3/17/2011
Computation of Earned Income for Retirement Plans in 2010 - No Change for 2010 Income Tax Health Insurance Deduction
This is a joint article drafted by Michael Greenberg (Technical Answer Group) and Aimee Nash (ftwilliam.com).
The Small Business Jobs Act of 2010 (SBJA) provides - for 2010 only - health insurance for self-employed persons can be deducted from self-employment net earning for purposes of income tax (Code section 162(l)(4)).
There has been debate about what this means for purposes of retirement plan earned income for self-employed persons (determined under Code section 401(c)). Some commentators have suggested it would raise earned income for purposes of retirement plans. The technical explanation of SBJA, Publication 560, and informal conversations with the IRS confirms that the temporary health insurance deduction has no effect on earned income for retirement plans.
The Technical Explanation of the SBJA of 2010 provides:
"It is intended that earned income within the meaning of section 401(c)(2) be computed without regard to this deduction for the cost of health insurance. Thus, earned income for purposes of the limitation applicable to the health insurance deduction is computed without regard to this deduction... A technical correction may be needed to achieve this result".
Publication 560 confirms the technical explanations. On pages 5 and 16 it states: "When calculating the deduction for one-half of self-employment tax, the deduction for self-employed health insurance is disregarded." The worksheet on page 22 further confirms this.
This means that for retirement plan purposes, there is no change in how earned income (and income available for deferrals) is calculated. We have confirmed our understanding of Publication 560 in informal discussions with the IRS. As a result, ftwilliam.com administration software and document software will not be modified for the SBJA of 2010 changes. Similarly, TAG's contribution calculator for self employed individuals is not affected by the SBJA provision.
If you have any questions please feel free to contact us at support@ftwilliam.com or call 800.596.0714.