Believe It or Not, There’s Still Time to Implement This Smart Strategy

The global pandemic has relentlessly hammered business owners from every angle – and while massive relief legislation eased some of the burden, it also increased the workload. Developing and maintaining alternative business operations to keep employees and customers safe, applying for Payroll Protection Program (PPP) loans, and then navigating the uncertain waters of PPP loan forgiveness added to taxpayers’ normal business activities – leaving little time to consider future planning.

Fortunately, due to various extensions also designed to relieve some of the strain on businesses, there’s still time to take advantage of some retirement planning strategies for 2020 – even as tax filing deadlines loom.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 included significant provisions designed to increase access to retirement planning – and one key extension gives business owners additional time to implement a defined benefit plan, profit-sharing plan, or cash balance plan for 2020.

You may be familiar with the first two, but cash balance plans are less well-known.

What’s a cash balance plan?

A cash balance plan is a defined benefit retirement plan, and it’s used on top of other plans, typically a safe-harbor match or 401(k) profit-sharing plan. It’s meant to layer on top of those plans to give some added benefits to the closely-held business owners – while benefiting employees at the same time. (Barnes Dennig Wealth Management practice leader and Director George Sparks explains in a bit more detail and provides an example of a cash balance plan in this short video.)

Unpacking the deadline extension

Under standard guidelines, these types of plans must be established by December 31 for a calendar year taxpayer.  With the extensions, a business owner has the benefit of reviewing accurate financials of the 2020 year to evaluate the tax benefit of funding the various retirement plans.

While saying 2020 was a year of uncertainty is of course an understatement, many industries found surer footing as the year ended. By the end of 2020, business may have returned to pre-pandemic levels – or even surged ahead – returning encouraging profits. For these taxpayers, the tax advantage of establishing defined benefit retirement plans may prove to be a very interesting and beneficial option.

Making the most of a rare opportunity

It’s exceedingly rare to find an instance where tax planning does not have to happen in advance of having full business results for a year, but 2020 was a year like no other. The year’s events led to an unprecedented increase in tax changes and adjustments, and understanding all your options can help you realize substantial tax savings. If you would like to learn more about defined benefit plans or would like to talk through the options that may best benefit your business, contact the Barnes Dennig team. We’re here to help.