Propelled by overwhelming bipartisan support, the Setting Every Community Up for Retirement Enhancement Act was formally passed by Congress in December 2019.
The legislation was primarily designed to help small businesses establish and maintain “safe harbor” retirement plans, including 401k and 403b plans. But the SECURE Act will also have a significant impact on employee stock ownership plans.
Starting in 2021, businesses with newly established employee stock ownership plans will have until the extended corporate tax return due date to make tax-deductible, prior-year contributions.
The SECURE Act extends a key ESOP deadline.
Section 201 of the SECURE Act grants businesses permission to treat qualified retirement plans, adopted before the extended corporate tax return due date, as having been adopted on the last day of the taxable year. As a result, a company that establishes an employee stock ownership plan on or by September 15, 2021, can still make 2020 ESOP contributions, so long as those non-cash contributions are made prior to the tax deadline.
This is notable because ESOP contributions are tax-deductible.
A plan sponsor is permitted to make an annual contribution, equivalent to 25% of its eligible payroll, to its employee trust. A company with a $20MM annual payroll could make an annual ESOP contribution as large as $5MM and receive an equivalent income tax deduction. For sponsors of new employee stock ownership plans, the ability to create a significant income prior-year tax deduction can be profound.
Closely-held businesses will also gain greater flexibility in their ESOP planning. Whereas plan sponsors previously rushed to form new ESOPs prior to a tax-year's end, the new, extended deadline should create breathing room for companies to engage in more comprehensive plan design and implementation.
Learn more about ESOP contribution-oriented tax deductions.
For a more detailed explanation of the ESOP tax advantages referenced above, check out our recent "High Payrolls, Accelerated ESOP Tax Benefits" article. CSG Partners' Steve Berman breaks down the ESOP contribution deduction and examines the outsized impact of this benefit on companies with high payrolls relative their annual income.
The SECURE Act - Full Text
The SECURE Act was part of H.R. 1865 (Further Consolidated Appropriations Act, 2020). The legislation's ESOP-related content begins on page 604 (Division O).