Cash balance plans have critical deadlines and contribution limits. The most important is the funding of the plan. When is the cash balance plan contribution deadline? It depends on the structure of the company who adopted the plan. Let’s take a closer look.
First, plans no longer need to be set up before the end of the year. A plan can be set-up and approved by the date the company files its tax return. Contributions must be made by the deadline of the company’s tax return (which includes extensions).
The contributions should then be accrued and deducted on the tax return. If the contribution deadline is missed, the contribution will be deducted on the subsequent year tax filing.
You must also state in writing to the plan administrator (or plan trustee) that contributions made subsequent to year-end represent contributions for the prior year. Alternatively, the company may simply deduct the contributions on the prior year tax return.
So for sole proprietorships and C-Corporations this deadline is April 15th and October 15th if an extension if filed. For partnerships and S-corporations, the deadline is March 15th and September 15th if an extension is filed.
So where are the contributions deducted?
Sole proprietors deduct these contributions on line 28 of Schedule C (on Form 1040), C-corporations deduct them on line 23 of form 1120 and S-Corporations deduct them on line 17 of form 1120-S.
Partnership rules are a little different. Contributions made by the partnership on your behalf are shown on Schedule K-1 of form 1065.
Unlike salary deferral made under a 401k plan, cash balance plan contributions will not show up as a salary reductions or in an information bow on form W2.
Make sure to work closely with your accountants so that the deadline is not missed.
So what if required contributions are not made by the deadline? The company will incur a 10% IRS excise tax as a penalty. Depending on the circumstance, the IRS can increase this tax up to 100%. The excise is non-deductible by the company. This is certainly not a situation any company wants to find itself in.
When does a cash balance plan need to be funded?
Solo or owner-only cash balance plans have the same funding deadlines that apply to plans that have many participants. The contribution is required to be made no later than 8 ½ months following the end of the plan year. This is September 15th for a calendar year plan.
Many business owners are aware of the contribution deadline and plan their tax payments and contributions accordingly. For example, let’s assume an S-Corporation estimates that it will earn $500,000 for a given year before any cash balance contribution. Let’s also assume that the company expects to make a $100,000 contribution to the plan and that the owner will have a $100,000 tax liability.
But what if the company (and the owner) does not have the $200,000 required to fund the cash balance contribution and the pay the tax liability? The owner can then make sure that an extension is filed for both the business and his or her personal return. The owner can then make a $100,000 extension tax payment before April 15th.
Since the business tax return is under extension, the owner can then take up to six months to save up the additional $100,000 required for the cash balance plan. Once the contribution is funded by the deadline, the owner can then file his or her personal return. Assuming the expected tax liability was accurate, the owner would have no late payment penalties or interest. This can be a win-win scenario.
The good news is that you can make contributions up to the date you file your tax return. This also includes extensions. So you don’t have to rush and get the contributions in before year-end.
Cash balance plan contribution deadline
So if you have examined the pros and cons of cash balance plans and decide one is right for you, take note of the cash balance plan contribution deadline.
You don’t want to find yourself with penalties and even worse – the loss of the plan tax deduction.