IRS snapshot shows audits may focus on retroactive contributions 

A recent IRS snapshot addresses compliance issues involving retroactive retirement plan contributions that employers make after tax year-end. Although issue snapshots don’t provide new guidance or information, they highlight issues IRS auditors may review during plan audits.

Deducting retroactive contributions. A retirement plan sponsor can deduct profit-sharing and matching contributions for a tax year even if they are made after tax year-end, as long as they are made by the employer’s tax-filing deadline, with extensions, and allocated to that year. Under Internal Revenue Code Section 415, the deadline to allocate a contribution to the prior year is 30 days after the deadline to take a deduction. However, contributions during this 30-day period are deductible only in the year paid to the plan, even if allocated to the prior year.

Retroactive plan adoption. IRS may be focusing on this issue because the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (Div. O of Pub. L. No. 116-94) extended the deadline for adopting a new retirement plan until the employer’s tax-filing deadline, with extensions, for the year in which the plan is first effective. (The previous deadline was the end of the initial plan year.) An employer adopting a new retirement plan retroactive to the prior year can deduct profit-sharing contributions on the prior year’s tax return if they meet the timing rules discussed above. However, the employer can’t deduct any matching contributions on that year’s return because they relate to salary deferrals, which can’t be made retroactively (except under certain single-member 401(k) plans).

Audit focus. The snapshot notes what IRS auditors might check when reviewing retroactive contributions:

• Auditors will check in which year the employer took a deduction for any retroactive contributions and confirm that they were treated as allocations for that year and timely paid to the plan. Auditors may also check the plan document for language that requires making contributions by the employer’s extended tax-filing deadline. If a plan includes this language, treating contributions made during the 30-day period after the tax-filing deadline as allocations for the prior year would violate the plan’s terms.
  
  
• If the plan is a new one, auditors may confirm it was timely adopted by reviewing the plan document and Form 5500 to check the plan’s adoption and effective dates and comparing these dates to the employer’s extended filing deadline. Auditors will also confirm that any elective deferrals were made after employees executed salary-deferral elections consistent with plan terms in effect at that time.

• Issue snapshot — Deductibility of employer contributions to a 401(k) plan made after the end of the tax year (IRS, periodically updated)
• IRC 401(k) plans — Establishing a 401(k) plan (IRS, periodically updated)