IRS Refreshes Discussion of Post-Tax Year Employer Contributions to a 401(k) Plan

The IRS has updated content it provides concerning the deductibility of employer contributions to a 401(k) plan made after the end of the tax year. The material now reflects the application of the SECURE Act as well as discussion of the use of up-to-date forms. 

The content is contained in the IRS Issue Snapshot, “Deductibility of Employer Contributions to a 401(k) Plan Made After the End of the Tax Year.” It discusses the timing rules of Internal Revenue Code (IRC) Sections 404(a)(6) and 415, and considers how they apply to employers that establish a new 401(k) plan after the end of the tax year.

Updated content covers a variety of areas, including: 

Establishing a plan. The Issue Snapshot observes that before contributions can be made or deducted, a plan must be established. Its discussion of that now reflects the provisions of Section 201 of the SECURE Act, which amended IRC Section 401(b)(2), and notes that for taxable years beginning after Dec. 31, 2019, that IRC Section permits an employer to establish a plan retroactively, as long as it does so by the due date—including extensions—for filing the employer's tax return for the taxable year of adoption, and the employer elects to treat the plan as having been adopted as of the last day of that prior taxable year. 

Timing of elective deferrals. In its discussion of timing of elective deferrals, the Issue Snapshot focuses on qualified cash or deferred arrangements (CODAs), which allow eligible employees to make an election between receiving cash compensation or deferring compensation into the plan. A CODA must be established before compensation can be deferred, it explains, and retroactive elective deferrals generally are not permitted. A plan is considered established as of the later of (1) the date the arrangement is adopted, or (2) the date the arrangement is effective.

The amendments to IRC Section 401(b)(2) made by Section 317 of SECURE 2.0, however, make an exception to this general timing rule available for new single-member 401(k) plans. Beginning in 2023, an individual who owns the entire interest in an unincorporated business, and who is the only employee of such trade or business, can adopt a new 401(k) plan after the end of the taxable year and—for the first year only—can elect to defer net earnings from self-employment in the prior year as late as the due date for the individual's tax return. 

Examples. In its discussion of the timing of deductible profit-sharing or matching contributions and the timing of allocations to participant accounts, the Issue Snapshot provides examples concerning application of the rules through filing forms such as Forms 1040 and 1120. 

The IRS also provides examples of how these amendments apply in the cases of an employer that decides to offer a retirement plan to its employees, a corporation that files its Form 1120 with an anticipatory deduction, treatment of a Form 1120 that reflects a profit-sharing deduction, treatment of salary deferrals, and a sole proprietorship that sees to add a 401(k) to its profit-sharing plan.