Tag Archive for: plan establishment

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Deadline for Setting Up a SIMPLE IRA Plan

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Did SECURE Acts 1.0 and/or 2.0 Change the Deadline for Setting Up a SIMPLE IRA Plan?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in New Mexico is representative of an inquiry involving a savings incentive match plan for employees (SIMPLE) IRA plan.

Highlights of the Discussion

The short answer is no. While SECURE Acts 1.0 and/or 2.0 have given us a multitude of retirement plan changes, they did not affect the deadline for setting up a SIMPLE IRA plan. The general deadline for establishing a SIMPLE IRA plan for a given year is still October 1 of the year.  For example, the deadline for an eligible business owner to set up a SIMPLE IRA plan for 2023 is October 1, 2023.

There are two exceptions to the general rule as follow (See IRS Notice 98-4, Q&A K-1).

  1. If the business comes into existence after October 1 of the year the SIMPLE IRA plan is desired, then the new business owner may still set up a SIMPLE IRA plan for the year, provided he or she does so as soon as administratively feasible after the start of the new business.
  2. If a business has previously maintained a SIMPLE IRA plan, then it may only set up a new SIMPLE IRA plan effective on January 1 of the following year (e.g., set up the plan in 2023 with an effective date of January 1, 2024).

Businesses that are eligible to establish SIMPLE IRA plans are those that

  1. Do not maintain any other qualified retirement plans; and
  2. Have 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding year [IRC §408(p)(2)(c)(i) and IRS Notice 98-4, Q&A B4 ].

However, an employer can use less restrictive participation requirements if it so desires.

(Note that SECURE Act 2.0, beginning in 2024, will allow employers to replace their SIMPLE IRA plans mid-year with an “eligible 401(k) replacement plan.” See a prior Case of the Week  “A SIMPLE Switch” for more information.)

The basic steps for establishing a SIMPLE IRA plan are

  1. Execute a written plan document (either a government Form 5304-SIMPLE or Form 5305-SIMPLE, or a prototype plan document from a mutual fund company, insurance company, bank or other qualified institution);
  2. Provide notice to employees; and
  3. Ensure each participant sets up a SIMPLE IRA to receive contributions.

Employees who are eligible to participate in a SIMPLE IRA plan are those who received at least $5,000 in compensation from the employer during any two preceding years and are reasonably expected to receive at least $5,000 in compensation during the current year.

Conclusion

Business owners who are interested in establishing SIMPLE IRA plans must be aware of the deadline to do so, and the additional steps involved to ensure a successful set up.

 

 

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Plan Establishment and “Compensation”

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“My client is a shareholder in an S-Corporation. Can the business still set up a retirement plan for 2022 and can she contribute to the plan based on her S-Corporation distributions?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Georgia is representative of a common inquiry related to setting up and contributing to qualified retirement plans.

Highlights of the Discussion

Because this question deals with specific tax information, business owners and taxpayers should always seek the guidance of a tax professional for advice on their specific situations.  What follows is general information based on IRS guidance and does not represent tax or legal advice, and is for informational purposes only.

With respect to setting up a plan for 2022, the short answer is, yes, provided the S-Corporation has an extension to file its 2022 tax return. Regarding contributions for your client, she could not base plan contributions on her S-Corporation distributions for 2022. She could only receive a contribution if she also had wages as an employee, which were reported on Form W-2, Wage and Tax Statement. (Please refer to Retirement Plan FAQs Regarding Contributions – S Corporation.)

Now for a bit of background. Under the SECURE Act 1.0, for 2020 and later tax years, a business has until its tax filing deadline, plus extensions for a particular tax year, to set up a plan. The plan establishment deadline is tied to the type of business entity and its associated tax filing deadline as illustrated below. [Note: Simplified employee pension (SEP) plans have historically followed the below schedule; and special set-up rules apply for SIMPLE and safe harbor 401(k) plans.]

