Tips for Small Business Owners

New 401(k) Tax Credits under the SECURE 2.0 Act

401k Small Business Tax Credits

Running a small business is no small feat, and neither is taking care of your employees.

With the recent changes introduced by the SECURE 2.0 Act, small businesses that offer qualified retirement plans, such as 401(k)s, may now be eligible for several tax credits that can significantly offset the costs associated with launching and maintaining these plans.

Curious to learn how you can take advantage of these changes? Let’s explore the details.

What is the SECURE 2.0 Act?

The SECURE 2.0 Act is a piece of legislation designed to enhance retirement savings opportunities for Americans. It builds upon the original SECURE Act, bringing in new rules and incentives to encourage more people to save for their future. Small business owners offering a 401(k) plan may now be eligible for several tax credits that can help to offset the cost of setting up and maintaining these plans.

Why should small businesses care?

If you’re running a small business, you know how crucial it is to keep your talented employees happy and reduce turnover. Offering a 401(k) plan can make a significant difference. 

What are the new tax credits?

1. Credit for Retirement Plan Startup Costs

If you’ve been hesitant to start a 401(k) plan due to the costs, this tax credit could help.

The SECURE 2.0 Act allows small businesses with 100 or fewer employees—who earned at least $5,000 in the prior year—to claim a tax credit for the costs associated with starting a 401(k) plan.

Qualified employers might be eligible for a tax credit of up to $5,000 for three years to cover the standard and essential expenses involved in initiating a SEP, SIMPLE IRA, or a qualified plan, such as a 401(k) plan. A tax credit directly decreases the taxes you owe, dollar for dollar.

Additional requirements are:

  • You included at least one plan participant who was not considered a highly compensated employee AND
  • In the three tax years preceding the first year you qualify for the credit, the employees who benefited were not largely the same ones who received contributions or accumulated benefits in a different plan sponsored by you, any company in a controlled group that you are a part of, or any predecessor of either.

This credit can be claimed for up to three years after establishing the plan.

2. Employer Contribution Tax Credit

Starting in 2023, small businesses can also receive a tax credit based on the cost of employer contributions to the 401(k) plan.

For businesses with 50 or fewer employees, the credit can be up to 100% of contributions in the first two years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year.

The credit has a maximum of $1,000 per eligible participant with wages of $100,000 or less.

For businesses with 51-100 employees, the credit percentage is reduced by 2% for each employee over 50.

3. Automatic Contribution Arrangement (ACA) Tax Credit

Adding an Eligible Automatic Contribution Arrangement (EACA) or a Qualified Automatic Contribution Arrangement (QACA) to your 401(k) plan can also earn you a tax credit.

These arrangements automatically enroll employees into the retirement plan, which can significantly increase participation rates.

Small businesses can receive a $500 tax credit for incorporating an automatic enrollment feature into either a new or current 401(k) plan.

This credit is available provided that the auto-enrollment adheres to the Eligible Automatic Contribution Arrangement (EACA) criteria.

Unlike the startup tax credit, this auto-enrollment tax credit applies to both new and existing 401(k) and profit-sharing plans that introduce a 401(k) feature.

4. Military Spouse Tax Credit

Beginning in 2023, if your small business employs a non-highly compensated employee (NHCE) who is a military spouse, you may receive a tax credit for each spouse that participates in the plan, subject to several requirements.

Final Thoughts

The SECURE 2.0 Act has made it easier and more rewarding for small businesses to help their employees save for retirement.

We can help to confirm your eligibility and develop a tax strategy that will take advantage of these opportunities, which can significantly reduce the costs associated with offering your employees a 401(k) plan.

Talk to us and get expert advice tailored to your specific situation. We can help you navigate the rules and maximize your benefits.

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