Now that we’re closing in on the official start of spring, the anticipation of warmer weather and vibrant flowers represents an exciting time for most people. But for many business owners this can be one of the most anxious times of the year as it also coincides with tax season. This is the time many business owners begin to have a better understanding of their 2025 earnings and may be looking for effective strategies to mitigate taxes.
Employer-sponsored retirement plans have historically provided a solution for business owners looking to limit tax liability, while also allowing the business owner to save tax efficiently for their own retirement. Additionally, recently enacted retirement legislation (i.e., SECURE Act 1.0 and 2.0) has created significant changes to the retirement plan landscape for business owners exploring new retirement plan solutions.
Deadline for Establishing a New Retirement Plan for 2025 Tax Year
For many years, business owners had limited options for establishing a new retirement plan after the end of a tax year. 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 return (including extension). While SEP IRAs continue as a popular choice for businesses establishing a plan after the close of the year, recent legislation has also extended the setup deadlines for other retirement plan types, such as traditional 401(k), profit sharing and defined benefit plans. For example, new regulations now permit 401(k) plans covering only the business owner and their spouse (known as Owner Only 401(k)s) to be established and funded until the due date of the business tax return.
NOTE: this special provision with Owner Only 401(k)s applies solely to businesses structured as a sole proprietorship, is available in the initial plan year only and is not applicable to any tax return extension.
Plan establishment deadlines will often vary based on the retirement plan provider being utilized, so business owners will need to check with their specific plan provider for plan establishment dates and details.
Other Important Retirement Plan Deadlines and Opportunities
In addition to plan establishment deadlines, recent retirement plan legislation introduced a number of key changes and exciting opportunities for business owners to be aware of, including:
- Prior to recent legislation, if an employer wanted to terminate an existing SIMPLE IRA plan, it had to be done on December 31 (i.e., not during the plan year). Employers can now terminate a SIMPLE IRA 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 IRA plan. Employers would need to work closely with their CPA or tax advisor and 401(k) plan administrator, to ensure compliance with the plan termination and employee notification requirements with this new provision.
- As a result of the recent retirement plan regulation, businesses are required to amend their plan documents to officially include the provisions and features introduced in the legislation. While retirement plans can generally just operate in accordance with the legislative provisions for now, there are firm deadlines for when business owners will need to formally amend their plans. For example, employers with 401(k), 403(b) and governmental 457(b) plans must have plan documents amended and compliant by December 31, 2026, while the deadline to amend plan agreements for IRA-based retirement programs (i.e., SEPs and SIMPLEs) has been extended to December 31, 2027.
- An overlooked provision with the recent retirement legislation is the generous tax credits that were created to assist small businesses (i.e., less than 100 employees) with the cost of establishing a new retirement plan. These tax credits cover some or all of the startup cost associated with establishing a new retirement plan, as well as the employer contributions (matching or non-elective) during the initial few years of a new retirement plan. Business owners establishing a new retirement plan should check with their tax advisor on the ability to leverage these helpful new tax credits.
With so many important deadlines and key regulatory provisions, remember to consult with your tax or legal advisor to review the impact to your personal and business tax situation. Consider speaking with your Benjamin F. Edwards 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.