Business Tax Status IRS Business Tax Filing Form Filing Deadline (and deadline to establish a retirement plan unless an extension to file applies) Extended Filing Deadline (and latest deadline to establish a retirement plan) Starting Point for Compensation or Earned Income for Plan Contributions
S-Corporation (or LLC taxed as S-Corp) Form 1120-S, U.S. Income Tax Return for an S Corporation

 

 March 15 September 15 Form W-2, Wage and Tax Statement

 
Partnership (or LLC taxed as a partnership) Form 1065, U.S. Return of Partnership Income

 

 March 15 September 15 Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. *

See adjustments below
C-Corporation (or LLC taxed as C-Corp) Form 1120, U.S. Corporation Income Tax Return

 

 April 15 October 15 Form W-2, Wage and Tax Statement

 
Sole Proprietorship (or LLC taxed as sole prop) Form 1040, U.S. Individual Income Tax Return with Schedule C

 

 April 15 October 15 Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)

 

Schedule F (Form 1040), Profit or Loss From Farming

See adjustments below

*Not to be confused with Schedule K-1 for Forms 1120s or 1041

The definition of compensation for contribution purposes for unincorporated business owners (i.e., sole proprietors or partners) is unique  [IRC 401(c)(2)(A)]. It takes into consideration earned income or net profits from the business [reported on Schedule C (Form 1040), Schedule F (Form 1040) or Schedule K-1 (Form 1065)], which then must be adjusted for self-employment taxes. The result is the individual’s “adjusted net business income (ANBI).” A retirement plan uses ANBI to allocate plan contributions. Please see the worksheets for self-employed individuals in IRS Publication 560, Retirement Plans for Small Businesses.

And here’s something owner-only businesses can look forward to because of the SECURE Act 2.0 of 2022 (SECURE 2.0). Effective for plan years beginning after December 29, 2022, Section 317 of SECURE 2.0 allows sole proprietors or single member LLCs to make retroactive first year elective deferrals up to the date of the employee’s tax return filing date for the initial year. Currently, this is an issue as explained in a prior Case of the Week Establishing a Solo 401(k) Plan.

Conclusion

Pass-through businesses, including sole proprietorships, partnerships, limited liability companies and S-corporations have several special considerations with respect to setting up and contributing to retirement plans. Tax advisors and other financial professionals with expertise in this area can really add value and set themselves apart from the comp

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How SECURE 2.0 Effects Plan Establishment Deadlines

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“Did SECURE 2.0 affect the deadline for establishing retirement plans?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry related to setting up qualified retirement plans.

Highlights of the Discussion

Two provisions in SECURE 2.0 affect plan establishment deadlines. First, Section 317 of the new law added retroactive first year elective deferrals for sole proprietors and single member LLCs. Effective for plan years beginning after December 29, 2022, sole proprietors and single member LLCs can make employee contributions (pre-tax deferrals, Roth or after-tax contributions) up to the employee’s tax return filing due date, determined without regard to any extensions, for the initial year.

Second, pursuant to Section 332 of SECURE 2.0, employers may replace a savings incentive match plan for employees (SIMPLE) IRA plan mid-year with a SIMPLE 401(k) plan or other 401(k) plan that requires mandatory employer contributions. This provision takes effect for plan years beginning after December 31, 2023. Currently, discontinuing a SIMPLE IRA plan mid-year is problematic because of the exclusive plan rule that requires a SIMPLE IRA be the only retirement plan maintained by the sponsoring employer during the plan year.

And don’t forget “SECURE Act 1.0” (i.e., Setting Every Community Up for Retirement Enhancement Act, 2019) affected plan establishment deadlines, too, by giving businesses more time to set up plans. Under  SECURE 1.0, for 2020 and later tax years, a business has until its tax filing deadline, plus extensions for a particular tax year to set up a plan. The plan establishment deadline is tied to the type of business entity and its associated tax filing deadline as illustrated below.

