Has your CPA been telling you for years that you need to set up a retirement plan but you’ve been so busy with the business that you don’t remember until you get their email asking for your financial reporting? And this year was the year you were going to do it, right? But now the year has closed and you’re going to have to hear the same speech again unless you open a SEP.
Or do you?!
It turns out that the original SECURE Act, passed at the end of 2019 (but barely pre-COVID, so don’t feel bad if you missed the memo), allowed the same rules which allowed a SEP to be established retroactively to extend to 401(k)s as well. Well, technically, only the profit sharing component of the plan, but still! While not adding much by way of additional deduction opportunity compared to a SEP, all of the other benefits of a 401(k) remain: Requiring a minimum number of hours worked for employee eligibility to share in the contribution and/or generally for the plan, subjecting the contribution to a vesting schedule (requires a minimum tenure for an employee to earn the benefit), and limiting employee access to the contribution are a few which come to mind.
Besides, if you actually were going to start that 401(k) before the year got away from you, this way you don’t have to go through any wasted effort claiming that deduction and starting your dream plan! Simply create the 401(k) plan retroactively effective last year but include a special effective date for salary deferral (i.e., 401(k)) contributions to let the IRS know that none of those were made before the document was in place, thereby making them compliant. Want a safe harbor? Good! Include that, too. What you have now is the 401(k) you wanted and you’re able to make that deductible contribution your CPA has been looking for all these years!
In order to take the deduction, you have until the due date of your business tax return (including extension) to put the plan in place and fund it. I say give yourself a month in advance to pull this off; it’s not the most complicated thing to do but it also doesn’t happen overnight and if you’re looking for providers to stop what they’re doing to help you out with your procrastination issues, that effort in and of itself could take a few weeks!
Are the contribution limits of a 401(k) plan too low for you? It turns out the same rules apply for pension plans (i.e., defined benefit or cash balance plans), so if those programs pencil for you then get after it!
Is your go-to resource telling you it’s too late for 2023 or not even broaching the option in conversations with you? Some providers simply turn off the option because it’s a bit of a hassle, so don’t give up before contacting Benefit Resources to see if we can help! Not all ideas are fantastic, but we are pros at separating good ideas from bad ones and we’re happy to help you make an educated decision when it comes to this sort of thing.
Happy (assumed) New Year!