No, it is NOT too late to establish and fund your 2020 401(k)

[Michael Plaks]

I had three clients by now who were told by three different IRA/401k custodians that it's too late to set up a 401(k) for 2020. They were WRONG! You still have time, most likely.

Yes, it had been a well-known rule that you must set up your 401(k) by December 31st. The IRS Publication 560 still claims that this is the case. Retirement blogs and websites of many retirement account custodians and administrators continue to repeat this old rule. Heck, even the respected TaxBook, a reference source for tax professionals, has not been updated. They are all wrong.

The truth is that the SECURE Act signed into law in December 2019 changed this old rule and updated Section 401 accordingly. Starting from 2020, you can adopt a 401(k) plan all the way until the filing due date of your business tax return, and it will be treated as if it was adopted by December 31st. Extensions are included.

Here is how the deadlines play out in 2021. 

• Sole proprietors (Schedule C) and disregarded single-members LLCs have May 17th deadline, which is the new deadline after the IRS extended the traditional April 15th deadline. You can file an extension by May 17th and gain extra time until October 15th.
• C-corporations, including LLCs taxed as C-corporations - same deadlines as sole proprietors.
• Partnerships, including multi-member LLCs taxed as partnerships, had March 15th as their filing deadline. If you filed an extension on March 15th, you have until September 15th. If you did not file an extension, you missed the boat, sorry. (You're also late with your partnership tax return and are incurring harsh penalties, so file ASAP if not already.)
• S-corporations, including LLCs taxed as S-corporations - same deadlines as partnerships
• Special rules for TX, OK, LA: these three states had all their deadlines moved to June 15th due to the winter storms. Since the storms happened before March 15th, even S-corporations and partnerships in these 3 states have time until June 15th.

All the other eligibility rules are unchanged, such as having a legitimate business with active income. Funding rules can get tricky. It is too late for the employee elective deferral contributions, but employer's contributions are available.

It's understandable that during the Covid year, many custodians and accountants had other priorities and could have missed this important tax law change. Don't let them mislead you and use the outdated IRS Publication 560 as an excuse. You still DO have time to start your 401(k), except for S-corps and partnerships that did not file their March 15 extension.