Tax Status Filing Deadline Extended Deadline
S-Corporation (or LLC taxed as S-Corp) March 15 September 15
Partnership (or LLC taxed as a partnership) March 15 September 15
C-Corporation (or LLC taxed as C-Corp) April 15 October 15
Sole Proprietorship (or LLC taxed as sole prop) April 15 October 15

[Note: Simplified employee pension (SEP) plans have historically followed the above schedule; and special set-up rules apply for safe harbor 401(k) plans.]

Prior to SECURE 1.0, a business that wanted a qualified retirement plan (e.g., 401(k), profit sharing, money purchase pension, defined benefit pension plan, etc.) for a particular tax year had to establish it by the last day of the business’s tax year. For example, a calendar year business had to sign documents to set up the plan by December 31 of the tax year in order to be able to contribute to and take a deduction for contributions.

Conclusion

From a timing perspective, both SECURE 1.0 and 2.0 have made it easier for business owners to set up retirement plans. This is in keeping with Congress’s goal to facilitate plan establishment with the end result being increasing employee coverage by workplace retirement plans.

 

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Remember Plan Tax Credits for 2021

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“Can you remind me of the special tax credits available for small businesses who set up qualified retirement plans, please?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Arizona is representative of a common inquiry related to incentives for setting up retirement plans.

Highlights of Discussion

My pleasure! Small business owners (with fewer than 100 employees) are eligible for additional tax credits for setting-up retirement plans and/or adding an automatic enrollment feature. The credits are available if the owner establishes a 401(k), a SEP or a SIMPLE IRA plan. The business must

• Have had fewer than 100 employees who received at least $5,000 in compensation for the preceding year;
• Have at least one plan participant who was a nonhighly compensated employee; and
• Not have maintained a plan in the past.

The “Startup Credit” is up to $5,000 (a formula applies), available for the first three years the plan is in existence and offers real benefits to owners by freeing up tax dollars for other important business purposes. The credit was greatly improved as part of the Setting Every Community Up for Retirement Enhancement of 2019 Act (SECURE Act), effective January 1, 2020 (increasing the maximum credit from $500 to $5,000). It is intended to encourage owners to establish retirement plans by helping make the plan more affordable during the startup process. In addition, the owners receive full tax deductions for all contributions made to the plan.

On top of that, if an owner elects to add an automatic enrollment feature to the plan, an additional $500 credit (for the first three years) is also available. The automatic enrollment feature calls for newly eligible participants to be enrolled automatically in the plan with a specified default deferral rate. The IRS provides additional details about the startup and auto deferral credits here.

Eligible businesses may claim the credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs.

See the Instructions for Form 8881 for more details.

Conclusion
Tax credits for setting up a plan and having an automatic enrollment feature are great tools to help small businesses defray the initial costs of starting and maintaining a plan. Business owners should discuss the credits with their accountants and advisors to determine if it makes sense for them to establish a plan.

 

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LLC Plan Establishment Deadline

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An advisor asked,

“I’m working with a limited liability company (LLC) that is interested in setting up a retirement plan.  What is the LLC’s deadline for establishing a plan?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry related to setting up qualified retirement plans.

Highlights of the Discussion

Because this question deals with specific tax information, business owners should always seek the guidance of a tax professional for advice on their specific situations.  What follows is general information.

The short answer is it depends on whether the LLC is taxed as a corporation, a partnership or a sole proprietorship. For federal tax purposes, the IRS, typically, treats an LLC as a partnership that must file IRS Form 1065, U.S. Return of Partnership Income for the business.[1] There are exceptions to this rule, so a client should be encouraged to determine the exact nature of the business’s tax structure with a tax advisor. For example, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832, Entity Classification Election and elects to be treated as a corporation. A single-member LLC may choose to be taxed as either a corporation or as a sole proprietorship.

Once the LLC’s tax-filing status is determined, then we turn to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which gave businesses more time to set up plans for a particular tax year. Prior to the SECURE Act, a business that wanted a qualified retirement plan (e.g., 401(k), profit sharing, money purchase pension, defined benefit pension plan, etc.) for a particular tax year had to establish it by the last day of the business’s tax year. For example, a calendar year business had to sign documents to set up the plan by December 31 of the tax year in order to be able to contribute to and take a deduction for contributions.

