BY DIANE WASSER CPA
PARTNER DIRECTOR, PENSION SERVICES GROUP

Employers who maintain pension plans for 100 or fewer participants need to be aware of the new audit guidelines for these plans. The Pension and Welfare Benefits Administration (PWBA) audit regulations are designed to improve the security of assets in small plans by tightening the eligibility requirements for small pension plans to qualify for a waiver of an annual audit by an independent CPA.

However, the audit requirement can be avoided in certain circumstances as follows:

If at least 95% of plan assets are qualifying plan assets defined as:

• qualifying employer securities;
• loans meeting the prohibited transaction exemptions;
• assets held by a bank or similar institution or a registered broker-dealer or any other organization authorized to act as a trustee for individual retirement accounts;
• investment and annuity contracts held by an insurance company;
• shares of mutual funds.

The plan must provide a notice informing participants and beneficiaries that they may, upon request and without charge, "examine or receive copies of evidence of required bonds and statements from each institution holding qualifying assets that describe those assets held as of the end of the year" and a notice stating that participants and beneficiaries should "contact the regional office of the PWBA if they are unable to examine or obtain copies of such statements."

The Summary Annual Report must identify the name of the institutions holding plan assets and the amount held by each at the end of the plan year.

If more than 5% of plan assets are NOT "qualifying plan assets" the audit can still be avoided if the disclosures described above are made; the plan has enhanced fidelity bond coverage for 100% of the "non-qualifying plan assets" and disclosure of the fidelity bond information is included in the Summary Annual Report.

BY RICH SACKIN CPA
PARTNER, TAX SERVICES

Employees generally expect a generous 401(k) plan to be part of their benefits package. One improvement to the plans that employers are offering is shortening the waiting period for new enrollees. In 1999, nearly 40% of employers allowed employees to enroll within the first three months of employment, up from 32% in 1998.

In addition, a recent change in the ADP/ACP testing - not having to count a person in the first year of eligibility - has made shorter waiting periods more attractive.

Remember that you cannot make exceptions to the waiting period for only selected people, especially if they are highly compensated employees. For organizations with a high percentage of transient employees, however, a more restrictive waiting period (setting a minimum age and longer period of employment, with fewer enrollment periods) may be preferable.

Vesting schedules are also getting shorter, again to attract and retain key staff. If an employee will be vested in as few as four or five years, there is a better chance of retaining the employee if they get an offer in two.

THE COST OF FRAUD

BY ALFONSE MATTIA CPA
FOUNDING PARTNER

The Costs of Fraud
(as reported by the Association of Certified Fraud Examiners)

• It is estimated that fraud costs United States businesses more than $400 billion annually.
• The average loss is more than $9 per employee/per day.
• An average organization loses about 6% of its total annual revenue to fraud and abuse committed by its own employees.
• Losses caused by managers are four times as great as those caused by employees.
• Median losses caused by executives are 16 times those of their employees.
• The most costly abuses occur in organizations with fewer than 100 employees.
• The typical perpetrator is college-educated.
• Call Brian Downey CPA at 732.287.1000 ext.239 to receive our Fraud Detection Prevention brochure or to confidentially discuss our services in this area.

THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001

The End Result of Tax Legislative Process
The Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (the "2001 Tax Bill") was signed into law by President Bush on Thursday June 7, 2001. This was after the size of the original tax bill proposed by President Bush had been scaled down from a $1.6 trillion tax reduction package to a $1.35 trillion dollar tax reduction package that was to be phased in over a 10 year period and then repealed in 2011 due to the so-called Byrd rule in the budget reconciliation process. Nearly everything President Bush asked for in his original tax bill was squeezed into the final 2001 Tax Bill, but due to the political give and take of the tax legislative process, many of the promised tax reductions were back-loaded to later tax years, phased-in or phased-out and ultimately made subject to the sunset provision that makes the entire 2001 Tax Bill disappear at the end of 2010, unless another Congress extends the tax legislation and makes the 2001 Tax Bill permanent.

Blueprints for Tax Legislation — Economic Tax Policy and Deadweight Losses to Society Caused by Higher Tax Rates
Much of the tax, economic and fiscal policy studies that underlay the 2001 Tax Bill were prepared under the direction of New Jersey Congressman John Sexton, Chairman of the Joint Economic Committee (the "JEC") of the United States Congress and are available at the JEC website (www.house.gov/jec/). These policy studies indicate that there is a "deadweight loss" to society that arises because of a decline in market exchanges when taxes are increased. One often quoted study estimates that the welfare loss to society from taxation may equal 40 or 50 cents for each dollar of taxes raised by the federal government.

IRS Statistical Income Information These policy studies also examine the actual IRS statistical information regarding the personal income tax burden by taxpayers ranked according to their adjusted gross income ("AGI") grouping provided by the Internal Revenue Service. This information demonstrates that the top 25% AGI group paid 81.3% of all individual income taxes in 1996, compared to only 4.3% of the taxes paid by all of the taxpayers in the bottom 50% AGI group. Thus, these policy studies indicate the tax law before the 2001 Tax Bill caused a distortion in the allocation of economic resources that reduced the overall economic efficiency within our economy, which led to reduced economic growth. Accordingly, these policy studies recommended that a reduction of tax rates would reduce economic deadweight losses and promote economic growth within our economy.

