Can I set up a DB plan for 2020 for sole-prop - off calendar plan

[Jakyasar]

Hi

A sole-proprietor wants to set up a db plan for 2020.

I can technically set up a db plan now starting 2/1/2020 with PY ending 1/31/2021 where minimum funding is due 10/15/2021. Plan document would read income used for the calendar year ending within the plan year.

What is your thought on this?

Thank you

[Bri]

It's the company's tax year that governs the timing rule.

[Jakyasar]

I am aware of that, my question was about off calendar plan year for a calendar tax entity. Just wanted to see about others' thoughts on this.

[Bri]

Oh, so you get 2020's entire income included in the benefit limit calculation, since it's too late to deduct anything for that year.  And then you go forward with the 1/31/2021's funding amount getting deducted on the 2021 return?  I suppose if you're using calendar-year-within-plan-year compensation, why go Feb. to Jan. and cut it close now, when you could probably get the same basic result with more than just the one month difference between the year-ends...

 

[Bill Presson]

Does SECURE allow you to use the business extension for starting a new plan if the business tax year and the plan tax year don't match?

[Lou S.]

22 minutes ago, Bill Presson said:

Does SECURE allow you to use the business extension for starting a new plan if the business tax year and the plan tax year don't match?

Bill I think you hit the nail on the head head and I'd love to know the answer.

Because if the answer is yes than the answer to Jakysar's question is yes, but if the answer is no then the answer to Jakysar's question is also no. It's not something I thought about previously when considering SECURE.

That is if you can do it then the the funding deadline and deductible deadline for the for his 1/31/2021 PYE would both be 10/15/2021 assuming the 2020 SP tax return is on extension and he elects to deduct the contribution in the fiscal year for the plan year that begins in the the fiscal year. At least I think I have that right, if I shifted something I apologize.

[Jakyasar]

Lou and Bill, right on the point. I did not see anything to the contrary in SECURE but may have missed.

Bri, if I understood what you said correctly i.e. deductible for 2021 tax, as sole-props tax due date is 10/15 and so is the minimum funding deadline if the 2020 plan year starts on 2/1/2020 and ends on 1/31/2021.

[Jakyasar]

I went back and reread section 201 of the SECURE act as well as House Committee on Ways and Means and I see nothing saying that plan and tax year have to be the same.

I hope others will chime in as I suddenly have a few of these.

Thanks

[C. B. Zeller]

The exact text of IRC 401(b)(2), as added by the SECURE Act, is

Quote

If an employer adopts a stock bonus, pension, profit-sharing, or annuity plan after the close of a taxable year but before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the taxable year.

If you have a calendar tax year, and a 10/15 tax filing deadline, then you have up until 10/15/2021 to adopt any plan that you could have adopted on 12/31/2020, this rule aside. Could you have adopted a 2/1/2020-1/31/2021 plan year on 12/31/2020? Sure. Is it a good idea? No comment.

Jakyasar, have you asked your actuary about this? What do they think? I know there are some actuaries out there who read the changes made by PPA to have the effect of making the rule under 1.404(a)-14(c) obsolete. Under that reading, the deduction limit is determined for the tax year which contains the end of the plan year only. See 404(o)(1)(A).

[Jakyasar]

C.B., thank you for your comments.

I agree with you that there are different opinions out there. Mine is ok to do so as I have no issues with this approach. It is the SECURE act that bothers me i.e. the plan document was not signed by 12/31/2020.

After reading the EOB - ERISA Online Book as well (I am not sure if I can quote the section/language here legally), it mentions that IRS's opinion was, 1.404(a)-14(c) will continue to apply (does not say obsolete - states that the language is not significantly different that pre-2008 rules). There is an example showing that 3 different options can be used for my scenario. Also references to the famous Notice 2007-28. 

EOB Chapter XVI, Part C is the section I am referring to especially 7.a.1. If I am allowed to provide that section, I will do so but need administrator's permission first.

At the end of the day, I will discuss in detail with the CPA and the client and explain to them about the law and the "not so clear" interpretation and let them decide.