SECURE 2.0: Retroactive Plan Adoption Feb 10

Do you have a client whose business has income from 2022, who could use a tax deduction, but they have no retirement plan?  If they haven’t filed their business tax return yet, no problem.

Beginning with the first SECURE Act, an employer could adopt a plan after the end of its taxable year and have the plan treated as being in effect in the prior year. For example, Company AP, an S Corporation with a fiscal year end of 12/31/2022, having not filed an extension, could adopt a profit-sharing plan by March 15, 2023.  If they filed an extension for their Corporate tax return, they would not have to adopt the profit sharing plan until September 15.

But what about a 401(k) plan and elective deferrals?  The first SECURE Act did not change the timing rules for 401(k) deferrals. Under the law before and after that Act, a company must adopt a plan before 401(k) election can be made.  So, while a company can adopt a plan after year end for the prior year, it could not be a 401(k).

But wait! Here comes SECURE 2.0 to make a slight change to the timing rules for elective deferrals with retroactive plans.  It allows for retroactive first year elective deferrals, but only for Sole Proprietors with no employees.  Any elective deferral made before the tax return due date (without regard to extensions) may be treated as having been made before the end of the plan’s first year. This applies only to the first plan year in which the 401(k) plan is established.  The provision is effective for plan years beginning after December 29, 2022, so really for plan years beginning in 2023 and forward.