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Retroactive Adoption of Cash Balance and ProfitSharing Plans: What CPAs Need To Know

Background: The SECURE Act and Retroactive Adoption: Prior to the passage of the SECURE Act in 2019, employers were required to establish qualified retirement plans, including profit sharing and cash balance plans, by the last day of the plan year. Employers were permitted to make contributions up until the tax filing deadline, however, the plan itself had to exist before the year ended.

The SECURE Act changed this requirement, by allowing employers to adopt retirement plans up to the business’s tax filing deadline, including extensions. This effectively gives businesses several additional months to evaluate their financial situation and decide whether to retroactively implement a retirement plan for the previous tax year.

Why This Matters for CPAs: This provision creates opportunities for you and your clients to re-evaluate, plan, and pivot at the end of the year. Your clients can review their taxable income at the end of the year and make an informed decision about whether a plan makes sense.

Two of the most strategic options are:

1. Cash Balance Plans (Defined Benefit):

• Plan assets are usually invested in a trust account maintained in the plan’s name and managed by an investment advisor.
• Contributions are age-weighted and actuarially determined.
• When paired with a profit-sharing plan, business owners can accelerate retirement savings while minimizing taxable income.

• Flexible contribution formulas that are often paired with a 401(k), but may be offered as standalone plans with no employee deferral option.
• Contributions can be discretionary and adjusted annually.
• Maximum annual additions for 2025 are the lesser of $70,000 or 100% of compensation ($77,500 with catch-up contributions).