Secure Act 2.0 removes most all cost barriers for small businesses with 1 to 50 employees to start a 401(k) plan plus provides potentially much greater tax credits for those companies that provide an employer match (employer contribution). These tax credits are effective as of January 1, 2023.
Tax Credit Covers 100% of New Plan Costs for the First Three Years
This credit can be applied to 100% of your qualified business 401(k) costs such as plan setup and administration. That's up to $15,000 in tax credits over the first three years to offset setup and administration charges for the maintenance of your plan. Most small business wouldn’t incur half of that to start and cover the plan administration costs.
Here's How It Works: Your business must have at least one employee, besides you as the owner, who earns less than $150,000 a year (a Non-Highly Compensated or NHC employee) to qualify for a tax credit. The tax credit received is the greater of $500 or $250 per NHC employee with a cap of $5,000 applied to 100% of the costs you incurred. So, if your ShareBuilder 401k business cost is $1,200 annually and you have 10 or fewer eligible employees, your tax credit is $1,200 in year one or $3,600 in total over the first three years fully offsetting these costs.
Providing an Employer Match Provides Tax Credits of $1,000 per Employee
Employer contributions are typically 100% deductible already. But now businesses with 1-100 employees can receive tax credits too! If you have less than 100 employees, you can qualify for tax credits of up to $1,000 per employee for your first 50 employees for your employer contributions. This applies for those employees earning less than $100,000 per year. The applicable percentage is 100% in the first (year plan begins) and second tax years up to $1,000 per employee, 75% in the third year, 50% in the fourth year, and 25% in the fifth year, and none for subsequent years. Note, there are some added tax credits for employees 51-100 as well, but a lesser percentage. There is no qualification for the credit if you have more than 100 employees.
Lastly, for those contributions you receive a tax credit, those likely don't qualify for tax deductions. However, the amount not covered by the credit should be deductible. You'll want to review with your tax accountant.
Here's How It Works: In year one, let’s say your business contributes $15,000 to the plan and you have 10 employees who earn less than $100,000 and all received over $1,000 in employer contributions. You just qualified for $10,000 in tax credits in year one. Let’s keep things constant for this example, so your number of employees and contributions are the same throughout the next five years. You’d receive tax credits of $10,000 in year two, $7,500 in year three, $5,000 in year two, and $2,500 in year three for a total of $35,000 over the five years. That’s powerful stuff!
401(k) plans are truly more affordable than ever for businesses with 1-50 employees.
Secure 2.0 offers even more great changes to help Americans save. Learn more in our article covering other key retirement plan and IRA changes coming 2023 through 2025. Happy Saving to you.
This is not meant to be tax advice. Please consult with your professional tax advisor.