Retroactive adoption of 401(a) Governmental Plan

[Pam S.]

A potential client approached us to establish a 6/30 year end 401(a) plan.  They are a governmental entity, so it will be a governmental plan.  It is September 13, 2023, and the client is expecting to establish the plan effective 7/1/2022, because they've already deposited a contribution for the 6/30/2023 plan year end to a Trust.  Can we prepare a plan document with a retroactive effective date at this time?  If not, what should the client do with the money that has already been deposited to a Trust?  I'm attempting to gather additional information from the client (i.e. documentation for the Trust; any documentation regarding the plan provisions).  Any guidance is appreciated.

 

[Bri]

Did they actually establish the trust, or rather just create an account?  (Just wondering, since often trust agreements get paired with the plan document.)

[Tom Veal]

This would be an easy question for a nongovernmental plan, since IRC §401(b)(2) allows an employer to treat a plan as having been adopted on the last day of a taxable year if it is adopted by the due date, including extensions, of the employer's income tax return for that year.  A plan adopted on the last day of a year may be effective as of the first day of the year; that is pretty routine.

Your client, however, has no tax return filing obligation, so section 401(b)(2) isn't literally applicable.  Still, it's hard to believe that the IRS wouldn't be equally indulgent toward governmental plans.  It is probably safe to prepare the document and submit it for a determination letter.  Also, there is very little downside.  If the IRS insists that the plan can't be effective until July 1, 2023, there will be no dire consequences.  Your client won't lose any tax deductions, and the plan, being an instrumentality of government, won't incur any tax liability.

[Pam S.]

Thank you, Bri.  I believe they just created an account at a Bank.  We're checking to see how it was set up (registration).

Tom - thank you as well.