By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement PlansPrint This Post
Now that we’re deep into the “dog days” of tax season, this is a time when many business owners are intently seeking ways to limit their tax burden and/or searching for opportunities to increase retirement savings. Employer-sponsored retirement plans represent a great way to accomplish both of those goals simultaneously. Additionally, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in December 2019, provides some new guidance that might be helpful for business owners still looking for a solution for the 2020 tax year.
Historically, business owners have had very limited options for starting a retirement plan after the tax year has ended. For many years, the SEP IRA was the only employer-sponsored retirement plan that could be both established and funded after the tax year, with the deadline being the due date of the tax returns for that business (including extensions). SEP IRAs are designed to be simple and cost effective, not permitting plan features such as vesting schedules or plan loans, but the SEP plan may not be appropriate for every business owner situation. The SECURE Act has remedied this situation by now permitting business owners to establish and fund multiple types of retirement plan options by the due date of business tax returns, including 401(k)s, profit sharing and defined benefit pension plans. This expansion of plan options will allow business owners greater flexibility in selecting the plan design that best meets their tax and retirement savings objectives.
Additionally, businesses with existing retirement plans will need to be mindful of both contribution (employer and employee deferral) and Department of Labor filing deadlines for their plans. Employer retirement plan contributions (i.e. profit sharing, matching, etc.) must be made by the due date of the business tax return (including extensions), while employee deferrals should be withheld and deposited as soon as possible by business owners – generally within 15 days for 401(k)s and 30 days for SIMPLE IRA plans).
Whether considering a new retirement plan or reviewing contribution deadlines, remember to consult with your tax or legal advisor to review the impact to your personal and business tax situation. You may also want to speak with your financial advisor to review your retirement plan alternatives.