New Plan Establishment Deadline Gives Employers More Time
By Luke Swanson, QKA, CIP
What is the deadline for an employer to establish a qualified retirement plan?
Prior to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, part of the Further Consolidated Appropriations Act, 2020 (FCAA), enacted in December 2019, qualified retirement plans (e.g., 401(k) plans, profit sharing-only plans, money purchase pension plans, and defined benefit pension plans) had to be established by the last day of the business’ tax year for which an employer intended to have a retirement plan. For example, a calendar year business (unlike a fiscal year business) had to establish a retirement plan by December 31 of the tax year for which the employer wanted to make a contribution and receive a deduction. If an employer passed this December 31 deadline, the employer could no longer establish a plan for that business year.
The SECURE Act changed the deadline for a business to establish a qualified retirement plan to the business’ tax filing deadline, including extensions, for the tax year for which it intends to have a plan. This change is effective for 2020 and later taxable years. Note that a business’ tax filing deadline depends on the business type (e.g., sole proprietorship, partnership, LLC, S-corporation, or C-corporation).
The new plan establishment rule matches simplified employee pension (SEP) plans, which have always operated under this rule; an employer can establish and contribute to a SEP plan for a prior year, as long as it was established and funded by the business’ tax return due date, plus extensions.
Under the new rule, can an employer establish a qualified retirement plan in 2020 for the 2019 plan year?
No. An employer may not establish a plan in 2020 for the 2019 tax year. The new rule is effective for the 2020 tax year and subsequent tax years, meaning that an employer may first use this extended timeframe if it wishes to establish a plan in 2021 for the 2020 business year, as long as the plan is established by its 2020 tax return due date, plus extensions.
If an employer establishes a plan for the prior year, can elective deferrals be contributed for that prior plan year?
No. Employees may not defer retroactively into a qualified retirement plan. The rules requiring that elective deferrals be made during a plan year—before being received, in fact—were unaffected by the SECURE Act; therefore, employee elective deferrals must still be contributed on a prospective basis only.
What types of contributions can be made for the prior year?
The plan sponsor may elect to make employer contributions to a defined contribution plan. Depending on the type of plan established, this could include profit sharing contributions or qualified non-elective contributions. If the newly-established plan is instead a pension plan, including a cash balance plan, the plan sponsor may contribute employer contributions to that pension plan. Note that these are all employer—not employee—contributions.
