Question: You are preparing the 2020 tax return for Bjorn Enterprises, a calendar year S corporation. The corporation has a valid extension with the IRS until Sept. 15, 2021, and does not have a workplace retirement plan. The corporation has greater profit than expected and Robert, the shareholder, mentioned he would like to adopt a 401(k) plan for 2020 since he had read that the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) gave businesses extra time to establish a new retirement plan. Bjorn Enterprises has 20 employees. Can Bjorn Enterprises establish a workplace 401(k) plan for 2020?
Answer: No. The SECURE Act contains a provision giving businesses extra time to establish certain new qualified retirement plans. The new deadline only applies to qualified plans that are 100% employer funded. Profit sharing plans would be an example of a 100% employer funded retirement plan that would qualify as a plan meeting the new extended deadline. The new deadline does not apply to 401(k) plans. If Bjorn Enterprises would like to establish a profit-sharing plan for 2020, it could do so by Sept. 15, 2021. The deadline for establishing new qualified plans is now the same as the deadline for setting up new SEP IRAs.
For plans adopted for tax years beginning after 2019, an employer may elect to treat a qualified retirement plan adopted after the close of a tax year, but before the due date (including extensions) of the employer’s tax return for the tax year, as having been adopted as of the last day of the tax year. [§401(b)(2)]. This does not, however, allow retroactive adoption of a qualified cash or deferred arrangement (CODA) [Reg. §1.401(k)-1(a)(3)(iii)(A)].
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.