Business use a variety of retirement plans to both mitigate their business taxes, and personal taxes if they are equity holders in a flow through business. However, in order to take a deduction in a particular year, the plan had to be in place by the end of that year. Businesses had up to the filing date of the businesses tax return with extensions in the following year to fund the plan.
If a business had not adopted a qualified retirement plan by year-end, the only alternative to obtain a tax deduction was to adopt a “simplified employee pension plan,” or SEP, in the following year by the filing date of their income tax return with extensions. However, SEPs are generally inferior to qualified retirement plans for several reasons, including that a SEP cannot exclude part-time employees, all SEP participants must receive the exact same contribution percentage of their compensation that the owner receives, and a SEP cannot have 401(k) elective deferral provisions.
The SECURE Act changes these timing rules beginning with 2020. Now, your clients can adopt a new qualified retirement plan up to their income tax filing deadline (including extensions) for the prior year. This means that there is still time in 2021 to adopt a qualified retirement plan effective January 1, 2020, and make a contribution that’s tax deductible for 2020.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.