Late SEP plan set-up

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with a financial advisor from Minnesota is representative of a common inquiry related to plan establishment. “My client is an independent specialty grocery wholesaler. Unlike many other businesses right now,she feels very fortunate that her business is doing extraordinarily well with the impact of the Coronavirus on grocery sales. She asked if she could still set up a retirement plan for 2019 at this late stage to maximize contributions and deductions for the year.What can I tell her?” 

Highlights of the Discussion

Yes, there is likely a retirement plan option for her:  A simplified employee pension (SEP) plan. In order to determine if a SEP plan is a good fit, she should discuss the option with her tax advisor or CPA. 

A business owner has until the due date for the business’s tax return, plus any extensions, to establish and fund a SEP plan. This is later than other types of retirement plans. For example, a sole proprietor could establish and fund a SEP plan for 2019 until July 15, 2020 (because of the special Covid-19 filing delay), or even later if she requests additional time to file. (Details of the filing extension are explained below). The contribution and deduction would be based on her business income for 2019.  

A SEP plan allows employers to make contributions to traditional IRAs established for each of their employees without getting into the complex qualified plan rules. Contributions to a SEP plan are not mandatory for any given year, so employers can determine from year to year whether a contribution will be made. The maximum deductible contribution that a business can make to a SEP plan is 25 percent of eligible payroll (i.e., the total compensation of all eligible participants in the plan). Contributions to any one participant cannot exceed 25 percent of compensation up to $56,000 for 2019. 

About the Covid-19 Tax Filing Delay

The IRS has delayed the individual and certain corporate tax filing deadline for 2019 from April 15, 2020, to July 15, 2020.   

The following types of filers are eligible to use the special tax filing extension: 

• Individual Form 1040 filers, 

• Corporations filing Form 1120, and 

• Fiscal year partnerships, associations and companies with due dates on April 15, 2020. 

Taxpayers do not need to file any additional forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the July 15 deadline, can request a filing extension by filing Form 4868. 

Conclusion

SEP plans are a low maintenance, flexible retirement plan option. They have the have the latest establishment deadline of any plan type for a tax year (i.e., the business’s tax return due date plus extensions).