That plan would be a SEP, the acronym for Simplified Employee Pension, an IRA-based retirement plan. Unlike a “qualified” retirement plan (401[k}, profit-sharing, or defined benefit) which must be in place no later than the last day of the year, a SEP is subject to a different rule.
Generally, a SEP can be set as late as the due date (including extensions) of the taxpayer’s income tax return for the tax year.
That means he or she may be able to establish a SEP for the 2019 tax year in 2020 before the due date including extensions.
Here are the details:
A SEP is relatively easy to set up and administer:
- No plan document is required. It can be set up using IRS Form 5305-SEP.
- There is no filing fee.
- Annual administration is minimal.
- Form 5500 is not required.
- It’s straightforward to administer. It must be offered to all employees who are at least 21 years of age, employed by the employer for three of the last five years, and earned at least $600 for 2019.
- The maximum contribution that can be made to a SEP for 2019 is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction), subject to a contribution cap of $56,000. (The 2020 cap is $57,000.)
- Contributions must be immediately 100% vested.
- The employer may be eligible for a tax credit.
There are a lot more details, of course, and you should talk this over with your tax advisor now. Time is running out.
But don’t leave yet. Effective January 1, 2020, new legislation allows businesses to adopt a qualified retirement plan as late as the due date including extensions of the tax return, and treat it as having been adopted as of the last day of the taxable year.
In other words, it’s the SEP rule. In plain language, this means a retirement plan adopted by the filing due date for 2020 including extensions may be treated as being effective as of the close of 2020.
But it doesn’t mean you have to procrastinate.
Image Credit: Can Stock Photo.