By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
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We’re entering that period of tax season that can be the most stressful for business owners. While some business owners (e.g., S-Corporations, Partnerships, etc.) have already been forced to make some important tax decisions, such as whether extending their tax filing deadline was prudent, others may now have a better understanding of their 2023 revenues and are exploring options to help reduce their taxable income and limit tax liability.
Employer-sponsored retirement plans provide an effective solution for business owners looking to limit tax liability and offer an effective employee recruiting tool while allowing the business owner to save for their own retirement in a tax-efficient manner. Additionally, recently enacted retirement legislation (e.g., SECURE Act 1.0 and SECURE Act 2.0) has significantly changed the “playing field” for business owners looking for 2023 tax year retirement plan solutions.
Deadline for Establishing a New Retirement Plan
Prior to recent regulation, business owners had limited options for establishing a new retirement plan after the end of a tax year. For many years, the SEP IRA was the only employer-sponsored retirement plan option that could be both established and funded after the close of a tax year, with the deadline being the due date of the business tax returns (including extensions). While SEP IRAs continue to be a popular choice for businesses establishing a plan after the close of the year, recent regulation has expanded the available alternatives by also permitting traditional 401(k), profit sharing and defined benefit plans to have an extended timeline for establishment.
Additionally, new regulations now permit sole proprietors to establish and fund an Owner Only 401(k) plan (i.e., including elective deferrals) up until the due date of the business tax returns. This new provision does not include any tax extensions and is only available for the first year of the plan. All of these new options allow business owners greater flexibility in selecting the plan design that best meets their tax planning and retirement savings goals. Despite this expansion of plan establishment deadlines for multiple retirement plan types, the date for starting a new SIMPLE IRA remains unchanged with a much earlier deadline than other plan types (i.e., October 1 of the effective year of the plan).
Along with extending the plan establishment deadline for some retirement programs, recent legislation has introduced generous tax credits to assist small businesses (i.e., those with less than 100 employees) with the startup cost of establishing a new retirement plan. These tax credits can be beneficial in easing some of the financial burden for small business owners looking to limit tax liability. Business owners should consult with their CPA or tax advisor to learn more about which tax credits might apply and the best process for claiming the credits.
Other Important Retirement Plan Dates
Prior to the new legislation, if an employer wanted to terminate an existing SIMPLE plan, it had to be done on December 31 (i.e., not during the plan year). Employers can now terminate a SIMPLE plan at any time during the year if certain employee notification conditions are met, and the employer initiates a safe harbor 401(k) plan as the replacement for the SIMPLE plan (as of the day after the SIMPLE termination date). Employers would need to work closely with their CPA, tax advisor and 401(k) plan administrator to ensure compliance with the new SIMPLE plan termination requirements.
Although retirement plans like 401(k)s can now be established after the end of the tax year, it’s important to remember that employee elective deferral contributions to those plans must still be made by the last day of the plan year/tax year (i.e., December 31, 2023 for the 2023 tax year). However, the employer contributions to 401(k) plans, such as matching and non-elective/profit sharing contributions, have until the due date of the business tax returns (plus extension) to be made. Some additional important dates for business owners starting a new or maintaining existing retirement plans include Department of Labor plan filing deadlines for qualified retirement plans (i.e., Form 5500 filings), required annual employee notices for certain plans (i.e., SIMPLEs) and ensuring that employee elective deferrals are withheld and deposited as soon as possible by business owners (generally within 15 days for 401(k) plans and 30 days for SIMPLEs).
With so many important deadlines and key retirement plan requirements, as mentioned throughout this communication, remember to consult with your tax or legal advisor to review the impact to your personal and business tax situation. Consider speaking with your financial advisor to review your retirement plan alternatives.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.