By Ian Berger, JD
Hidden within the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) signed into law last December is a provision giving businesses extra time to establish certain new tax-qualified retirement plans.
Prior to the SECURE Act, a new workplace plan had to be adopted by the last day of the employer’s tax year. Despite that deadline for adopting a new plan, businesses were always allowed extra time to make retroactive employer contributions for any year (including the plan’s first year). The employer contribution deadline is the due date (including extensions) of the company’s federal tax return.
Under the SECURE Act, businesses now have the same deadline – the corporate tax return due date (including extensions) – for taking the necessary steps to put a new retirement plan into place.
The change is effective for plans newly adopted in fiscal years starting in 2000. So, a business can’t adopt a new plan retroactively in 2020 for 2019.
Example: Sweets Candy Company wants to start up a new profit sharing plan. The company’s fiscal year ends December 31, and the deadline (including extensions) for its corporate tax return is the following October 15. If Sweets wanted to have the new plan in place for 2019, it would have needed to adopt the plan by December 31, 2019. Sweets was unable to meet that deadline. However, it will have until October 15, 2021 to adopt the new plan for 2020.
The SECURE Act change brings the deadline for establishing new qualified plans in line with what the deadline has been for setting up new SEP IRAs.
Importantly, the new extended deadline only applies to qualified plans that are entirely employer funded, such as profit sharing plans and pension plans. It does not apply to 401(k) plans. Because of the timing rules for 401(k) deferral elections, a new 401(k) plan effective in one year cannot be established after the end of that year.
For many small businesses, final financial numbers for a tax year are not available until after the year is over. The new extended deadline will give companies extra time to decide whether they can afford to retroactively adopt a new qualified plan to reap the benefits of a tax deduction and kick-start individual retirement savings.