“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.

[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.