By Jennifer Bassett, CIP, CISP, QKA, CHSP – Source: Ascensus
We all have them—clients who wait until the very last minute to file their tax returns. Those same clients are the ones who will be in your office at 4 p.m. on April 15 to make a 2020 contribution (i.e., a prior-year contribution). Although they may be making a contribution at the last minute, at least you know that they’re making it by their tax filing deadline.
But what about other prior-year contributions that you receive—contributions that are mailed to your organization or deposited through an automated clearing house (ACH) payment after April 15? How do you handle those? This article will explain when it’s okay and when it’s not okay to accept these contributions as prior-year contributions.
IRA and HSA Contribution Deadline
Account owners generally have until their tax return deadline—not including extensions—to make a regular IRA and health savings account (HSA) contribution. So even if an account owner files for an extension to file his tax return, he will not be granted additional time to make a prior-year contribution. Most account owners have a calendar year tax year, so their deadline is generally April 15. If the deadline for filing an individual’s federal income tax return falls on a Saturday, Sunday, or legal holiday, the account owner will have until the following business day to make his contribution.
ESA Contribution Deadline
Individuals who contribute to a Coverdell education savings account (ESA) have until their tax filing deadline—not including extensions—to make a prior-year contribution. Note that the deadline follows the contributing individual’s tax filing deadline, not the designated beneficiary’s (i.e., the child that the ESA is established for).
It’s also worth noting that designated beneficiaries cannot receive ESA contributions once they turn age 18. This restriction seems to conflict with the treatment of prior-year contributions when designated beneficiaries turn 18 on or after January 1 but before their tax filing deadline. The law provides that prior-year contributions are deemed to have been made on the last day of the previous calendar year. But according to IRS comments to Ascensus, the age 18 restriction prevails, and, thus, contributions cannot be made once a designated beneficiary turns 18—even if the contribution is intended for the previous year when the designated beneficiary was not yet 18. If the opportunity arises, it may be worth reminding contributors of this and perhaps suggesting that they plan ahead to make contributions before the beneficiary’s 18th birthday arrives.
SEP and SIMPLE IRA Employer Contribution Deadline
Employers have until the due date of their business’ federal tax return, including extensions, to establish and fund a simplified employee pension (SEP) plan or a savings incentive match plan for employees of small employers (SIMPLE) IRA plan. This deadline is less restrictive than other contribution deadlines: if an employer files for an extension to file its business tax return, it will have until the end of the extension period to make a contribution.
NOTE: Employee SIMPLE IRA deferrals must be contributed as soon as practicable, but no later than 30 days after the end of the month to which the deferrals relate.
Contribution Delivery Methods
Contributions Sent by Mail
Your organization may receive 2020 IRA contributions that were delivered after the contribution deadline. A contribution delivered by U.S. mail or an IRS-approved delivery service after the deadline is still considered timely made if the envelope in which it is delivered carries a postmark date of on or before the applicable deadline.
Example: ABC Bank receives Jane Doe’s 2020 IRA contribution on April 19, 2021. Because the envelope is postmarked April 14, 2021, ABC Bank can still treat this as a 2020 IRA contribution.
If your organization chooses to accept these contributions, you should save, copy, or electronically image the envelope bearing the postmark in the client’s file. If the client did not indicate in writing the tax year that the contribution is for, you should ask the client to complete an IRA contribution form. Completing this form will document the tax year that the contribution is for (which is required if they intended it to be for the previous year, a prior-year contribution) and the client’s authorization to process the transaction.
Contributions Sent by ACH
The IRS has not addressed the timing requirement for ACH requests in any of its published guidance. But there are two situations where the IRS has addressed the timing requirement for electronic delivery of instructions for contributions: the deposit of payroll taxes by an employer and income tax payments made by individuals. Your organization may be able to use these as a guide for how to handle contributions via ACH requests.
Payroll Taxes: Employers must deposit their payroll taxes using the Electronic Federal Tax Payment System (EFTPS). According to the EFTPS website, employers that submit a payment of $100,000 or less before 1 p.m. ET on a business day may make same-day payments. Employers that do not meet these requirements must have payments set up at least one day before the taxes are due. The IRS will then make the debit request the day the payments are due.
Income Tax Payments: Individuals can make a same-day tax payment if they submit
a payment of $100,00 or less before 1 p.m. ET on a business day, or
the payment through EFTPS before 11:45 p.m. ET and select “current business day” as the payment date.
Reporting Prior-Year Contributions
Now that we’ve covered the contribution deadlines and whether it’s okay to accept contributions after the deadline, let’s review the reporting requirements.
IRA, HSA, and ESA Contribution Reporting Requirements
Your organization must report IRA, HSA, and ESA contributions for the year for which they are made. For example, you must report all prior-year contributions made from January 1, 2021, through April 15, 2021, as follows.
Report Traditional IRA contributions in Box 1 and Roth IRA contributions in Box 10 of the 2020 Form 5498, IRA Contribution Information.
Report HSA contributions twice—the first year (2020 Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information) in Box 3 and the following year (2021 Form 5498-SA) in Box 2.
Report ESA contributions in Box 1 of the 2020 Form 5498-ESA, Coverdell ESA Information.
SEP and SIMPLE IRA Employer Contribution Reporting Requirements
Your organization must report SEP and SIMPLE IRA employer contributions for the year in which they are made. So if an employer makes a SEP or a SIMPLE IRA contribution in 2021 for 2020, your organization must report the contribution on a 2021 Form 5498—even if the employer plans to deduct the contribution on its 2020 tax return. You must report all SEP contributions in Box 8 of Form 5498 and all SIMPLE IRA contributions in Box 9.
If you haven’t already, take some time now to review your organization’s procedures for accepting prior-year contributions. Ensure that everyone understands the deadline for each contribution type and whether it’s okay to accept contributions delivered after that deadline.