STEIKER, FISCHER, EDWARDS & GREENAPPLE, P.C. | SES ADVISORS, INC.

Client Alert DECEMBER 2013

What You Need to Know About Your ESOP Tax ReportingWritten by Kelly Irizarry, ESOP

Administrator – SES Advisors, Inc.

Tax reporting is a small, but

important element of the overall

recordkeeping process as it relates to

ESOP plan administration. This

article will explain what is needed

and required to avoid unpleasant

surprises and penalties for non-

compliance. Fortunately, most plans

engage the Trustee or Third Party

Administrators (TPAs) to bear the

administrative burden of the

preparation and submission for the

1099-Rs and Form 945. Nonetheless,

employer/taxpayer cooperation is

vital to ensure a smooth and accurate

process.

Annual ESOP Tax Reporting and Filing

Form 1099-R is filed for participants

receiving distributions of $10 or

more from retirement plans or profit-

sharing plans, individual retirement

arrangements (IRAs), annuities,

pensions, death benefit and disability

payments made from a retirement

plan, and distributions or 404(k)

dividends from an Employee Stock

Ownership Plan (ESOP).

Form 945 is filed to report all federal

income tax withheld from non-

payroll payments or distributions on

an annual basis. When filing the

Forms 1099-R and 945 the payer,

trustee or plan administrator must use

the same employer identification

number (EIN) and name used to

deposit the tax withholdings.

Form 1099-R Reporting Requirements

Form 1099-R contains detailed

information specific to each recipient

and outlined as follows:

� The recipient account number is

the social security number for the

individual who received the

distribution. For example, if a death

benefit distribution was made to a

participant’s beneficiary, the

beneficiary’s social security number

and address would be reported on the

Form 1099-R.

� The gross distribution amount is

reported under Box 1: the total

amount of the distribution prior to

any tax deductions withheld. The

amount in Box 2A is the taxable

amount of the distribution; the

amount reported would be $0.00 if

the distribution amount is transferred

to a direct rollover account as the

distribution amount is non-taxable.

� Federal income tax withheld is

reported in Box 4. If state or local

income tax is withheld, those

amounts are reported in Boxes 12

and 15. The payer’s state

identification number is entered into

Box 13 along with the abbreviated

name of the state.

� Each distribution has a code that is

reported in Box 7; the distribution

codes are dependent upon the type of

distribution processed. The most

common codes reported are as

follows:

�Code 1 {early distribution} - If

employee/taxpayer has not reached

age 59.5 and there are no known

exceptions under Code 2, 3 or 4

�Code 2 {early distribution with

possible exceptions} -

Employee/taxpayer has not reached

age 59.5 and it’s known that the

distribution is a Roth IRA conversion

Client Alert

referenced on the check or money

order.

There are two deposit schedules that

dictate when to deposit federal income

tax withheld: semi-weekly or monthly.

The associated schedules determine

when the deposit is due after the tax

liability occurs; before each calendar

year a determination must be made as

to which schedule will be used. For

calendar year 2013, the employer is a

monthly schedule depositor if the total

tax reported on the 2011 year’s Form

945 was $50,000 or less. If the total

tax exceeded $50,000 on the prior

Form 945 the employer is a semi-

weekly schedule depositor.

All of the federal income tax

withheld from non-payroll

payments or distributions are to be

reported once on a calendar year

basis. If an employer/taxpayer

withholds federal income tax a

Form 945 must be filed; if there is

zero federal tax withheld then a

Form 945 does not need to be filed.

The Taxpayer Identification

Number (TIN) used on the Form

945 must be consistent with the

TIN used on the Form 1099-R as

the two forms are submitted to the

Internal Revenue Service and the

federal tax withholding amounts

must match one another. Generally

the best practice is to use the Plan’s

TIN. However, in some cases the

Sponsor’s TIN or a third party

payer’s TIN is used.

Form 945 Tax Withholding Requirements

Federal deposits made by electronic

transfers are usually processed

using the Electronic Federal Tax

Payment System (EFTPS). This is

a free service offered by the

Department of Treasury. Other

options available for funds transfers

are payroll service, financial

institution, institutional Trustee, or

other third party; all other options

may have fees associated with the

service. If the Summary of Deposits

is less than $2,500, payment can be

made by check with the Form 945;

otherwise all deposits should be

made using an electronic funds

transfer system. Payment of less

than $2,500 should be submitted

with the Form 945 and Form 945-V

(payment voucher) with a check or

money order made payable to the

“United States Treasury.” The EIN,

Form 945 and tax period should be

(an IRA converted to a Roth IRA), or

a distribution from a qualified

retirement plan after separation of

service in or after the year the

taxpayer has reached age 55

�Code 3 – Disability distribution

�Code 4 – Death benefit OR Code

4G as a death benefit rollover

distribution

�Code 7 – Normal distribution

from a plan, i.e. employee/taxpayer is

at least age 59.5

�Code G – Direct rollover and

rollover contribution

�Code U – Dividends that have

been distributed from an employee

stock ownership plan (ESOP) under

section 404(k)

Form 1099-R Filing Deadlines

All employees/taxpayers that require

a Form 1099-R should receive a copy

of the Form 1099-R by January 31st

for tax filing purposes. The employer

has a February 28th IRS deadline to

file Copy A of Form 1099-R. The

Copy A filing submission to the IRS

consists of the red IRS Form 1099-R

as well as the Form 1096 Transmittal

which is a summary sheet of all the

information contained with the Form

1099-Rs (i.e., total federal taxes

withheld, number of Form 1099-Rs

submitted, total gross distributions

amount, etc.). The Form 1096

Transmittal should be signed by the

trustee of the retirement plan that has

issued the distributions.

