Are you a tax or financial advisor working with a self employed individual or a small business owner who wants to set up a new retirement plan for 2005? If you are, you’ve probably asked this question of your qualified plan provider. Here are a few qualified plan basics to help you determine your “drop dead date”.
- Assuming your client is a calendar year taxpayer, a qualified plan must be established no later than December 31 in order to generate a tax deductible contribution for the current fiscal year.
- This means the client must determine what type of plan he or she wants as well as what the plan design will look like, and have the plan submitted to a written document that can be signed by the employer, on or before December 31.
- Remember that you may be but one of many (perhaps dozens, possibly hundreds, dare I say thousands) tax and financial advisors who are relying on your retirement plan consultant to “work their magic” in the waning days/hours of the year.
- Also, there is often a labor intensive manual process required to generate and deliver plan documents once the type and design of a plan have been chosen.
- Finally, the IRS has been known to “change the rules” when we least expect it, often with little or no advance notice. Witness the recently issued proposed regulations under IRC Section 415 (Limitations on Contributions and Benefits under Qualified Plans). Although the May 31, 2005 effective date was subsequently modified by Notice 2005-87, it may still benefit your client to have their new DB plan adopted prior to issuance of final regulations, whenever that might be.
Professional courtesy dictates that you give your service provider ample time to prepare any necessary benefit illustrations, plan documents, enrollment forms, etc., that may be required in order for your client to make an informed decision and receive a quality work product. For this reason, many qualified plan professionals are reluctant to take on new business after the first week in December. Waiting too long for that “drop dead date” could result in your client missing out on a valuable 2005 tax deduction.
Fortunately for those procrastinators in the industry, some innovative retirement plan service providers have developed web based tools that dramatically shorten the time required to put a plan in place. Many of these on line tools are targeted toward the self employed – Individual 401(k) Plans and Individual Defined Benefit Plans can now be established in a matter of minutes, rather than days or weeks as was formerly the case. But beware! Not every web site that can generate a preliminary illustration or proposal on line goes the distance. Make sure the web tool you rely on allows you to fully customize a plan that suits your client’s needs, print out adoption agreements, sign and send them in right up to the last minute.
If you think you might want some help with the process, or if you think you might have questions along the way, you just might want to give yourself a few extra days (hours). However, thanks to technology and some truly creative actuarial minds (I know that sounds like an oxymoron), your drop dead date really is December 31 - after dinner…..and desert……and even after dinner drinks if you wish. Just make sure you get the documents signed and faxed back to your service provider (check to see what their cut off time is – missing a deadline by an hour or two is in such bad taste). And then, why not call the next business day to make sure everything got there alright and thank your service provider for investing in the technology that allows you to be the hero, all the way up to your drop dead date.
Written by Jeff Berends, executive vice president of CCA Small Business Group LLC in Chicago and co-developer of the MyMax individual retirement plan. Berends, who is based Denver, has designed defined benefit retirement plans for small businesses for more than 25 years.