Section 201 of the Setting Every Community Up for Retirement Enhancement (SECURE – our government will do almost anything for an acronym) permits an employer to adopt a retirement plan after the close of the employer’s tax year. This provision applies to plans adopted after December 31, 2019. This represents a major change in the law. Previously, retirement plans needed to be adopted by the last day of the year. Indeed, many savvy accountants and financial advisors have already taken advantage of this change in the law and have recommended to their clients that they implement (and can still implement) a retirement plan now, legally retroactive to the 2020 tax year. As long as the client’s tax return (inclusive of extensions) has not been filed, it is still possible to implement a retirement plan for the 2020 plan year.
However, it was unclear whether and how those employers should complete Form 5500 for the 2020 plan year.
In the IRS’s August 6th issue of Employee Plan News (yes, there really is such a publication) the IRS pleasantly surprised all of us in the retirement plan community by saying: “If an employer adopts a plan during the employer’s 2021 taxable year (but not later than the due date, including extensions, for filing the employer’s 2020 tax return) and elects to treat the plan as having been adopted as of the last day of the employer’s 2020 taxable year, then the plan sponsor will not be required to file a Form 5500 with respect to the plan for the plan year that begins during the employer’s 2020 taxable year (references to Form 5500 include the Form 5500-SF and Form 5500-EZ unless otherwise noted).
Instead, the first Form 5500 required to be filed with respect to the plan will be the 2021 Form 5500. However, the plan sponsor will be required to check a box on the 2021 Form 5500 indicating that the employer elects to treat the plan as retroactively adopted as of the last day of the employer’s 2020 taxable year.
The instructions for the 2021 Form 5500 will further explain the filing requirements for plans adopted retroactively.
IMPORTANT NOTE – Sponsors of defined benefit and cash balance plans adopted after December 31, 2020 can wait until the 2021 plan year to file Form 5500. For calendar year plans, 2021’s Form 5500 will not be due (without extension) until July 31, 2022. However, what has not changed is the plan’s minimum funding deadline. So for defined benefit or cash balance pension plans, adopted in 2021 retroactive to 2020, the minimum funding deadline is still 8 ½ months after the end of the plan year. This means that for 2020 calendar year plans, no matter when they were adopted, the “drop dead date” to finish paying the Minimum Required Contribution (MRC) is September 15, 2021. What about a new retirement plan that was adopted before the end of 2020? To me, this relief only applies to plans adopted after December 31, 2020, retroactive to the last day of 2020. For those plans adopted before the end of the year, you should expect to file Form 5500 by July 31, 2021 or by October 15, 2021 if the Form 5500 was placed on extension.
Based upon the August 6, 2021 article in ASPPA’s Practice Management Newsletter as well as the August 6, 2021 Employee Plan News.