Adoption Due Date Changes for Retroactive Qualified Retirement Plans

Jan 13, 2021

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) signed into law on December 20, 2019 contains a provision that gives businesses extra time to establish certain new tax-qualified retirement plans.

The SECURE Act states:

“If an employer adopts a stock bonus, pension, profit-sharing, or annuity plan after the close of a taxable year but before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the taxable year.”

Prior to the SECURE Act, a new qualified plan had to be adopted by the last day of the taxable year. However, the employer contribution deadline was the due date (including extensions) of the company’s federal tax return.

What changed?

Under the SECURE Act, businesses now have the same deadline – the company 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 and effective in 2020 and for employer fiscal years starting in 2020. A business could not adopt a new plan retroactively in 2020 for 2019.

The new extended deadline only applies to qualified plans that are entirely employer funded, such as profit sharing and pension plans. It does not apply to 401(k) plans. The timing rules for 401(k) deferrals require that elections to defer compensation be made on, or before the end of the plan year; a new 401(k) plan effective in one year cannot be established after the end of that year.

Businesses usually do not have financial results finalized for a tax year until after the end of the taxable year. The new extended deadline will give companies extra time to decide whether a retirement plan may be beneficial, and if so, retroactively adopt a new qualified plan to get the benefits of a tax deductions for the taxable year just ended.

Contact your BPAS representative for more information.

William Nusblast is a Vice President, Consulting with BPAS Actuarial & Pension Services.