New Retirement Plans for 2020

December 11, 2020

Making contributions to tax-preferred retirement plans is one of the best ways to reduce income taxes and save for retirement.  Congress has made this even easier in 2020 by extending the deadline for adopting plans and providing an increased tax credit for small employers adopting such plans.

These new rules apply to 401(k) profit sharing plans as well as defined benefit plans which can offer savings opportunities of up to $300,000 per individual.  Defined contribution plans allow deferrals of up to $57,000 per individual. The Direct Recognition Variable Investment Plan (DR-VIP) and other defined benefit plans, including cash balance plans, can offer significantly more in tax savings, often requiring much smaller contributions for non-highly compensated employees. The DR-VIP is a retirement plan that offers many features that traditional or cash balance retirement plans cannot match.

Under prior law, qualified plans (but not Simplified Employee Pensions (SEPs)) had to be adopted before the end of the tax year to receive a contribution for the tax year. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted December 20, 2019, extended the deadline for establishing new retirement plans until the extended due date of the employer’s income tax return for years beginning after December 31, 2019.  Now an employer can delay in both adopting the plan and in making plan contributions until the extended due date of the current year’s income tax return.  Of course, for salary reduction contributions, amounts must be contributed when salary would otherwise be paid.  Plans adopted after year end can include salary reduction contributions, but only for future salary, not previously paid salary.

Small employers have an added incentive for adopting such plans. The tax credit for qualified start-up costs for eligible employers who adopt qualified plans, Simple-IRA plans and SEPs has been increased to up to $5,000, depending on the number of non-highly employees included in the plan.  This credit is available for three years and, for qualified plans and Simple-IRA plans, can be combined with another credit, a tax credit available to employers that include automatic enrollment of employees as a plan feature.  An automatic enrollment feature of a plan allows employers to enroll all employees in the 401(k) plan as long as employees are given the option to cancel such enrollment.  This feature encourages retirement savings by using human nature’s inclination to inertia to keep employees in the plan and saving for retirement.

Although 2020 has been a tough year for many businesses, some employers want to make increased tax deductible contributions to retirement plans. Please feel free to contact your CB professional regarding any potential opportunities for increasing tax deductible retirement plan savings.