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. 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.
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.