One of the last great tax deductions for small businesses, including sole-proprietors and LLCs, is the ability to make tax deductible contributions to a retirement plan. If an entity does not currently have a plan in place and they expect to make deductible contributions for 2016, then a plan must be established no later than December 31, 2016.
At this time of year, as part of year-end tax planning, business owners strategize about possible retirement plan contributions and the establishment of a new plan if one does not currently exist. The most common types of plans established at year-end are solo 401k plans, profit sharing plans, which include 401k plans, and defined benefit plans (traditional or cash balance). While other plan types exist, these are typically the most popular at tax planning time. Frequently, the Simplified Employee Pension (SEP) is considered; however, SEPs can be established post year-end prior to the extended due date of the Employer’s tax return.
Each plan should be considered carefully so that the associated costs and benefits meet the business’s goals, objectives and cash flow limitations. These plans require different levels of evaluation and time to set-up. The solo 401k plan for example, can be evaluated and set-up in a couple of hours, if not less. While a defined benefit arrangement could take several days at a minimum, given the need to consult with an actuary and the consideration needed to commit to potentially very large contributions; not to mention the other potential time drags that may occur as a result of needing to find an investment advisor or evaluate potential plan vendors. The spectrum of what is involved in getting a plan put in place is wide and varied.
As year-end quickly approaches, businesses should be well into tax planning, with new plan considerations in full force. Some plan vendors are nimble and have flexible deadlines for establishing plans by year-end, while others are extremely rigid and may require new plans to be set-up several weeks prior to year-end. Business owners should be mindful that plan establishment challenges increase exponentially the closer to year-end we get, especially with all of the holiday season demands.
Don’t wait if you are seriously contemplating establishing a new plan for 2016, you need to get the process going as soon as possible. For questions regarding retirement plans, please contract Aronson’s Compensation and Benefits Practice Director Mark Flanagan at 301.231.6257.