If you have a cash balance plan, you are required to satisfy the minimum funding requirements of the plan each year. But determining the funding amount can be complicated and requires the help of an actuary. Then the contribution needs to be made by the cash balance plan funding deadline.
As a general rule, plan contributions are applied to the year in which they are made. However, you are able to apply them to the prior tax year if all of the following requirements are met:
- The contributions are made by the due date of your income tax return for the prior year (plus any applicable extensions);
- The plan document was established by the end of the prior year; and
- As a matter of policy, the plan treats the contributions as if they were received on the last day of the prior year.
In addition to the above requirements, you must do either of the following: (1) provide a written statement to the plan administrator or the trustee that the contribution will apply to the prior year; or (2) deduct the contributions on the applicable income tax return for the prior year.
Cash Balance Plan Funding Deadline
The funding deadline is establish to help self-employed business owners get tax-deferred contributions into the plan. Often we see that business owners have tight cash requirements. So in many situations they get behind on their quarterly tax payments and must make a payment by April 15th to avoid additional penalties and interest.
The problem is that they often don’t have a lot left over to fund the cash balance plan. But of course they have until the extension deadline to make a payment. So tax payments can be made first and the retirement contribution funded later. It is truly a win-win situation and one of the best cash balance plan rules.
Making sense of the cash balance plan funding deadline
- Determine if you will apply cash basis accounting to your contribution. The general rule is that you will deduct the contribution in the year paid. However, you can also elect to deduct the amount for the prior year.
- Know your business filing deadline. S-corp and partnership deadlines are March 15th. The personal tax deadline is April 15th for sole proprietors. C-Corps can have a fiscal year-ends.
- Make sure extensions are filed. Remember that you can file an extension and then fund the plan just before the extension deadline. This is often overlooked. But make sure the extension is filed because if not the deadline remains the return due date.
- Coordinate with accountant. Many accountants and CPAs don’t understand how the plans work and what the deadlines are. If unsure, make sure you communicate with the TPA and tax professional.
- File tax return. The last part is the easy part. Just make sure that you get the tax return filed before the deadline.
So don’t get caught funding your retirement after the deadline. The deduction will be disallowed and you can get stuck with interest and penalties. Your third-party administrator is there to help along with your tax professional. Don’t be afraid to ask for help.