There are essentially eight major provisions in the 2001 Tax Bill that are phased in or out over the next 10 tax years. The budgetary impact of these provisions that add up to the projected $1.35 trillion dollar cost of the 2001 Tax Bill can be graphically presented as follows, based on projections provided by the Joint Committee of Taxation:

The above chart summarizes the tax dollars associated with each of the eight major provisions of the 2001 Tax Bill. The marginal rate reductions are the largest portion and account for roughly $8.75 billion of the projected total 11 year tax expenditures associated with the 2001 Tax Bill. But as can be seen from the above chart, the largest portion of these tax reductions are not effective until 2005 through 2010. What does come into effect in 2001 is the advance refund check that taxpayers will receive sometime in the summer or fall of 2001 based on their 2000 filing status, calculated on a new 10% rate that is carved out of the 15% rate, and a 1% reduction across the board reduction in the tax rates effective July 1, 2001. Also effective for 2001 through 2004 is the temporary alternative minimum tax ("AMT") relief that is provided for by a modest increase in the AMT exemption and its interaction with certain credits. What is clear about the 2001 Tax Bill is that taxpayers will need to be alert to all of the tax incentives within the 2001 Tax Bill and their effective dates so that long term tax, business, personal financial and estate planning can be done in a cost effective manner that ensures that no significant opportunities are lost, that revenues are not foregone, that needless deadweight losses are eliminated and that individuals and businesses can operate as efficiently as possible. Amper, Politziner & Mattia will be posting tax articles of interest from time to time at its website www.amper.com for those interested in current tax developments and tax planning tips.

REFUND CHECKS & CHILD TAX BENEFITS OF THE NEW TAX BILL

There are several reasons why you may be receiving an "advance refund" check later this year.

The legislation reduces the lowest rate by creating a new 10% rate bracket below the current 15% rate bracket, effective retroactively to January 1, 2001. The 10% rate applies to the first $6,000 of taxable income for single filers, the first $10,000 for heads of households, and the first $12,000 for joint filers. Since this new rate is five percentage points less than the former lowest rate, and applies retroactively, the effect will be to reduce individual federal income tax for 2001 by a maximum of $300 for single filers (5% of $6,000), $500 for heads of households (5% of $10,000), and $600 for joint filers (5% of $12,000).

Lawmakers decided to implement the new 10% rate this year by means of a credit, as computed above, and having the Treasury Department prepay the credit by issuing "advance refund" checks before October 1 of this year to all eligible taxpayers who timely filed their 2000 tax returns. Therefore, if you filed your federal income tax return for 2000 by this year's April 16 deadline, you may be entitled to an "advance refund" check from the federal government. Taxpayers filing their 2000 income tax return after this year's April 16 deadline, even if they have valid extensions, will receive their checks later in the fall. No checks are to be issued, however, after December 31 of this year (or earlier, if the Treasury decides on an earlier cut-off date for administrative reasons).

The Treasury Department will determine who is entitled to an "advance refund" — and the amount — based on each taxpayer's 2000 income tax return information. Next year, when preparing their 2001 returns, taxpayers will need to reconcile the amount of the credit, based on their actual 2001 tax information, with the amount of the "advance refund" they received this year. In all likelihood, these amounts will simply cancel each other out. However, taxpayers whose actual credit exceeds the amount of the advance refund check they received will simply need to reduce the credit to be claimed on the 2001 return by the amount of the check. Taxpayers who are entitled to the credit but who did not receive an advance refund check will simply claim the full amount of the credit on their 2001 return. What's more, taxpayers whose actual credit turns out to be less than the amount of the check will not be required to repay the credit or include it in taxable income.

The lawmakers' rationale for using this "advance refund" method was to provide a more immediate stimulus to the economy than other methods.

2001 Child Tax Benefits
The new law covers four broad areas relating to children. The highlights are:

Child Tax Credit. The legislation retroactively increases the child tax credit for 2001 from $500 per child to $600 per child. The $600 limit is to apply through 2004, then increase in stages until reaching $1,000 in 2010.

Adoption Expenses. The legislation permanently extends both the adoption credit and the exclusion for employer-provided adoption assistance, which were scheduled to expire after this year, and increases the maximum amount of each from $5,000 to $10,000. Perhaps more important for many taxpayers, however, is that it raises the income level at which the benefits begin to be phased out to $150,000 (versus $75,000 in 2001).

Employer-Provided Child Care Facilities. The legislation creates a new credit of up to $150,000 per year for employers who provide employees with child care facilities or child care resource and referral services. The new credit applies in taxable years beginning after December 31, 2001.

Dependent Care Credit. The legislation also provides more generous dependent care credit limitations that will increase the maximum credit for many taxpayers, but these provisions do not take effect until 2003.

AMPER PROMOTIONS

Amper, Politziner & Mattia has announced the promotions of Brian Downey and Howard Klein to Partner status.

Brian Downey, of our Edison office, is a Certified Public Accountant in New York and New Jersey, Brian has over 23 years of experience in public and private accounting. Brian also serves as Co-Director of the firm's Technology Group, which provides a variety of industry- specific services to Amper's technology clients in the areas of business and strategic planning, due diligence, IPO/SEC services, tax planning, mergers and acquisitions and corporate finance.

Brian received his Bachelor of Science degree from Canisius College. He is a member of the American Institute of Certified Public Accountants (AICPA) and the New York Society of Certified Public Accountants (NYSCPA). He lives in West Caldwell.

Howard Klein has nearly 20 years of experience in public accounting and is responsible for the full time supervision and servicing of many closely-held clients in a variety of industries. His expertise includes the review of corporate, partnership and individual tax returns, tax planning, financial planning and projections, representation at federal and state tax audits, multi-state taxation issues, mergers and acquisitions, and special projects. In addition to his client responsibilities, Howard is an integral participant in the firm's staff training and continuing professional education programs.

A Certified Public Accountant in our Edison office, Howard received his MS in Taxation from Baruch College and his Bachelor of Science Degree in Accounting from State University of New York, Binghamton. A member of the American Institute of Certified Public Accountants, the New York State Society of Certified Public Accountants, and the New Jersey Society of Certified Public Accountants, Howard is active in many professional organizations. He is a resident of Manalapan.