David J. Kupstas, FSA, EA, MSEA Chief Actuary
When it comes to depositing employer contributions into qualified retirement plans, we are often asked what the deadline is for making these contributions. Believe it or not, that is not an easy question to answer. I suppose one way to look at it is maybe there’s never really a deadline for depositing contributions. As long as you don’t mind paying a penalty tax, losing or delaying a tax deduction, or going through an IRS or DOL correction program, you can make your deposit whenever you want!
That is not a helpful answer, of course. What people want to know is, what’s the latest I can deposit my contribution without anything bad happening? That is an excellent question worth looking into.
Minimum Funding and Tax Deduction Deadlines
Let’s start with a couple of easy rules:
- If you want to take a tax deduction for a contribution, it must be deposited by the due date of the tax return. Assume a company has a calendar fiscal year and a retirement plan that also operates on a calendar year basis. The 2019 contributions must be made by the due date of the 2019 company tax return to be deductible. For a corporation, that due date is probably April 15, 2020 without an extension or October 15, 2020 if a six-month extension is received. It’s okay if the contribution is made after the tax return is filed, so long as the deposit is made before the tax return is due. Different due dates will apply for sole proprietors, partnerships, LLCs, and other entities.
- Contributions need to be made by September 15 for plans subject to minimum funding rules. That sound bite needs a bit of explanation. First, it is only defined benefit and money purchase plans that are subject to the minimum funding rules. Other plans like safe harbor 401(k)s have required contributions, but they are not subject to the minimum funding rules. Second, the September 15 date applies to calendar year plans. The general rule is 8½ months following the close of the plan year. And 8½ months is always on the 15th of a month, even when the 15th is on a weekend or holiday or when the month has something other than 30 days. Finally, the consequence of missing the 8½-month deadline is a 10% excise tax. If you don’t mind paying that tax, your deadline can be much later!
It is worth emphasizing that the minimum funding deadline is a separate deadline from the deduction deadline. You might meet the minimum funding deadline but miss the deduction deadline, and vice versa.
In some cases, the plan year and employer fiscal year do not coincide. Different rules about deducting contributions may apply in these cases. The 8½-month minimum funding deadline still applies, though.
Annual Addition Deadline
In a defined contribution plan, an “annual addition” means any increase in a participant’s account balance due to 401(k) deferrals, matching contributions, safe harbor nonelective contributions, profit sharing contributions, and forfeitures – pretty much anything except investment earnings. An employee may not receive unlimited annual additions. There is an annual “415(c) limit” of $56,000, or 100% of the employee’s compensation if less. (Those are the 2019 limits; they are indexed each year for inflation.) The annual addition limit rises to $62,000 for any participant age 50 or older who makes $6,000 in 401(k) catch-up contributions.
The period over which annual additions are measured is called the limitation year. This is usually the plan year, but not always. For 415(c) limit purposes, a contribution is generally credited to the limitation year that contains the date the contribution is deposited. If a contribution is made on April 3, 2020, then it counts toward the employee’s 415(c) limit for the 2020 limitation year. That said, there is a big, gigantic exception to this rule.
You know how above we said that for deduction purposes a contribution had to be made by the due date of the tax return? Well, for annual additions, the deadline is 30 days after that. A contribution may be treated as an annual addition for the prior limitation year if it is made within 30 days after the plan sponsor’s tax return due date, including extensions. Let’s look at a few examples to help clarify this concept. Assume a calendar plan year and fiscal year:
- Example 1. Profit sharing contribution is made on December 15, 2019 for the 2019 plan year. It is treated as a 2019 annual addition and is deductible in 2019 since the deposit was made in 2019.
- Example 2. Assume the contribution is deposited on January 15, 2020. It may be treated as a 2019 annual addition and deducted on the 2019 tax return since this is well before the due date for the 2019 tax return. It could also be treated instead as a 2020 annual addition and deducted on the 2020 tax return.
- Example 3. Assume the 2019 tax return has been extended and is due on October 15, 2020. A contribution made on October 20, 2020 could be counted as a 2019 annual addition since it is within the 30-day period after the tax return due date, but it would have to be deducted in 2020 since it’s past the 2019 tax deadline.
- Example 4. Assume there is a desire to make a 2019 profit sharing contribution on December 1, 2020. This will not work because it’s more than 30 days past the 2019 tax return deadline. This contribution will have to be a 2020 annual addition and may be deducted in 2020.
