When to Fund and Deduct Employer Contributions
By Kristoffer Aas, QKA, EdM
With tax season upon us, many employers are determining when to fund and deduct the employer contributions that they’ve allocated to their retirement plans. Different contribution deadlines apply based on the type of contribution being made and the business tax return due date.
Generally, the business tax return due date for partnerships and S-corporations is 2½ months following the business tax year end. For sole proprietorships and C-corporations, it’s 3½ months following the business tax year(extensions can be up to an additional six months where applicable).
The following deadlines apply to the most common employer contributions: safe harbor and nonsafe harbor, fixed and discretionary, match and nonelective.
Deduction deadline
The deduction deadline under Internal Revenue Code Section (IRC Sec.) 404 is the employer’s tax return due date, plus extensions for the intended year. If funded timely, the contributions count towards the employees’ annual additions limit (also known as the IRC Sec. 415 limit) and the employer’s deduction limit for the year intended.
For example, an employer with a December 31 business tax year-end sponsors a 401(k) plan with a December 31 plan year-end and limitation year. A 2024 profit sharing contribution made by an employer’s tax return due date, plus extensions will be applied to the 2024 annual additions limit and deducted for 2024.
IRC Sec. 415 deadline
If not funded timely, but within 30 days following the IRC Sec. 404 employer contribution deduction deadline (also known as the IRC Sec. 415 deadline), the contributions will count towards the annual additions limit for the intended year, but because the deduction deadline was missed, the deduction will apply towards the IRC Sec. 404 limit for the year in which it was made.
For example, an employer with a December 31 business tax year-end sponsors a 401(k) plan with a December 31 plan year-end and limitation year. A 2024 nonsafe harbor matching contribution made within 30 days following the employer’s tax return due date, plus extensions, will count towards the 2024 annual additions limit and the 2025 deduction limit. This will affect how much the employer can deduct in 2025 and may result in an excise tax if the deduction limit is exceeded.
Regulatory deadline
If a fixed (nondiscretionary) contribution is funded after the IRC Sec. 415 deadline but before the last day of the plan year following the intended plan year, the contribution will count towards both the annual additions limit and the deduction limit for the year in which it is made (because both the IRC Sec. 415 deadline and the deduction deadline were missed).
For example, a 2024 safe harbor nonelective contribution made in December 2025 will count towards the 2025 annual additions limit and the 2025 deduction limit. This may affect how much the employer can contribute and deduct in 2025 without risking an IRC Sec. 415 excess if attempting to contribute for two separate years at the same time.
An employer using the Ascensus Cycle 3 plan document cannot make a discretionary contribution after the IRC Sec. 415 deadline. Employers not using the Ascensus document should refer to their plan document to determine whether there is a stated deadline for discretionary contributions.
Operational failures
If the previous deadlines are not followed, the plan may have an operational failure, as described below.
If a mandatory contribution is not funded within the timeline as defined in the plan’s document, the plan will have an operational failure that should be corrected through the IRS’ Employee Plans Compliance Resolution System (EPCRS). If not corrected through EPCRS, the contributions are considered annual additions in the year made.
It is important to note that no discretionary contributions are permitted for a previous plan year after the plan’s stated deadline. An employer that has taken a deduction in a previous plan year for a discretionary contribution that was never made, is strongly encouraged to seek counsel from a competent tax professional.
Any contribution funded after the regulatory deadline (the last day of the plan year following the intended plan year) is subject to adjustment for lost earnings, which, if made within the timeframe prescribed by EPCRS, is attributed to the annual additions limit of the intended year rather than the year it is made. The normal deduction deadlines, however, still apply.
Safe harbor funding deadlines
Safe harbor contributions must satisfy an added layer of funding and operational deadlines.
Safe harbor nonelective contributions and safe harbor matching contributions calculated on an annual basis must be funded no later than 12 months following the end of the plan year for which they are intended (also, coinciding with the regulatory deadline mentioned above).
Safe harbor matching contributions that are calculated quarterly or more frequently (e.g., per payroll period or monthly), are due by the end of the quarter following the quarter for which the contribution was calculated.
NOTE: There are no specific rules about the funding deadline for a safe harbor match calculated on a semi-annual basis. But applying the same rules as those used for determining calculation frequencies (e.g., per payroll period, monthly, or quarterly), would likely be viewed by the IRS as a conservative, good-faith effort to comply. Additionally, all nonsafe harbor matching contributions and profit sharing contributions are due by the plan’s stated deadline.
Operational deadlines
Employer matching contributions that are made before the elective deferrals they match, or before the services are rendered with respect to which the elective deferrals are made (or if earlier, before the cash subject to the cash or deferred elections would be available), are not deemed matching contributions. Contributions that are intended to be matching contributions should be made on or after the time that deferrals are made.
Example
Employer A is taxed as a partnership with a March 15, 2025, tax return due date without an extension. The employer has elected and chooses to fund its annual safe harbor match after the 2024 plan year. Because it’s calculated on an annual basis, Employer A waits until after the end of the plan year after all deferrals for 2024 are made to make the contribution.
NOTE: In this example, the plan year, tax year, and limitation year are all the calendar year.
If made by the tax return due date, plus extensions (March 15, 2025), the contribution will apply towards the 2024 annual additions limit and will be deducted for 2024 (the intended year).
If made by the tax return due date, plus extensions, plus 30 days (April 15, 2025), the contribution will apply towards the 2024 annual additions limit (the intended year), but because Employer A has missed the deduction deadline, it will be deducted for 2025 (the year in which the contribution is made).
If made by the last day of the plan year following the intended plan year (December 31, 2025), Employer A will have missed both the annual additions deadline and the deduction deadline. As a result, the contributions will apply towards both 2025 limits (the year in which the contribution is made).
Unfortunately, Employer A forgets about the obligation until a week past its tax return due date. While Employer A does not miss the IRC Sec. 415 deadline, it does miss the deduction deadline, so the contributions will apply towards the 2024 annual additions limit but will be deducted for 2025.
To avoid an excise tax, Employer A will have to be mindful of how much it deducts in 2025, as there are now two years of contributions that will be applied to the same deduction limit. But because Employer A did not miss the IRC Sec. 415 deadline or the regulatory deadline, it did not incur an operational failure and is not responsible for lost earnings.
Employer A also met its safe harbor funding deadline (here the same as the regulatory deadline) and the operational deadline (made after deferrals were made).