Form 945 Reporting Requirements

Form 945 is used to report federal

income tax that is withheld from non-

payroll payments to include:

pensions, military retirement,

gambling winnings, voluntary

withholding on specific government

payments and backup withholding.

Steiker, Fischer, Edwards & Greenapple, P.C. is pleased to announce that Paul S. Fusco has joined the firm’s Rochester, NY office as a

Senior Associate.

Contact Paul:(585) 238-3568 or pfusco@sfeglaw.com

Learn more atwww.sfeglaw.com

Introducing Paul Fusco

Client Alert

penalties for late filing or failure to

file and the Plan participants may

have problems filing their personal

tax returns electronically.

4. Collect Social Security

Numbers for every beneficiary

when paying death benefits.

5. Return your 1099 data to your

TPA in a timely manner. SES

sends a template and data request in

December. A prompt response to

this request helps us to ensure your

forms are filed on time.

In conclusion, carefully following

these procedures is necessary to

avoid penalties for non-compliance.

For example, the failure to file

1099-Rs on time may result in a

penalty range of $30 to $100 per

form depending on when the forms

were filed. Also, failure to prepare

and issue the 1099-Rs on time

could result in a participant’s need

to amend their personal tax return.

Form 1099-R: irs.gov/form1099r

Form 945: irs.gov/form945

EFTPS: eftps.gov

Contact Kelly at

kirizarry@sesadvisors.com

Client Appreciation Dinner: Las VegasOn November 7th, SES Advisors and SFE&G invited our clients to join us at a special appreciation dinner at Joe’s Seafood Restaurant at The Forum Shops. Clients took a break from The ESOP Association’s ESOP Technical Conference to celebrate with us.

Notwithstanding the prior total, if total

withholding exceeds $100,000 on any

day in a deposit period, the taxpayer

immediately becomes a semi-weekly

schedule depositor. For these

taxpayers the withholding must be

deposited the next day after the tax

liability is incurred and Form 945-A

must accompany Form 945.

Form 945 Filing Deadline

The Form 945 must be filed by

January 31st if a payment is included

with the submission. Otherwise, if

deposits were timely and full payment

of taxes for the year processed, the

return can be filed by February 11th.

All Form 945s are sent depending on

two criteria: where the principal place

of business is located and whether or

not a payment is included with the

return.

In most cases the Form 945 is

submitted by the owner of the business

or the trustee of the qualified plan.

There are alternative signature

methods available such as corporate

officers or duly authorized agents who

may sign the Form 945.

Avoiding Potential Pitfalls

Sponsors of ESOPs and other

retirement plans should be wary of

a few potential pitfalls concerning

tax reporting and withholding

deposits:

1. Register for EFTPS even if you

have no tax liability or your

expected liability is less than

$2,500. Registration is free and

there are penalties for paying late or

failing to pay electronically. It can

take up to four weeks to receive

your Personal Identification

Number (PIN) from EFTPS. Plan

ahead and register before you begin

processing distributions.

2. Be aware of any change in

your withholding deposit status.

E.g., when you first exceed the tax

withholding thresholds of $2,500,

$50,000 in a calendar year or

$100,000 in a deposit period.

3. Ensure that you’re depositing

withholding under the same TIN

as you’re reporting on Form

1099-R. If the TIN doesn’t match,

the Plan Sponsor may be subject to

MARCH 2013

Client Alert

PENNSYLVANIA SES (215) 508-1600, SFE&G (215) 508-1500 | NEW JERSEY SES (973) 540-9200, SFE&G (973) 540-9292

RHODE ISLAND SFE&G (401) 632-0480 | VIRGINIA SES (757) 442-6651| FLORIDA SES (813) 818-5920 | INDIANA SES (219) 548-3696

TEXAS SES (817) 712-2363 | NEW YORK SES (585) 385-0819, SFE&G (585) 238-3568 | MASSACHUSETTS SFE&G (617) 310-6565

VERMONT SFE&G (802) 860-4077 | KENTUCKY SES (859) 425-1223, SFE&G (859) 244-1901

WWW. SESADVISORS.COM | WWW.SFEGLAW.COM

Office Spotlight: Philadelphia, PAHome of the SES/SFE&G headquarters, our staff is out and

about in our community!

My Daughter’s Kitchen

Run by the Vetri Foundation and The Philadelphia Inquirer, the

mission of My Daughter’s Kitchen is to teach Philadelphia

schoolchildren to prepare healthy, easy meals on a budget. Diane

Fanelli and Barbara Krumbhaar volunteer their time each week at

Wissahickon Charter, showing their budding chefs how to cook

unfamiliar foods, such as Moroccan stew and Bucatini with spicy

squash and beans. They begin by finding the foods’ origin on a

map, and even learn how to properly set the table. All of the meals

are nutritious, can be prepared in less than an hour and cost less

than $20 for six servings, making it easy for the kids to bring

recipes home to share with their families.

Special Olympics New Jersey

Special Olympics is founded on the belief that people with intellectual disabilities

can, with proper instruction and encouragement, learn, enjoy and benefit from

participation in individual and team sports. Alice Simons has been an assistant coach

in various sports for the Burlington All-Stars for five years, helping to take the soccer

team to the Regional Tournament in Lawrenceville, NJ this fall. The All-Stars

athletes range in age from 11 to 20 and compete at various skill levels, but everyone

improved throughout the season, enjoyed getting outside and had plenty of fun!