Deadline to Set Up a Defined Benefit Plan [+ Funding for 2023]

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Do you know the deadline to set up a defined benefit plan? Can you set up a defined benefit plan after year-end? What is the defined benefit plan funding deadline?

In this post, we will discuss the important deadline. But we will also cover some of the set up initiatives you must have in place in order to properly fund and establish the plan.

Set Up DeadlineFunding Deadline
Up to the date tax return is filedDOL & IRS require by September 15th
Will also include extensionsUp to the date tax return is filed (latest Sept 15th)
Must have time to open accountCan be made monthly or quarterly
Rule change allows late set upMust be accrued on tax return

We normally recommend that clients have a plan established 30 days before funding. This will give them ample time to get the custodial account opened and funded.

defined benefit plan funding deadline

Deadline to set up a defined benefit plan

Under the old rules you were required to have the plan set up by the end of the plan year. This is normally December 31st. But thanks to the SECURE Act, things have changed.

The SECURE Act essentially extended the date a plan can be set up. For you to take advantage of a plan, you must establish a plan by the date you file your taxes, including extensions.

For an S corporation that follows a calendar year, meaning you close your books by December 31st, you have until March 15th to set up and fund the plan. A six-month extension can be added for you to file by September 15th.

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But remember that the plan also has to be funded by that deadline. So the set up should actually occur well in advance of that date. You must fund the plan before filing your tax returns.

How a defined benefit plan works

Why is defined benefit plan such a great retirement strategy? Simply stated, it allows the participant to contribute a substantial amount into retirement and take a significant tax deduction. Let’s look at an basic example below.

Assume a 54 year old physician who earns $500,000 a year. Let’s also assume, that the physician is the only eligible full time employee. Depending on compensation, the doctor could contribute approximately $200,000 into a defined benefit plan.

If the plan is combined with a solo 401k that has a profit sharing component, the doctor can contribute an additional $37,000. This is a total of $262,000. Assuming a tax rate of at least 40% (federal and state), this is a tax savings of $104,000. Not too bad.

Who should consider a defined benefit plan?

The ideal candidate for a defined benefit plan is a business owner who is age 40 or older. A plan sponsor with no other employees or only young employees will have the lowest non-owner costs.

defined benefit plan set up

The plan sponsor must be aware that the contributions are generally mandatory and feel that future cash flow will support the continuation of the plan. The risks of inflated costs due to market fluctuations and/or the hire of older employees must be anticipated.

Add-on 401(k)

Plan sponsors who maintain both a defined benefit and a defined contribution plan have a maximum deduction limit of 6% of eligible payroll. Under EGTRRA, employee contributions towards a 401(k) plan do not count towards this limit.

The result of this change is that employers with defined benefit plans can add on a 401(k) plan that allows for participant deferrals only (no employer contributions).

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For the plan sponsor without non-highly compensated employees, this would mean an additional contribution of $22,500 if under age 50 or $30,000 if age 50 or older. If there are common-law employees, the deferral by highly compensated employees would be limited based on the average deferral by those employees.

The funding deadline is established to help self-employed business owners get tax-deferred contributions into the plan. Often we see that business owners have tight cash requirements. 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 much left over to fund the cash balance plan. But they have until the extension deadline to make a payment. Tax payments can be made first and the retirement contribution funded later. It is a win-win situation and one of the best cash balance plan rules.

Can you set up a defined benefit plan after year-end?

Thanks to recent tax reform, you can set up a defined benefit plan after year-end. In fact, the deadline is the due date of the tax return, which includes extension periods.

However, the last date you can set up the plan and fund it is September 15th. This is even true if you were a sole proprietor with an extended tax return due date of October 15th.

Even though you have plenty of time after year end to set up and fund the plan, you want to ensure you have adequate time to set up your investment account and fund the plan. It typically takes a couple of weeks to set up a defined benefit plan, and then it will take a couple of weeks to set up the investment custodian account.

Lastly, you need to fund the plan for the allowable contribution and ensure this information gets to your accountant ASAP so you don’t miss the final funding deadline. Bottom line, there are plenty of items to coordinate, so don’t wait till the last minute to set up your plan. But you definitely can set up a defined benefit plan after year-end.

How to set up a defined benefit plan before the deadline

The 6 steps to set up or establish a defined benefit plan:

  1. Know your business filing deadline

    S-Corp and partnership deadlines are March 15th. The personal tax deadline is April 15th for sole proprietors. You must give yourself time to set up the plan and still file your tax return. You should allow at least 30 days to establish the investment or custodian account and to get it funded.

  2. Make sure extensions are filed (if necessary)

    Remember that you can file an extension and fund the plan before the extension deadline. This is often overlooked. But make sure the extension is filed because if not, the deadline remains the tax return due date. But the IRS and DOL still require funding by September 15th even if you are a sole proprietor.

  3. Find a plan TPA.

    The TPA will draft the final plan. But they will also tailor the plan to work best for you and your company. In order for the plan to be legal, you will have to sign all plan documents and company resolutions. The documents can take time to review.

  4. 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. The great news is that you have up until you file your tax return, including extensions, to make your contribution.

  5. Coordinate with accountant

    Many accountants and CPAs don’t understand how the plans work and the deadlines to establish. If unsure, make sure you communicate with the TPA and tax professional. Meet with your CPA and/or financial advisor a couple months before the end of the year to make sure a plan is right for you.

  6. File tax return

    The last part is the easy part. Just make sure that you get the tax return filed before the deadline. Surprisingly, we have seen many clients miss the filing deadline and not communicate the plan details or funding to their CPA.

Final thoughts on the funding deadline

Considering a defined benefit plan? You are definitely on the right track. Huge tax savings, high contribution limits and excellent employee benefits are some of the advantages under a defined benefit plan. But don’t miss the deadline to set up a defined benefit plan.

Thanks to the SECURE Act you now have until you file a tax return to get a plan set up (including tax extensions). You need to be running defined benefit plan illustrations, multiple scenarios just to find the best plan that will fit well with the company.

Don’t get caught funding your plan 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.

Make sure you have communicated your plan intentions to all employees by the end of this month in order to have everyone on board. It is never too early, you better start now!

Paul Sundin

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