In the timeless children’s book Are You My Mother?, a baby bird goes in search of his mother. When a mother bird’s egg starts to jump, she hurries off to make sure she has something for her little one to eat. But as soon as she’s gone, out pops the baby bird. He immediately sets off to find his mother, but not knowing what she looks like makes it a challenge. Of course, everything turns out fine in the end. Similarly, with the passage of the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Congress and the IRS may have many plan sponsors and their advisors asking, “Where‘s my deduction?”
September 15th is an important day for pension actuaries, Third Party Administrators (TPAs) and plan sponsors of defined benefit and cash balance pension plans. This date, 8 ½ months after December 31st, is the day that calendar year defined benefit and cash balance plans must make their Minimum Required Contribution (MRC). Failure to make the MRC carries with it a 10% excise tax and additional tax form filings to various agencies alerting them that the MRC was not made. At the end of the day, the MRC is still required to be contributed to the plan.
In the CARES Act, Congress did not extend the due date for filing the 2019 form 5500, nor has it extended the due date for business entities to file their 2019 income tax returns For calendar year plans, Form 5500 was still due to be filed by July 31, 2020 (seven months after the close of the plan year). Using various extensions provided by the IRS, that filing date can be extended to October 15, 2020. The CARES Act extended the due date for 2019’s MRC until January 1, 2021. But if you do choose to take advantage of this extension, do you deduct the extended payment on 2019’s income tax return or on 2020’s return? And is a there potential tax planning opportunity for doing it one way or the other?
There a few different possibilities:
- The simplest situation is that you have already been advised of your pension plan’s 2019 minimum and recommended contribution by your actuarial or TPA firm. You deposit the contribution prior to September 15, 2020 or October 15th (depending on the type of entity sponsoring the plan) and assuming the tax return (or returns) is on extension, that amount is deducted on the appropriate 2019 tax return.
- Alternatively, you were advised of the 2019 MRC but your current cash flow makes depositing the contribution by September 15th or October 15th problematic. Perhaps you are simply looking to preserve cash. In that case, you can defer making the 2019 MRC as late as January 1, 2021. If the MRC is paid after September 15th, as a result of the CARES Act, the 10% excise tax is waived. It is my opinion though, that if the subject contribution is deposited after the filing of the plan sponsor’s 2019 tax return with extensions then the deduction for the contribution should be taken on the plan sponsor’s 2020 income tax return (and not 2019).
- What if 2019 was a really good year and as a result of COVID-19, 2020 looks to be somewhat challenging? If you wanted to maximize the 2019 contribution and deduction and perhaps soften the required contribution for 2020 is there a way to do that? There is a technique that will probably work. To use this technique you would need to do two things:
- You would need to reach out to your actuarial firm or your TPA firm and request that they provide you with the maximum contribution to the plan. The true maximum contribution is an amount that you may have never seen before and an amount that is probably much higher than you would want to deposit into the plan. But you do not have to deposit the entire maximum contribution. You can choose to contribute an amount that is higher than the recommended contribution but still lower than the maximum contribution. If you do use this technique, you need to be extremely careful about not overfunding the plan. Again, consult with your pension consultant before making a contribution that is higher than 2019’s recommended contribution.
- To be deductible for 2019, you would need to deposit the contribution on before either September 15, 2020 or October 15, 2020. This would also serve to reduce the MRC for 2020.
These are complicated times and your ability to navigate our currently troubled waters means that you need to make sure that you surround yourself with a solid team of advisors. They may provide you with options that you were not previously aware of.