Defined Benefit Plans have several deadlines. In order to receive favorable tax treatment and avoid penalties, you must meet these due dates in a timely fashion.
What deadlines must you be aware of with a Defined Benefit Plan?
We discuss these deadlines below in more detail. This article also answers how a Defined Benefit Plan may help you and what a Cash Balance Plan is.
You must set up the Defined Benefit Plan by the time you file your business return (with extension) for the applicable tax year. For example, if you have a calendar tax year, you could adopt the Defined Benefit Plan as late as September 15, 2024 to get a 2023 deduction. However, note that the Defined Benefit account also must be set up and funded by that date. Thus, for practical purposes, you may need to adopt the Plan well in advance of that deadline.
Notwithstanding, it may be advantageous to adopt the Defined Benefit Plan before the end of the applicable tax year. For example, in conjunction with 2023 year-end tax planning, many businesses adopt their Defined Benefit Plan before December 31, 2023. In fact, this timing can be essential for an S Corporation when the owner’s W-2 needs to be adjusted to achieve a specific contribution target. Of course, after the end of the year, it may be too late to adjust the applicable W-2, and the opportunity to achieve the desired retirement contribution may be lost.
As long as you adopt and fund the Defined Benefit Plan before filing your 2023 business return, you may deduct the amount you fund for the 2023 tax year. However, you should begin the process of setting up the Plan 4 to 6 weeks before you file your return.
Again, as mentioned above, an adoption by the end of the applicable tax year may be advantageous (i.e., for a 2023 deduction, it may make sense to set up the Defined Benefit Plan by December 31, 2023 for a calendar tax year business).
You must sign the Defined Benefit Plan document by the deadline. In order to meet the due date, your actuary will discuss with you what your objectives are in starting the Plan to ensure the provisions layout an appropriate design.
In general, the due date for funding the 2023 Plan year is the date you file your business tax return (with extension) but no later than September 15, 2024 for a calendar tax and Plan year.
Your Defined Benefit Plan actuary and/or TPA should make you aware of the deadlines for all applicable government filings.
You can deduct more in a Defined Benefit Plan than other retirement arrangements. For example, the contribution limits for SEPs and 401(k) Profit Sharing Plans are $66,000 and $73,500, respectively, per year per person. If you want to deduct more than that, a Defined Benefit Plan may be your only option.
A Cash Balance Plan is a type of Defined Benefit Plan, and the deadlines are the same. The difference is a Cash Balance Plan is an account-based plan and a Traditional Defined Benefit Plan expresses the benefit as an amount payable for life at retirement age. Both types of Plans may provide a single sum distribution in lieu of an ongoing monthly benefit. In fact, in smaller Plans, nearly all participants elect the lump sum payment at termination.
Yes, you can have both a Defined Benefit Plan and a 401(k) Plan. Having both allows you to further increase your deductible limit. However, you must be aware of the combined deductible limit. Your TPA or actuary will assist you with this.
That depends on your age, earned income, business profitability and whether your spouse is an employee in the business. The Defined Benefit Calculator provides you an estimated deduction based on these factors.
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