Under the SECURE Act, for 2020 and later tax years, a business has until its tax filing deadline, plus extensions for a particular tax year to set up a plan. The plan establishment deadline is tied to the type of business entity and its associated tax filing deadline as illustrated below.

Tax Status Standard Filing Deadline Extended Filing Deadline
S-Corporation (or LLC taxed as S-Corp) March 15 September 15
Partnership (or LLC taxed as a partnership) March 15 September 15
C-Corporation (or LLC taxed as C-Corp) April 15 October 15
Sole Proprietorship (or LLC taxed as sole prop) April 15 October 15

[Note: Simplified employee pension (SEP) plans have historically followed the above schedule; and special set-up rules apply for safe harbor 401(k) plans.]

EXAMPLE:  The Limited is an LLC taxed as a partnership. Its standard tax filing deadline is March 15th of the year following the tax year in question. For the 2020 tax year, The Limited timely filed IRS Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.  Consequently, it has an extended tax filing deadline of September 15, 2021, for its 2020 tax year. The owners of The Limited decide in August of 2021 they would like to set up a 401(k)/profit sharing plan for the business for 2020 and later years. The Limited has until September 15, 2021, to execute plan documents to set up the plan, effective for 2020. While The Limited would be able to make a profit sharing contribution on behalf of participants for 2020, participants can only make pre-tax employee salary deferrals and designated Roth contributions prospectively—meaning after they execute valid salary deferral elections for compensation yet to be received in 2021.

Conclusion

For many reasons, including determining the deadline to establish a qualified retirement plan, it is important to ascertain the federal tax-filing status of an LLC business. Under the SECURE Act, for 2020 and later tax years, a business has until its tax filing deadline, plus extensions to set up a plan.

 

[1] LLC Filing as a Corporation or Partnership

 

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Plan Establishment Deadlines

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“Is it too late to establish a qualified retirement plan for 2020?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Arizona is representative of a common inquiry related to setting up qualified retirement plans.

Highlights of the Discussion

As a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, businesses have more time to set up plans for a particular tax year.

Prior to the SECURE Act, a business that wanted a qualified retirement plan (e.g., 401(k), profit sharing, money purchase pension, defined benefit pension plan, etc.) for a particular tax year had to establish it by the last day of the business’s tax year. For example, a calendar year business had to sign documents to set up the plan by December 31 of the tax year in order to be able to contribute to and take a deduction for contributions.

For 2020 and later tax years, a business has more time—until its tax filing deadline, plus extensions for a particular tax year—to set up a plan. Notice the plan establishment deadline is tied to the type of business entity (e.g., sole proprietor, partnership, corporation, etc.) and its associated tax filing deadline as illustrated below. [Note: Simplified employee pension (SEP) plans have historically followed this schedule; and special set-up rules apply for safe harbor 401(k) plans.]

Tax Status Filing Deadline Extended Deadline
S-Corporation (or LLC taxed as S-Corp) March 15 September 15
Partnership (or LLC taxed as a part) March 15 September 15
C-Corporation (or LLC taxed as C-Corp) April 15 October 15
Sole Proprietorship (or LLC taxed as sole prop) April 15 October 15

EXAMPLE:  Doin’ Great, Inc., has an extended tax filing deadline of October 15, 2021, for its 2020 tax year. The owners of Doin’ Great decide in early 2021 they would like to set up a 401(k)/profit sharing plan for the business for 2020. They have until October 15, 2021, to execute plan documents to set up the plan, effective for 2020. While Doin’ Great would be able to make a profit sharing contribution on behalf of participants for 2020, participants can only make pre-tax employee salary deferrals and designated Roth contributions prospectively—meaning after they execute valid salary deferral elections for compensation yet to be received in 2021.

Conclusion

Thanks to the SECURE ACT, for 2020 and later tax years, a business has more time—until its tax filing deadline, plus extensions for a particular tax year—to set up a plan.

 

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