IRS Issues Snapshot on Deductibility of Employer 401(k) Contributions Made After the Plan Year End

On July 17, 2023, the IRS released an issue snapshot on the deductibility of employer 401(k) contributions made after the plan year end. Issue Snapshots represent the IRS’ periodic research summaries on tax-related issues. This snapshot discusses how IRC timing rules apply to employers who establish a new 401(k) plan after the end of the tax year. These rules determine whether a retirement plan can be retroactively established and, if so, whether plan contributions are allocable to and deductible in the prior year. The snapshot provides guidance and examples of the application of changes made by the SECURE Act and the SECURE 2.0 Act. Regulations include four separate timing rules for plans to consider including rules related to establishing a plan, the timing of elective deferrals, the timing of deductible profit-sharing or matching contributions, and the timing of allocations to participant accounts.

A qualified plan must be established before contributions can be deducted. Employers can establish a plan retroactively as long as the plan is established prior to the due date of the employer’s tax return, including any applicable extensions, although timing limits apply to certain plan contributions.

Elective deferrals under a qualified cash or deferred arrangement (CODA) can only be made for an amount not yet currently available to the employee as of the date of the election; retroactive elective deferrals are not permitted. However, beginning in 2023, the SECURE 2.0 Act allows a single-member 401(k) plan to adopt a new 401(k) plan after the end of the taxable year and, for the first year only, elect to defer net earnings from self-employment in the prior year.

Regulations permit an employer’s deductible profit-sharing or matching contributions to be made after the close of the tax year but before the due date of the employer’s tax return, including any applicable extensions. Retroactive payment is allowed if the employer treats the contribution as having been made in the prior tax year. These contributions must be paid to participants’ accounts no later than 30 days after the end of the employer’s extended tax return due date. Notably, although contributions can be allocated after this date, they cannot be deducted unless they were paid prior to the extended tax return due date. Contributions paid and allocated after the extended due date would be deductible in the following plan year, subject to existing IRC limits.

To illustrate these concepts, the snapshot provides five examples employers can use and additional audit tips to navigate compliance in the event of an audit. Employers that sponsor 401(k) plans may find the snapshot and related examples helpful.

Issue Snapshot — Deductibility of employer contributions to a 401(k) plan made after the end of the tax year | Internal Revenue Service (irs.gov) »