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Adopting ESOP as of 12/31/23


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Client is looking at selling 100% of his S Corp Stock to an ESOP with an adoption date of 12/31/23.

I'm told by cpa that operating Co/plan sponsor is on cash basis.

I've always thought that any retirement plan can be funded and set up and documents drafted for previous year if done by Sept 15th of following year or up until time of filing tax return. 

 

However, given 12/31/23 has passed how does the law allow an adoption date without backdating documents? I note 401ks do this all the time. 

Is there a treasury regulation that allows the back dating of documents to memorialize the sale to the esop? 

Thank you! 

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I note that 401(k)s do not backdate documents all the time.  That is a scary statement.

So, while I cannot address your question, I will address your statements.

Only under very limited circumstances can a plan sponsor retroactively adopt 401(k) provisions, and this is newly available under SECURE 2.0.  Retroactive 401(k)s are permitted beginning with the 2023 plan year for Schedule C and K-1 filers who have no common-law employees.  This is permitted with an unextended filing deadline in 2024.

SECURE 1.0 introduced retroactive adoption for employer contribution only plans effective beginning with the 2020 plan year.  While the funding deadline for retroactively adopted DC plans is the due date of the entity tax return for the applicable plan year, which includes extension, the extended funding deadline for retroactively adopted DB plans is 8 1/2 months following the end of the plan year.

Be careful about quoting calendar dates.  Not all plans/plan sponsors are on a calendar year cycle, and different entity types have different filing deadlines.

Prior to the enactment of the SECURE Acts, all qualified retirement plans were required to be adopted by the last day of the applicable plan year, and 401(k) was a prospective provision within the plan document (and still is, with the exception noted above).  

Retroactive adoption and backdating are very different.  Retroactive adoption is permitted under specified circumstances.  Backdating is always fraud.

 

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What you have "always thought" is not correct. Assuming your S corp has a calendar year fiscal year. You need to have taken action on or before 12/31/2023 to adopt the written ESOP plan documents. The effective date can be retroactive to Jan 1, 2023. Whether the company is on a cash- or accrual-basis has nothing to do with the requirement to adopt on or before fiscal year end.

You have until due date for federal income tax return to make contributions and deduct for fiscal year end 12/31/2023.

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JRN, that was the case prior to the SECURE Act. The plan itself needed to be adopted by 12/31, but contributions could be made until the employer's tax-filing deadline. The original SECURE Act allowed the plan to be adopted by the tax-filing deadline and still accept deductible contributions for the retroactive year.

That said, I agree that backdating the sale of stock is problematic. 

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