By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
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While the start of Spring can represent the beautiful and exciting change of seasons for some, it can be one of the most anxious times for business owners as it also signals tax season. Now is the time many business owners begin to have a better understanding of their 2024 income and are looking for effective tax-mitigation strategies.
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 2024 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 returns (including extensions). While SEP IRAs continue as a popular choice for businesses establishing a plan after the close of the year, recent regulations have also extended the deadlines for establishing other retirement plan types, such as traditional 401(k), profit sharing and defined benefit plans. Specific establishment deadline dates for these retirement plans will depend on the retirement plan provider or third-party plan administrator providing services, so business owners will need to check with their plan provider for details. Additionally, new regulations permit sole proprietors to establish and fund an Owner Only 401(k) plan, including elective deferrals, until the due date of the business tax returns. Of note, this new provision does not include any tax extensions for the tax return and is only available for the initial year of the plan.
Despite this expansion of several plan establishment deadlines, 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).
Other Important Retirement Plan Deadlines
Prior to recent 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. Employers would need to work closely with their CPA or tax advisor, and 401(k) plan administrator, to ensure compliance with the new SIMPLE plan termination requirements.
Although regulations now permit retirement plans like traditional 401(k)s to 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 (e.g., December 31, 2024 for the 2024 tax year), with the exception noted above for Owner Only 401(k) plans in the initial plan year. However, 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 (“DOL”) 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).
In addition to administrative and compliance deadlines business owners should be mindful of, recent legislation has introduced generous tax credits to assist small businesses (i.e., less than 100 employees) with the cost of establishing a new retirement plan. These tax credits cover startup costs associated with establishing a new retirement plan, as well as any employer contributions (matching or non-elective) during the initial years of a new retirement plan. Business owners establishing a new retirement plan should take care to 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 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.