Issue Snapshot — Deductibility of employer contributions to a 401(k) plan made after the end of the tax year

This was just released thru BL today.

Issue Snapshot — Deductibility of employer contributions to a 401(k) plan made after the end of the tax year | Internal Revenue Service (irs.gov)

Not a 401k expert.

Example 5 is an interesting one, is it correct though?

SECURE 2.0 section 317 states for plan years after 2022.

What am I missing here?

Thanks

Interesting. My understanding was that this would only be allowed for a plan adopted in 2024, retroactive to 2023, and do a retroactive deferral election for 2023. I didn't think you could adopt the retroactive deferral election retroactive to 2022.

I think it may be wrong, but I hesitate to say that with any certainty without some research.

I am curious, no one is taking a shot at this.

Like Belgarath, I had thought that 2023 was the first plan year for which retroactive 401(k) elections were allowed.  It appears, however, that the IRS interprets the effective date provision as requiring only that the election be made in a plan year beginning in 2023 or later.  I'm certainly happen to accept the IRS's view in this instance.

Ditto! Although at this point, we have no actual situations for plans under contract where this would apply...

Y'know, I'm still not quite certain I fully understand the example. I'm probably reading things incorrectly, but 317 of SECURE 2.0 seems to me to require the deferrals themselves to be made no later than the tax return date NOT including extensions. The IRS seems to be saying (and it's fine with me) that as long as the deferrals themselves were made in February (i.e. prior to the unextended due date for tax filing) that the CODA can be adopted retroactively by the due date INCLUDING extensions. Is that how you read this?

Example 5

Eagle is a self-employed individual's sole proprietorship trade name. Eagle reports its income on Schedule C of the individual's Form 1040. Eagle decides it wants to add a 401(k) feature to its pre-existing profit-sharing plan on February 21, 2023, by executing a new adoption agreement with a CODA election box checked. Eagle's owner can designate a portion of her 2022 self-employed income as an elective deferral into the plan because, under amendments to IRC section 401(b)(2) made by the SECURE 2.0 Act, the CODA can be adopted retroactively as long as it is executed before the due date of the employer's tax return, including extensions.

Interesting, there is a low stating otherwise.

I do not have any of these nor will accept IRS' point of view but that's me. I did set up a 2022 DC plan for a sole-prop recently and 401k is effective in 2023.

I will also check this out with an ERISA attorney and see they will say.

Correction above "there is a law stating otherwise"

Belgarath, I read it the same way you do but it what IRS says contradicts section 317. I do not read it any other way. I do not even accept as an interpretation.

They may come up with an additional guidance.

I am just making noise here and see if I am actually misreading all.

Belgarath --

Section 317 deals only with when the election can be made.  The first SECURE Act's version of section 401(b)(2) allows the retroactive adoption of a plan at any time up to the extended due date of the employer's tax return.

Jakyasar --

Section 317's effective date provision reads, "The amendment made by this section shall apply to plan years beginning after the date of the enactment of this Act."  Someone at the IRS reads that to mean that an election made in a plan year beginning after the date of enactment (December 29, 2022) can affect a plan year that began before the date of enactment.  That doesn't strike me as completely irrational, even though I was telling people until yesterday that it was wrong.

Tom

Thank you for your input.

If I understood correctly, for 2022, could still set up a new plan in 2023 but the plan year had to start on or after 12/29/2022 for 2022 deduction.

This was discussed on this platform before but I am not remembering the exact details (sorry do not have time to check this week). I think it may have been for a short plan year.

Here’s an earlier BenefitsLink conversation (some of it before we knew SECURE 2022’s enactment date).

https://benefitslink.com/boards/index.php?/topic/70080-anyone-know-when-president-signing-consolidated-appropriations-act-2023-including-secure-20/

Unlike the example 5 mentioned above, some of us imagined a plan year that began December 30 and ended December 31.

Recall that a plan and its § 401(k) arrangement might provide that “a sole proprietor’s compensation is deemed currently available on the last day of the individual’s taxable year.” 26 C.F.R. § 1.401(k)-1(a)(6)(iii) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(a)(6)(iii).

Even if the IRS’s example 5 interpretation is incorrect, is there any harm in following it for a sole proprietor who is her business’s only employee?

In Example 5, the Profit-Sharing Plan is pre-existing.  I doesn't specify when it came into existence.  The 401(k) "feature" is added in 2023 (possibly up to 10/16/23?), effective in 2022.  As Peter points out, the sole-proprietor's compensations is deemed currently available on the last day of the individual’s taxable year.  This is not the case for a rank-and-file employee.  How would you run non-discrimination tests if there were employees in addition to the sole-proprietor?

But the law says for plan years beginning after 12/2/2022 and I do not believe it makes a difference if new or amended plan.

The sole prop does not have a deferral agreement signed by 12/31/2022.

Just playing the bad TPA here (cop?)

16 hours ago, imchipbrown said:

In Example 5, the Profit-Sharing Plan is pre-existing.  I doesn't specify when it came into existence.  The 401(k) "feature" is added in 2023 (possibly up to 10/16/23?), effective in 2022.  As Peter points out, the sole-proprietor's compensations is deemed currently available on the last day of the individual’s taxable year.  This is not the case for a rank-and-file employee.  How would you run non-discrimination tests if there were employees in addition to the sole-proprietor?

Maybe I'm misunderstanding your question, but the only situation where the retroactive deferral is allowed is for a sole prop with no other employees - so nondiscrimination wouldn't be an issue.