The SECURE Act was signed into law at the end of 2019. Among its many provisions was the ability to adopt a new profit sharing or defined benefit plan (including a cash balance plan) after the end of the plan year. The deadline to adopt a 401(k) feature did not change.
Before 2020, an employer had to adopt a plan by the last day of year in which it would be in effect. As a result, each year, many employers were rushing to establish a new plan by December 31 to secure a tax deduction for such year. Under the SECURE Act, an employer now has until their business’ tax return due date, plus extensions, to sign a document to establish a plan for the prior year. The tax filing deadline varies based on the employer’s business entity type.
Let’s look at an example:
ABC Clinic wants to establish both a profit sharing plan and a cash balance plan for 2020. The business is an S-Corp, so the tax filing deadline for 2020 is March 15, 2021. ABC Clinic may establish both plans by this deadline and fund contributions for the 2020 plan year.
If ABC Clinic extends its tax filing deadline to September 15, 2021, they will have additional time to establish and fund both plans. The clinic can fund contributions for 2020 for both plans if the documents are in place by September 15.
The clinic can consider adding a 401(k) deferral component to the profit sharing plan, but such deferrals cannot begin until the plan is executed. If the plan document is signed on February 1, for example, the deferral feature can be added as of this date—or as soon as administratively feasible following this date.
Keep in mind, this extended deadline does not extend other plan-related deadlines. For example, the minimum funding deadline for the cash balance plan will continue to be September 15 (8.5 months after the end of the plan year). The Form 5500 filing deadline continues to be July 31 unless extended to October 15. Employers qualify for an automatic extension if their business tax return deadline is extended, and their plan year is the same as their tax year. These deadlines assume a calendar plan and tax year.
Going forward, business owners will have extra time to make the decision to adopt a plan and get one set-up, but it will be essential to allow sufficient time to prepare the 5500 and calculate any contributions that must be funded by the same deadline. We anticipate service providers will have earlier deadlines to accommodate the required plan administration and to prepare the plan documents to establish these plans for the prior year.