The Window for Your Clients to Establish a Qualified Plans Is Still Open, but Not for Long!

Even though the plan document does not have to be signed until the date of the return filing, the plan is still being implemented for the prior tax year and will have a plan effective date of December 31. Regulations state that the plan contribution is owed to the plan as of the effective date, and there will be an interest rate charged on the owed contribution until it is made.

For plans that are considered “End of Year Plans” such as Profit-Sharing Plans, the IRS requires that a Form 5500 be filed no later than July 15 after the close of the plan year. The penalty for a late filing of this form is $25 per day, up to $150,000. If the business owner waits until their extension deadline to implement this type of plan they may owe significant penalties to the IRS. 

The IRS requires that defined benefit plans must be funded no later than 8 ½ months after the end of the plan year. Therefore, the contribution for a defined benefit plan established for the 2023 calendar year would be due by September 15, 2024. If the required annual contribution is late a 10% excise tax applies which could be increased up to 100% under certain conditions.

Life insurance in a qualified plan must be issued on the effective date of the plan. This means, that if the plan is being implemented at the time the business owner is filing their taxes, that any insurance being issued would have to be backdated to the 12/31 effective date of the plan. Under some state statutes, backdating is only allowed for 6 months. In addition, backdating requires the plan participant to pay for insurance during a time that they did not have it.  This can be troublesome for clients. If the state law prohibits, or the client does not want to pay for additional months of no coverage, then issuing the insurance would have to wait until the following plan year.

• Note: The qualified plan MUST be established before the life insurance or annuity products can be issued.

The last, and one of the most important considerations is TPA deadlines. For any plan type other than simple or sep iras, a TPA must be used to draft plan documents and prepare final calculations. Many TPAs need time in order to complete these tasks and waiting until the last possible moment may preclude the client from implementing a qualified plan because of TPA timelines.

In short, just because business owners have an extended deadline to work with for establishing a qualified plan doesn’t mean they have a green light to procrastinate. It is imperative that business owners consider all of the relevant factors in the implementation process and complete this process in an appropriate timeframe to avoid these consequences.