Secure 2.0 Tax Credits
Signed into law on December 29, 2022, the SECURE 2.0 Act ushered in new and increased tax credits to small businesses to encourage plan creation. The existing tax credits were expanded to enhance the administrative cost credits as well as introduce new contribution cost credits.
Administrative Cost Credits
This credit is to cover the administrative costs for setting up
and operating a plan for the first three years. The credits are tiered based on how many "eligible employees" the plan has.
For employers with 1-50 eligible employees, the tax credit is 100% of the administrative costs, up to $5,000. For employers with 51-100 eligible employees, the tax credit is reduced to 50% of the administrative costs with the same limit of $5,000.
To be counted as an eligible employee, the employee would have needed to receive at least $5,000 in compensation from the employer in the prior year.
The method for calculating the eligible tax credit is determined
using these guidelines:
Minimum of $500
Maximum of $5,000
$250 for each eligible non-highly compensated employee(NHCE). An NHCE is an eligible participant who made less than $135,000 in the prior year (2022) and who is not a greater than 5% actual or attributed owner.
As an example, if a company started a plan in 2023 and had 20 eligible participants in 2023, with 15 of them being non-highly compensated, the credit would be $3,750 (15 x 250) for 2023, assuming at least that amount of eligible fees were incurred for the year.
The eligible costs include payments for services for plan administration, recordkeeping, and employee education. It is not clear if other expenses are also covered by the credit (ex. advisory services). The hope is that this will encourage more small employers to establish and maintain a retirement plan for its employees.
Contribution Cost Credits
This new credit for start-up plans is based on contributions to
plans (not including defined benefit plans) for the first five years. For employers with 50 or fewer employees in the preceding year, the credit is 100% of the contributions (up to $1,000 per eligible employee who earned less than $100,000) for the first two years. An employee is anyone who earned at least $5,000 from the employer in the year that the contributions are made. This is different than the above credit where it is based on the prior year.
After the first two years, the credit is reduced as follows: 75% for the third year, 50% for the fourth year, and 25% for the fifth year. The tax credits are eliminated after the fifth year. Employers with more than 50 employees are still eligible for a credit, however the credit is reduced by 2% for each employee over 50.
Some considerations for both credits:
The plan will need to have at least one eligible non-highly compensated participant.
The credit is only available to start-up plans.
The employer must not have covered substantially the same employees in a qualified plan, SEP IRA, or SIMPLE IRA in the 3 preceding tax years.
There is also a $500 tax credit for establishing a plan with automatic enrollment.
This is key, as another portion of Secure 2.0 mandates the implementation of automatic enrollment you cannot claim both a deduction and a credit for the same expenses/contribution.
The expenses must be paid by the company and not from plan assets (including forfeitures and revenue sharing).
You cannot both deduct the costs/contributions and claim the credit.
Contact your Service Team member with any questions.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.