The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Arizona is representative of a common inquiry related to setting up qualified retirement plans. The advisor asked:
“Is it too late to establish a qualified retirement plan for 2020?”
Highlights of the Discussion
As a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, businesses have more time to set up plans for a particular tax year.
Prior to the SECURE Act, a business that wanted a qualified retirement plan (e.g., 401(k), profit sharing, money purchase pension, defined benefit pension plan, etc.) for a particular tax year had to establish it by the last day of the business’s tax year. For example, a calendar year business had to sign documents to set up the plan by Dec. 31 of the tax year in order to be able to contribute to and take a deduction for contributions.
For 2020 and later tax years, a business has more time—until its tax filing deadline, plus extensions for a particular tax year—to set up a plan. Notice the plan establishment deadline is tied to the type of business entity (e.g., sole proprietor, partnership, corporation, etc.) and its associated tax filing deadline as illustrated below. [Note: Simplified employee pension (SEP) plans have historically followed this schedule; and special set-up rules apply for safe harbor 401(k) plans.]
|
Tax Status |
Filing Deadline |
Extended Deadline |
|---|---|---|
|
S-Corporation (or LLC taxed as S-Corp) |
March 15 |
Sept. 15 |
|
Partnership (or LLC taxed as a part) |
March 15 |
Sept. 15 |
|
C-Corporation (or LLC taxed as C-Corp) |
April 15 |
Oct. 15 |
|
Sole Proprietorship (or LLC taxed as sole prop) |
April 15 |
Oct. 15 |
EXAMPLE: Doin’ Great, Inc., has an extended tax filing deadline of Oct. 15, 2021, for its 2020 tax year. The owners of Doin’ Great decide in early 2021 they would like to set up a 401(k)/profit sharing plan for the business for 2020. They have until Oct. 15, 2021, to execute plan documents to set up the plan, effective for 2020. While Doin’ Great would be able to make a profit sharing contribution on behalf of participants for 2020, participants can only make pre-tax employee salary deferrals and designated Roth contributions prospectively—meaning after they execute valid salary deferral elections for compensation yet to be received in 2021.
Conclusion
Thanks to the SECURE ACT, for 2020 and later tax years, a business has more time—until its tax filing deadline, plus extensions for a particular tax year—to set up a plan.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2021, Retirement Learning Center, LLC. Used with permission.
