This third installment of summaries of some of the key provisions of the Setting Every Community Up for Retirement Enhancement Act of 2020 (“the SECURE Act”) discusses an extension of the date for adopting a new employer retirement plan.
Under prior law, an employer that wanted to deduct a contribution to a tax-qualified retirement plan for a tax year had to adopt the plan by the last day of the year, but had up until the due date of the tax return for the year, including extensions, to make the contribution.
Effective for tax years beginning after December 31, 2019, the SECURE Act allows an employer to adopt a tax-qualified retirement plan for a tax year up until the due date, including extensions, of the tax return for the year.
This change, which is intended to provide greater flexibility to small employers, comes with a couple of caveats:
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- The Internal Revenue Service’s (“IRS”) historical position has been that a plan is not “adopted” until a document, which includes all material terms (eligibility to participate, vesting requirements, distribution options, etc.), has been signed, and the plan has been communicated to employees. As recently as December 13, 2019, the IRS’s Office of Chief Counsel issued a memorandum cautioning that employers must be able to produce a signed plan document to an examining IRS agent and that if a signed plan document is not produced, “it is appropriate for IRS exam agents . . . to pursue plan disqualification.”[1]
- The Act does not alter the requirement that certain plan provisions, most notably provisions for 401(k) elective contributions, must be in place during the plan year and cannot be adopted after the end of the year. It also does not modify the IRS’s rules that preclude changing many plan provisions—such as the formula for allocating an employer profit sharing contribution—after the point in the year in which a right to receive an allocation of the contribution has been earned (for example, after the completion of 1000 hours of service).
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The change made by the Act giving more time to adopt a new employer retirement plan is in many ways similar to the timing rule applicable to setting up an individual retirement account (“IRA”). However, because IRAs do not have the plan document and employee communication steps applicable to employer retirement plans, companies will need to be mindful that the new deadline does not change the fact that putting a plan into effect will in many instances require a substantial amount of advance planning. That said, one group of likely beneficiaries of the extended plan adoption deadline are consultants who do not have employees; they now readily have the ability to wait beyond the end of the year to decide whether to adopt a tax-qualified plan by filling out and signing a prototype plan adoption agreement and make a plan contribution to shelter their income for the year.
[1] One of the issues not addressed by the memorandum is how long an employer must retain the signed document or, more likely to be the case, how many earlier versions of a plan must an employer retain.