to a 401(k) plan are not included in the income of the participant. In fact, contributions to a 401(k) plan, as well as earnings, are taxed only when withdrawn. Annual contributions to an employee's 401(k) plan were limited to $15,000 in 2006 and are capped at $15,500 in 2007.
Generally, matching contributions made to a 401(k) plan by an employer are not treated as elective contributions and, therefore, are not subject to the annual limit. Thus, matching contributions made to a 401(k) plan for self-employed landfill operators, refuse collectors and recyclers are not treated as part of that individual's elective contribution.
Unfortunately, few businesses can offer employees a traditional 401(k) plan without bankrupting the operation. In addition to their complexity, 401(k) plans are usually far too expensive for even an extremely profitable waste operation to manage themselves. Plan sponsors, such as banks, insurance companies and mutual funds, will administer a 401(k) plan. But the entities that offer this kind of investment assistance are rarely interested in employers with less than 5,000 employees and charge significant fees for their services.
Fortunately, there are alternatives. Under U.S. tax rules, another type of plan called a “Savings Incentive Match Plan for Employees” (SIMPLE) may be structured as an investment retirement account (IRA), or as a 401(k) plan. Any employer with 100 or fewer employees who received at least $5,000 in compensation during the preceding year can adopt a SIMPLE plan. However, if a SIMPLE plan is established, it must be the only retirement plan for the business.
A SIMPLE IRA plan could be compared to establishing an IRA for each employee. Another variety, the SIMPLE 401(k) plan, more closely resembles and must generally satisfy the requirements that apply to other 401(k) plans.
When a worker takes money from any SIMPLE plan, those distributions are taxed similarly to distributions from an IRA, including an early withdrawal penalty. However, participants may roll over distributions from one SIMPLE account to another, tax-free. In fact, anyone who has participated in a SIMPLE plan for at least two years may roll over a distribution from a SIMPLE account to an IRA without penalty.
If a waste business adopts any version of the SIMPLE plan, it must be open to every employee reasonably expected to receive at least $5,000 in compensation during the current year and who received at least $5,000 in compensation from the employer during any two preceding years. Self-employed operators and business owners also are eligible to establish a SIMPLE plan.
Under U.S. tax rules, there is no distinction made between pension, profit-sharing and other retirement plans (including SIMPLE accounts) established by corporations and those established by individual proprietors and partnerships. When references are made to the “employer,” a sole proprietor is treated as his or her own employer, while a partnership is considered to be the employer of each partner. Retirement plans established by S corporations (incorporated businesses that elect to be treated like partnerships for federal tax purposes) are governed by the same rules that apply to plans established by other corporations.
The Internal Revenue Service recently issued a model amendment to be used by employers wanting to adopt a SIMPLE 401(k) plan. The model amendment sets forth the requirements for such things as employee contributions, employer options concerning its contributions and notification to employees. Alternatively, small employers can take advantage of the plans offered and administered by a variety of financial institutions and firms.
Although the new pension legislation devotes more than half of its pages to defined benefit plans, the new law also addresses retirement savings held in IRAs, 401(k) plans and other defined contribution plans. It will now be easier to make transfers from pension plans to 401(k) plans and IRA-type arrangements under the new rules. The new law also makes it easier for employers to automatically enroll their employees into their company's 401(k) plan.
Retirement investment alternatives like the SIMPLE 401(k) are affordable and attractive to employees. And, best of all, these alternatives also benefit the waste business's partners, shareholders and owners by providing tax deductions for the refuse collection, recycling or landfill operation, and tax-free contributions for the people who work there.
— Mark E. Battersby is a freelance tax and financial writer based in Ardmore, Pa. His work has appeared in leading trade journals and he is the author of four books.
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