November 9, 2022
Thinking Ahead: “Pension Season” Reminders and Deadlines
Five reasons business owners should take this opportunity to be proactive
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 qualified plans for businesses prior to the end of the year to qualify for a tax deduction. However, the SECURE Act changed the nature of Pension Season as it extended the deadline to implement certain types of Qualified plans to the taxpayer’s filing deadline plus extensions.
This new rule is applicable to qualified plans that are being funded exclusively by the employer, such as SEP IRAs, Profit Sharing Plans, and Defined Benefit plans. (Note: Safe Harbor 401(k) plans or Simple IRA plans must still be implemented no later than October 1 while 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.
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 2022 calendar year would be due by September 15, 2023. If the required annual contribution is late a 10% excise tax applies which could be increased up to 100% under certain conditions.
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, always plan ahead. The SECURE Act provided some relief by extending the deadline for employer-funded qualified plans into the next year but there are other factors that a business owner must consider before deciding to wait until their tax filing deadline to implement the plan. It is never too early to start planning for the implementation of a qualified plan.
