Late Adoption Lessons, Part 2

Thanks to the SECURE Act, December 31 is no longer
the deadline to adopt a retirement plan for the current plan year. Now, we can adopt plans retroactively up until the due date of

the client’s business return including extensions.

In addition, no new clients will bleed out the week after Christmas if their TPA takes a vacation and can’t get them a plan document to sign
by December 31 (although his may

not be true for “owner only” plans, but that’s another story altogether). This is only the second year in which we can retroactively adopt qualified plans for prior plan years. What have we learned? What have we had to change?


For plans adopted after the end of
the fiscal year, there was uncertainty regarding whether IRS Form 5500 series filing was required. In the IRS’ Employee Plan News of Aug. 6, 2021, the agency provided guidance that the 2020 Form 5500 series filing would not be required for 2020 for plans adopted after the end of the year. Instead, there will be an indication on the 2021 IRS Form 5500 that the plan was adopted after the end of the 2020 plan year.

However, the IRS guidance came
so late that many practitioners had already filed a request for an extension to file the 5500s for the plans that were adopted retroactively—although now we know the 5500 and the related Form 5558 were not necessary. Hopefully, plan sponsors will not receive a notice regarding a late or missing 5500 when, in fact, the filing is not required.

Certain due dates were not extended by the IRS. The minimum funding requirements continue to require that minimum contributions be made by 81/2 months after the end of the plan year. While a small employer’s tax deadline may be extended until October 15, the minimum funding deadline for a defined benefit plan they adopted retroactively is not extended beyond September 15. Realistically, their actual deadline for retroactively adopting a plan is prior to September 15 and in time to be able to fund it by September 15.

This becomes a challenge for may TPA firms and means that we must decide what our deadline needs to be. Decisions such as whether we should charge a rush fee for the last-minute adopters must be made (remember the lesson from Part 1 and put a value on your time and the headache you will have to suffer through). Which custodians can accept contributions at the last minute and how much lead time do they need?

It seems like we may have gone from one definitive deadline of December 31 to a situation where every day is a deadline up until the tax filing and/or funding deadline, and instead of one stressful month leading up to December 31, we have spread the stress throughout the entire year.


The SECURE Act provision allows many employers to have a tax- deductible contribution by adopting a plan after year-end. However, in many cases we discovered that the CPA had already filed the tax return. The expected plan implementation process, in which the CPA sees that
a client has substantial tax liability while preparing their tax return and calls their local TPA to implement a qualified plan for their client, did not magically occur last year. In many cases, the CPAs may not have even been aware of the new option under the SECURE Act. This year, many of us realize that we must do a better job of making our CPA and financial advisor partners aware of the ability to retroactively adopt a qualified plan after year-end if it is done prior to the business tax return being filed.


In 2021, implementing a plan after year-end did not always work out as anticipated. Here are some problems we have experienced and things to look out for.

Cash Flow. Some businesses have experienced new and extreme success during the pandemic and have now decided to implement a qualified plan. Implementing a cash balance plan after one or two extremely successful years might be risky. We need to explore with our clients whether they can sustain the cash flow to meet

the minimum funding requirements beyond the next year or so.

Bad Data. The new plans with challenges generally face those challenges because of incorrect census data used during the sales process. The plan is being implemented retroactively and often in a hurry so that the client can file their tax return. Often, the potential client provides “rough” census data and savings goals during the sales process so that the TPA can prepare design illustrations. Working with estimated data can

lead to inaccurate illustrations. One excellent suggestion from an actuary is that you should require the actual year-end payroll data before you run an illustration. After all, it is available by then.

Timing. Retroactive plan implementation condenses the time to prepare an accurate report. Therefore, one of our clients acted on the plan design data. Several challenges were created as a result, including the

date of hire. The employer provided estimated dates of hire during the sales process. The actual dates of hire meant that key employees were not eligible for the plan. The client funded the plan based on the sales illustration before the final actuarial report was completed using the correct census information. The contributions for the employees who were not yet eligible for the plan were not deductible.

In a separate case, the potential client reported compensation equal
to the IRS maximum during the sales process. However, when the actual payroll data was submitted, we learned that the client had not actually paid themselves the full amount the reported during the sales process, and since it was after year-end, it was too late to change that.


Here are five best practices moving forward in the new post-SECURE world:

1. Get accurate census data before running the illustrations to avoid headaches.

2. Decide what your deadlines are going to be for setting up a retroactive plan for your client.

3. Stick to your deadlines. Don’t let someone else’s failure to plan become your emergency. There are no retirement plan emergencies.

4. Value your time and your health. If you let someone rush you at the last minute, value your time enough to charge for it.

5. Market to your CPA and financial advisor partners. Remind them that this new option is available. PC

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