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SIMPLE retirement plans.

One provision of the Small Business Job Protection Act, signed by President Clinton in August 1996, created the Savings Incentive Match Plan for Employees (SIMPLE), which allows employees to defer income and receive tax-free benefits at the time they contribute. These pension plans will help small businesses with fewer than 100 employees who are paid at least $5,000 as well as companies that do not maintain other employer-sponsored retirement plans.

SIMPLE plans are not subject to the discrimination rules (including the top-heavy rules) of qualified plans, making them easier for employers to establish and operate. They also can be maintained as individual retirement accounts (IRA) or 401 (k) accounts. When they are set up as 401(k) accounts, employees can make limited contributions to them, and employers must match the employee contributions up to 3% of compensation or provide nonelective contributions of 2% compensation.

As with qualified plans, employer contributions are tax deductible and are not taxable to the employee. Also, employee contributions are not tax deductible.

Observation: Generally, the administration of the SIMPLE plan will be easier than that of a qualified plan, and the SIMPLE plan should be less expensive to establish. The matching provisions also are reasonable. For these reasons, small business owners have good incentives to set up SIMPLE plans. However, such plans may not be better than qualified plans for all employee-owners. Because self employed individuals and other employers are considered employees for the purpose of SIMPLE plans, employers should consider whether adopting such a plan will reduce their own retirement contributions. Because the overall limit for employer and employee elective contributions for 1997 is only $9,500, qualified plans that allow for higher contributions may be a better choice.

--Stanley Person, CPA, partner of Person & Co., New York City


* An educational organization claimed tax-exempt status despite the fact that it operated a profitable publishing business. In private letter ruling 9636001, the Internal Revenue Service ruled the sale of textbooks did not further the organization's exempt status; therefore, the publishing activities were subject to unrelated business income tax.

* A company contracted with a state to transport students to training and educational programs. The company attached school bus signs to cars, minivans and large-capacity vans. In private letter ruling 9636003, the IRS said such vehicles remained passenger automobiles regardless of their use, and the company was denied a refund and credit for gasoline taxes.

* According to Internal Revenue Service announcement 96-88, the IRS will waive the Internal Revenue Code section 6722 penalty assessed providers of information returns who fail to include their telephone numbers on 1996 forms W-2G, 1098, 1099 and 8308. The 1996 forms were printed before passage of the statute requiring the phone numbers. The IRS hopes taxpayers will voluntarily list phone numbers on their 1996 forms. The 1997 revised forms will require the numbers.

* A woman with a history of making lifetime gifts signed a power of attorney making her daughter attorney-in-fact. The document gave the daughter broad powers but did not expressly authorize the making of gifts. The daughter continued to make annual gifts of the woman's property,. After the woman's death, the IRS, in private letter ruling 9634004, included the gifted property in the decedent's gross estate under IRC section 2038, because the power to make the gifts was not expressly authorized.

* A decedent's will left specific portions of a trust to Catholic (80%), Protestant (10%) and Jewish (10%) charities to be determined by a named trustee. In private letter ruling 9634025, the IRS applied revenue ruling 69-285 (1969-1 C.B. 222), saying such bequests to unnamed religious charities do qualify for a federal estate tax charitable deduction under IRC section 2055(a)(3).

* A newspaper publisher hired a carrier to deliver papers for five or six hours a day The publisher provided a list of subscribers and a timetable for delivery. In private letter ruling 9634007, the IRS said the publisher exercised sufficient control to create an employer-employee relationship for federal employment tax purposes.

--Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.
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Title Annotation:savings incentive match plan for employees
Author:Person, Stanley
Publication:Journal of Accountancy
Date:Dec 1, 1996
Previous Article:Educational assistance refunds.
Next Article:Not so SIMPLE?

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