September 30, 2019
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 in 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, 2021 to get a 2020 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 in advance of that deadline.
Yes, the SECURE Act of 2019 extended the due date for adopting a Defined Benefit Plan. Previously, an employer had to adopt the Plan by the end of the tax year for which the deduction applied. For example, employers with calendar tax years had to adopt the Defined Benefit Plan by December 31, 2019 to receive a 2019 Plan deduction. However, for tax years beginning after 2019, the adoption due date was extended from the end of the tax year to the due date of the business filing (with extensions).
It is too late for calendar tax years. The provision extending the adoption deadline is effective for tax years beginning after 2019. However, for non-calendar tax years, the Plan could be adopted by the end of the tax year which begins in 2019. For example, if your tax year ends July 31st, you could adopt a Plan by the end of July 2020 to receive a business deduction for the fiscal year beginning August 1, 2019.
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 lay out an appropriate design.
In general, the due date for funding the 2020 Plan year is the date you file your business tax return (with extension) but no later than September 15, 2021 for a calendar tax and Plan year. Thus, there is no longer several months between the deadline for adopting and funding the Defined Benefit Plan.
Yes, the CARES Act provides temporary relief by extending the deadline for all contributions due in 2020. Under the CARES Act, employers can make all contributions due in 2020 as late as January 1, 2021. Note, however, that there are a number of logistical issues for which guidance has not been provided. For example, as of now, the Form 5500 deadline has not been extended for calendar year Plans. Thus, if an employer delays the 2019 contribution from the original due date of September 15, 2020 to the extended deadline of January 1, 2021, the contribution could not be reported on the 2019 Form 5500. As a result, it appears that the Plan’s actuary would need to show a funding deficiency on the Schedule SB. Additionally, as of now, it seems the contribution could not be deductible for 2019. It could only be deducted for 2020.
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 roughly $60,000 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.