Contributions
Timing and changing contributions
Cash Balance contributions follow two calendars, one for the tax deduction and one for minimum funding. Changing the contribution level is possible, but it is done by plan amendment and timing is critical.
Deposit deadlines
| Deadline | What it controls | Calendar-year plan |
|---|---|---|
| Tax return due date, including extensions | Last day to deposit and still deduct for that tax year | Varies by entity, for example September 15 or October 15 of the next year |
| 8½ months after plan year end | Last day to meet the minimum required contribution | September 15 of the next year for calendar year plans |
Late minimum contributions trigger an automatic 10% excise tax, and must be funded by the following due date or another penalty is created. Reminders are sent frequently to clients throughout the annual administration year.
Starting a new plan
A new plan can be adopted as late as the business's tax filing deadline, including extensions, and treated as if it had been adopted by the last day of the prior tax year. That means a business can often set up a plan for the year that just ended once the year's profit is known. Technically, that means a plan can be started as late as the following Sept 15th for the prior year. Realistically, the plan should be started by the following August 15th to allow for time to perform the valuation and fund the required contribution timely.
Changing the contribution level
The pay credits are described in the plan document, so changing them requires a plan amendment.
- Lowering future pay credits. Credits already earned can never be taken away. A reduction has to be adopted before participants earn that year's credit, and participants must receive advance written notice (generally 15 days).
- Raising pay credits. Increases are usually adopted retroactively after the end of the plan year, once profits are clearer, and must still pass the nondiscrimination tests. See Adding employees.
- Freezing the plan. Stopping all future pay credits keeps the plan in place without new accruals. Interest credits continue.
The plan is meant to last
A qualified plan is expected to be permanent. Ending a plan after only a year or two, without a real business reason such as a change in the business's finances, can put its tax treatment in question. A common rule of thumb is to plan on keeping it at least five years.
Before you sign
Build the first few years of contributions into the business's cash flow plan. The flexibility of the range helps, but there is still a minimum every year the plan is active. Future minimums can be reduced by amendment, and the Flex Plan™ allows for lower minimums than normal. But once accrued, the minimum due must be funded timely to avoid a 10% penalty.