October 14, 2020
“Pension Season” Is Extended, But Other Plan Deadlines Are Not
Five reasons business owners should still ACT NOW!
With the passage of the SECURE Act in December 2019, “Pension Season” has changed. Pension Season refers to the time of year where we often saw a rush to implement a Qualified Plan prior to the end of the year. This is because prior to 2020, Qualified Plans (also referred to as Pension Plans) had to be established by December 31 to qualify for a tax deduction. The SECURE Act has changed this.
For Qualified Plans where the employer is making 100% of the contributions, the SECURE Act has extended the deadline to implement new plans as the filing date of the taxpayer, including any extensions. This new rule is applicable for plans such as SEP-IRAs, Profit Sharing Plans, Traditional Defined Benefit and Fully Insured 412(e)(3) Defined Benefit plans. (Note: Employee salary deferral plans such as 401(k) or SIMPLE-IRA plans must still be implemented no later than October 1. Owner-only deferral Solo 401(k) plans must be implemented, and deferrals made by December 31)
It is still important to PLAN EARLY for implementing a qualified plan. Even though Business Owners can wait, there are a number of consequences that must be considered.
Here are some of the reasons that a Business-Owner would not want to wait:
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.
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 gather client information and draft the plan documents. Waiting until the last possible moment may preclude the client from implementing a qualified plan because of TPA timelines.
In short, always plan ahead. Even though one law allows an extension to the Business Owner’s tax filing deadline, there are several other factors to consider that limit this date. It is never too early to start planning for the implementation of a qualified plan.
