On August 6, 2021, the IRS announced that employers who in 2021 retroactively adopt a tax-qualified retirement plan for 2020 are not required to file a 2020 Form 5500 Annual Return/Report for that plan. Instead, employers will need to check a new box on their 2021 Form 5500 indicating that the plan was adopted retroactively for 2020. If the plan is a defined benefit plan (including a cash balance plan), the employer must attach a 2020 and 2021 Schedule SB to the 2021 Form 5500.
The 2021 Form 5500 will be the initial Form 5500 for the 2020 plan and is due by the end of the seventh month following the 2021 plan year-end.
Since a 2020 Form 5500 is not required for retroactively adopted plans, an independent qualified auditor’s report is also not required for the 2020 plan year (the report generally would be required for plans with 100 or more participants as of the first day of the 2020 plan year). Presumably, the initial audit report should be filed with the 2021 Form 5500 and should cover both the 2020 and 2021 plan years, but the IRS has not yet addressed this issue.
The relief applies to Form 5500, as well as Form 5500-SF (short form) and 5500-EZ (for one participant plans).
For decades, employers generally could deduct plan contributions made by the extended due date of their federal income tax return to fund a plan for the prior year, as long as the plan was adopted before the end of the prior year. However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 allows employers additional time to adopt a plan for years beginning after December 31, 2019.
The SECURE Act established new Internal Revenue Code Section 401(b)(2) to allow employers (including “owner-only” businesses) to retroactively adopt a plan within the same time period for making deductible contributions. This change in the law is not related to COVID-19, so it applies for 2020 and thereafter. Thus, employers now can retroactively adopt and contribute to a tax-qualified retirement plan for the previous year by the extended due date of the previous year’s federal income tax return, as well as deduct the contribution on the extended return. The deadline for filing federal income tax returns for calendar year S corporations and partnerships is March 15 (or September 15, if extended) and for C corporations and sole proprietors it is April 15 (or October 15, if extended).
Although employers began using the SECURE Act relief in significant numbers after the close of their 2020 taxable years, it was unclear whether and how those employers should satisfy their annual reporting requirements, including the completion of Form 5500 for the 2020 plan year.
The IRS says it anticipates that similar rules will apply to the 2022 adoption of a plan retroactive to 2021 under the SECURE Act relief. The instructions for the 2021 Form 5500 will further explain the filing requirements for plans adopted retroactively.