By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
As we move into “crunch time” for tax season, many taxpayers are carefully assessing their tax situation for the 2022 tax year. And for business owners, this is now the time they often have a better understanding of their 2022 revenues and are actively looking for ways to help reduce their taxable income and limit tax liability.
Employer-sponsored retirement plans can provide an effective solution to assist business owners with limiting tax liability, while also creating an opportunity for business owners to potentially increase their retirement savings. Recently enacted legislation (i.e., SECURE Act 1.0) provides some key provisions that might prove helpful for business owners still looking for 2022 tax year solutions.
Deadline for Establishing a Retirement Plan
Prior to SECURE Act 1.0, 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 to be a popular choice for businesses establishing a plan after the close of the year, SECURE Act 1.0 expanded the plan options available for this scenario by also permitting 401(k), profit sharing and defined benefit plans to be established after the close of their tax year. These new options allow business owners greater flexibility in selecting the plan design that best meets their tax planning and retirement savings goals. Despite these enhancements, the date for starting a new SIMPLE IRA remains unchanged and has a much earlier deadline than other plan types (i.e., October 1 of the effective year of the plan).
In an effort to encourage business owners to establish retirement savings programs like 401(k) plans, recent legislation has introduced generous tax credits designed to help small businesses (those with less than 100 employees) cover some of the startup cost of establishing a retirement program. These tax credits can really add up and be beneficial in easing some of the financial burden for business owners looking to limit tax liability and “bump up” their retirement savings with an employer sponsored retirement plan. 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 Plan Deadlines
Although retirement plans like 401(k)s can now be established after the end of the tax year, it’s important to note that any employee elective deferral contributions for 2022 must be made solely from income earned in 2022 and cannot be made retroactively (i.e., elective deferrals made in 2023 for the 2022 tax year). However, employer contributions to 401k plans 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 DOL plan filing deadlines for qualified retirement plans (Form 5500 filings), providing 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, 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.
Benjamin F. Edwards does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.