The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by the U.S. Congress with bipartisan support and signed into law on March 27, 2020. Much of the focus since its passage has been centered on the Paycheck Protection Program, but the Act contained several other provisions that savvy CPAs and their clients should not overlook.
One such provision, Section 3608, provides relief for plan sponsors by extending the due date for minimum required contributions (MRC) into their defined benefit plans, from their due dates in 2020 until Jan. 1, 2021. For most plan sponsors, this applies to the deadline for their 2019 plan contribution due 8 1/2 months after the end of the plan year, typically Sept. 15.
The economic uncertainty when the CARES Act passed was such that few, if any, businesses believed they would be profitable in 2020. Congress sought to strike a balance between gloomy economic forecasts and the need to protect workers’ retirement savings. With Section 3608, they did that by both mandating that the MRC must still be funded but also permitting cash basis taxpaying plan sponsors to defer a potentially substantial deduction in 2020 to the following year.
According to the most recent statistics from the IRS, 95 percent of all business returns are from pass-through entities such as sole proprietorships, partnerships, and S corporations, and the vast majority of these returns are filed using the cash basis of accounting. The cash basis affords a significant level of flexibility to businesses to either accelerate or delay a deduction around the Dec. 31 year-end, depending on their particular tax planning strategy.
The prospect of being able to realize this shift was initially dashed by the IRS in August 2020 when it issued Notice 2020-61. The notice stated that interest would accrue on the MRC contribution from the original due date until Jan. 1, 2021. But more importantly, it provided no administrative safe harbor to extend Jan. 1, 2021 — a legal holiday when all financial institutions are closed — to the first business day in 2021. By not curing this drafting oversight, the actual last day for the MRC would be Dec. 31, 2020, and no cash basis taxpayer would be able to shift the deduction into the next year.
Relief was finally given in IRS Notice 2020-82, issued Nov. 16. In it, the IRS stated, “to achieve this deferral of the payment obligation until calendar year 2021 for all employers impacted by Section 3608(a)(1) of the CARES Act, the IRS will treat a contribution with an extended due date of Jan. 1, 2021, pursuant to Section 3608(a)(1) of the CARES Act as timely if it is made no later than Jan. 4, 2021 (which is the first business day after Jan. 1, 2021).”
The IRS recognized that the intent of Congress in drafting Section 3608 was precisely to permit cash basis taxpayers sponsoring defined benefit plans to decided which year was optimal for them to take the MRC tax deduction.
With the election over, and the prospect that a Biden administration will increase tax rates going forward, it may be advantageous for CPAs and their cash basis tax clients to consider ways to accelerate income into 2020 and delay their deductions until 2021. Now, with the blessing of the IRS, all cash basis plan sponsors of defined benefit and/or cash balance plans have a unique opportunity to engage in tax planning using the timing of their contribution.
This blog originally appeared on the Pennsylvania Institute of Certified Public Accountants' website, PICPA.org.