You can imagine why it’s important what year an annual addition is assigned to. Suppose Jodi makes $200,000 per year and is given a $40,000 employer contribution annually. This is well within the 415(c) limit, as $40,000 is less than $56,000 and less than 100% of her compensation. However, if the 2019 contribution is deposited past the date by which it may be counted as a 2019 annual addition, it will have to be treated as a 2020 annual addition instead. Now, Jodi has already used up $40,000 of her 2020 annual addition. She won’t be able to get a full $40,000 annual addition from her “real” 2020 contribution. She will be limited to $16,000 in 2020 – the $56,000 415(c) limit less the $40,000 already assigned to the 2020 limitation year from the late 2019 contribution.
12-Month Grace Period for Some 401(k) Contributions
The regulations say that some contributions associated with 401(k) plans may be made up to 12 months following the close of the plan year:
- Matching contributions subject to ACP test
- Safe harbor match and nonelective contributions
- Qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs)
While meeting the 12-month window may satisfy rules related to 401(k) testing, the 12-month deadline does not trump either the deadline for taking the tax deduction or the deadline for crediting the annual addition to the prior limitation year. For example, making a 2019 safe harbor nonelective contribution on December 31, 2020 enables you to meet the 2019 safe harbor requirement. You aren’t able to deduct that contribution for 2019, nor are you allowed to count it as a 2019 annual addition, as December 31 is well past the deadlines applicable for doing both.
In that sense, the part of the 12-month window after the deduction and annual addition deadlines should be viewed as a last resort – a time to still satisfy the safe harbor rule even if you’ve missed the deduction and annual addition deadlines. I knew someone once who regularly announced to his clients that the deadline for these contributions was 12 months after the plan year end. Although he was technically correct, I was never comfortable with his doing that since he left out important information about other deadlines to be met. Personally, I don’t ever tell clients about the 12-month deadline unless it’s necessary. It’ll confuse them.
There is something of an oddity to point out. A 2019 safe harbor match deposited “timely” on December 31, 2020 cannot be counted as an annual addition for 2019. Depositing the 2019 safe harbor match on January 15, 2021 would be “late.” In that case, the plan sponsor should go through the IRS’ Employee Plans Compliance Resolution System (EPCRS) and ‘fess up to the late deposit. One result of the IRS-approved correction could be having the January 2021 deposit counted as a 2019 annual addition – an option not available for the timely made December 2020 deposit. File that tidbit away and pull it out if you ever run into a pinch with annual additions.
Often, we get questions about late discretionary contributions. These are match and profit sharing contributions that aren’t required by law or by the terms of the plan – just contributions the employer is making out of the goodness of its heart. For this kind of contribution, we normally tell the plan sponsor to make the deposit by the due date of the tax return. Every so often, around November 15, we’ll get a call that goes something like this: “I know you said make the profit sharing contribution by September 15. Well, we forgot. Is it too late to deposit the contribution for last year?”
The answer is probably, yeah, it’s too late. November 15 is past the deadline to deduct the contribution for last year. It’s past the deadline to count the contribution as an annual addition for last year. This contribution can’t really be considered a “2019 contribution” in any sense.
There are a number of reasons why this may be disappointing to the plan sponsor. There may be employees who terminated who were eligible for a 2019 contribution but not a 2020 contribution. Or, the plan sponsor may have formally announced a 2019 match or profit sharing contribution and now is not delivering. In these cases, the employer may want to use the EPCRS program and declare this a mistake to be corrected. By doing so, the IRS may allow the contribution to be counted as a 2019 annual addition after all. There wouldn’t be a way to deduct it for 2019, though. That ship has sailed.
Sometimes, a plan has a fixed match that is required to be made per the plan document. If this is late, it is necessary to go through EPCRS. The contribution, when eventually made, will be counted retroactively as an annual addition for the limitation year the match was intended for.
- It gets tricky when a contribution is made after the tax return due date but within 30 days after that. It counts as a prior year annual addition but a current year tax deduction. The employer would need to add this “late” prior year contribution to whatever is being deducted as a regular contribution for the current year. The defined contribution plan deduction limit for a year is 25% of pay. If the “late” prior year contribution plus the regular current year contribution sum to less than 25% of pay, it can all be deducted. Otherwise, the employer will have to scale back on the current year contribution to leave room under the 25% limit for the late prior year contribution that is being deducted.
- Contributions made pursuant to a corrective amendment under regulation section 1.401(a)(4)-11(g) count as annual additions for the limitation year the contributions relate to, even if the tax return is not on extension and the 30-day window pertaining to annual additions has already expired.
- Not-for-profit companies do not have tax returns to file. For the annual addition limit, they get 9½ months after the close of the fiscal year rather than 30 days after the tax return is due.
- Depositing salary deferral contributions late is not addressed in this article but is addressed extensively here.