Exploring SECURE 2.0 Tax Credits for Establishing New Retirement Plans
In late December 2022, the SECURE 2.0 bill was signed into law. In addition to 90+ provisions impacting retirement plans, there are several new and expansion tax credits written into the bill, with a specific focus on the tangible benefits they offer businesses when establishing new retirement plans.
These tax credits are designed to alleviate the financial burden associated with the setup and administration costs of retirement plans, which can be considerable in the startup and micro plan market (under $1 million in total plan assets). By providing incentives through tax credits, SECURE 2.0 encourages businesses to embrace the establishment of retirement plans, enabling them to offer valuable retirement benefits to their employees.
The first of several significant employer credits in SECURE 2.0 is actually an expansion of credits introduced in the original SECURE Act (Setting Every Community Up for Retirement Enhancement Act signed in December 2019). This credit offsets a significant portion of the costs associated with initiating a new retirement plan, the allows eligible businesses with no more than 100 employees, including self-employed individuals, to receive a credit of up to $250 per eligible non-highly compensated employee (NHCE) per year, with a maximum credit of $5,000 per year for up to three years. When originally introduced, the start-up credit allowed for up to 50% of administrative costs, and under the new bill, was increased to up to 100% for businesses with up to 50 employees. Business between 51 and 100 employees can still benefit from the original provisions. A non-highly compensated employee is someone who earned less than $135,000 in 2022 and is not the business owner.
For a business’s establishing a new plan within an existing Multiple Employer Plan (MEP). The start-up credits are available for three years to employers that join an existing MEP, regardless of how long the MEP has been in existence. The MEP rule is retroactively effective for taxable years beginning after December 31, 2019.
Additionally, original SECURE introduced the automatic enrollment credits which continue. This credit rewards eligible small businesses with an additional credit of up to $500 per year for three years for including automatic enrollment provisions in a retirement plan. It serves as an incentive to encourage employers to adopt automatic enrollment features, which has been demonstrably shown enhance employee participation in retirement plans. SECURE 2.0 does require new plans created in 2025 or after to incorporate automatic enrollment and increase features, though there are carve outs for businesses with under ten employees at establishment.
Potential annual start-up credits for organizations of differing sizes and team construction.
There is a new tax credit, effective for January 2023 and after, for employer matching or profit-sharing contributions for the first five years of the plan. The credit is for businesses with up to 100 employees, with caveats: the credit is reduced by 2% per employee over 50 employees earning less than 100,000/year. The credit covers 100% of employer matches for the first two years after plan creation, 75% in Year 3, 50% in Year 4, and 25% in Year 5, before falling to zero in Year 6. The annual maximum for this credit is $1,000 per participant. Employers with up to 50 employees receive the full benefit of this credit, and it is phased out gradually (2% per employee) for those businesses between 51 and 100 employees.
SECURE 2.0 tax credits represent a game-changing opportunity for businesses embarking on the establishment of new retirement plans. By leveraging & combining these incentive credits, businesses can alleviate some of the financial burdens associated with plan setup and provide affordable retirement benefits to employees. Seize this moment make a positive impact in your employees' financial futures, attract top-tier talent, and enhance your employer brand. Embrace the potential of SECURE 2.0 tax credits and unlock a brighter tomorrow for your business and its valued employees.
Now that you are aware of the attractive benefits offered by SECURE 2.0 tax credits, it is time to take proactive measures. Engage the services of a qualified Retirement Plan Advisor who possesses expertise in navigating the intricacies of retirement plan implementation. They can assess your business's eligibility, assist in designing a tailored plan, and ensure compliance with regulatory requirements. By leveraging their knowledge, you can evaluate the potential of SECURE 2.0 tax credits, ultimately establishing a robust retirement plan that aligns with your goals while optimizing financial advantages. If you're looking for a Retirement Plan Advisor to help you start or manage your retirement plan, email us today, Christina.Tunison@lpl.com.
This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
#446218 June 2023