As long as a qualified retirement plan is established by the end of an employer’s tax year, contributions to the plan may be deducted in that tax year, even if not actually paid until the following year. The only requirement is that contributions be made before the due date of the sponsor’s tax return, including extensions. For example, if a corporation set up a plan by December 31, 2018, it would have until September 16, 2019, to make its contribution to the plan, assuming it filed for an extension. (September 15, 2019, is a Sunday, so the tax return is due the following Monday.)
It is important to note that a tax return can reflect only one annual contribution, even if larger amounts are actually paid to the plan during a tax year. This could happen when an employer makes its contribution for the first plan year in September and also makes its contribution for the second plan year in December. This is an issue particularly relevant to fully-insured 412(e)(3) plans, which are usually established with a current effective date.
To illustrate, assume that a 412(e)(3) plan has an effective date of September 1, 2018. Also assume that the employer is making quarterly contributions to the plan. If the employer files its tax return on March 15, 2019, it will have made three quarterly payments before the return is filed, and it can deduct those contributions on its 2018 return. If the employer makes its final quarterly contribution on June 1, 2019, but also makes the entire second year contribution on October 1, 2019, it cannot deduct the entire amount paid on its 2019 tax return. The deduction is limited to the amount of one annual contribution, and the employer could not deduct the balance of the total payments until the following tax year.
Late winter and early spring is a great time to discuss a retirement plan with your clients. They are in the process of preparing their 2018 tax returns and may be surprised by how much they have already paid and how much more they may owe. A retirement plan not only helps your clients secure their retirement, but contributions to the plan may be deductible. In addition, adopting a plan at the beginning of a year gives your clients the ability to spread out their contributions over the entire year. To learn more about our retirement planning process, contact RMC today at 239.298.8210 or rmc@rmcgp.com.
