By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
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No matter the year, it always seems that the holiday season arrives sooner than expected. Before you know it, your attention must turn to gift shopping, preparing for the big holiday dinner, or making New Year’s Eve plans. But for business owners looking to establish a retirement plan, the holiday season can introduce additional challenges, like understanding important deadlines and compliance requirements that are critical to business owners meeting intended retirement goals and objectives.
Retirement Plans for the 2024 Tax Year
Unfortunately, the deadline for establishing several plan types has already passed for the 2024 tax year, such as SIMPLE IRAs and Safe Harbor 401(k)s, but the SEP IRA continues to be a popular option for business owners interested in starting a retirement plan at or after the year-end. SEP IRAs represent a simplistic and cost-effective plan solution that can be established and funded through the business tax filing deadline, including extension.
Recent legislation has also extended the plan establishment deadline for other retirement plan types to the business tax filing date, including extension. Now, qualified retirement plans like 401(k), profit sharing and defined benefit plans can have the same plan establishment flexibility previously enjoyed only by SEP IRAs. (Note: Plan establishment deadlines for plans like 401(k), profit sharing and defined benefit plans can differ by retirement plan provider. Check with your designated retirement plan provider to confirm specific plan establishment dates/deadlines for 2024 retirement plans.)
Additionally, SECURE Act 2.0 introduced a host of new provisions that can benefit business owners establishing retirement plans for 2024. For example, self-employed business owners (i.e., sole proprietors or single member LLCs) looking to start a 2024 owner-only 401(k) plan now have until the due date of the business tax return to establish the plan, as well as make elective deferral and employer contributions. But be careful, this extended deadline for both elective deferral and employer contributions is only available for the first plan year of the owner-only 401(k) plan. After the initial plan year, elective deferral contributions must be made by year-end, while employer contributions can be made through the business tax filing date, including extensions.
Retirement Plans for the 2025 Tax Year
Although there are some limitations with establishing retirement plans for the 2024 tax year, this is a great time for business owners to start exploring plan options for 2025. With plan alternatives ranging from SEP IRAs and SIMPLE IRAs for business owners looking for cost-effective solutions, to 401(k) and defined benefit plans for employers in search of higher contribution levels, business owners have a lot of flexibility in selecting a plan solution that meets their unique goals and objectives. And for business owners with an existing retirement plan, SECURE Act 2.0 has introduced exciting new plan features that could enhance savings and participation, including expanded catch-up contributions for employees aged 60-63, the ability to designate contributions to SEPs and SIMPLEs as Roth contributions, and the requirement to include automatic enrollment and escalation provisions for 401(k) plans.
As 2025 approaches, business owners will need to be aware of the key deadlines and compliance requirements impacting retirement plans for 2024 and 2025. Business owners can contact their financial advisor to review potential retirement plan alternatives and should always consult with their legal and tax advisor before establishing a retirement plan.
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.