Among the multiple, latest provisions offered by SECURE 2.0 includes updated tax credit opportunities targeting small business employers wanting to open a 401(k) plan.
The changes are aimed at promoting retirement savings while boosting tax savings for small employers, by offsetting the costs of starting or maintaining a qualified employer-sponsored retirement plan.
The credit originated in SECURE 1.0 in 2019 to offset certain plan startup costs and has been increased as part of the updated legislation. The change modifies the tax credit for small employer pension plan startup costs, directed to employers with 50 or less employees, explained Zachary Keep, manager of Compliance Risk for Paychex. This startup credit increases from 50% to 100% of qualified startup costs for the first three years of the plan, with a cap of $5,000. The previous paradigm of up to 50% remains in place for many larger employers, Keep said.
The full amount of the employer contribution credit ($1,000 per employee) is limited to employers with 50 or fewer employees and reduced for employers with between 51 and 100 employees.
The full 100% startup cost credit is limited to employers of 50 or less as well.
A new credit, the employer contribution credit, may entitle eligible businesses with up to 100 employees to a tax credit based on their employee matching or profit-sharing contributed. “This credit, which caps at $1,000 per employee, phases down gradually over five years and is subject to further reductions for employers with 51 to 100 employees,” added Keep. The credit phases down over the course of five years. Both changes are applicable as of January 1.
In addition to the reimbursement program, small businesses will be required to automatically enroll employees and will receive $1,500 in tax credits over three years as a result.
Expanding coverage for small businesses
These revisions and new changes brought on by SECURE 2.0 make 401(k) saving accessible for small business employees and allow their employers to finally offer retirement savings features, supporting the long-awaited notion of expanding coverage to smaller workforces.
“It’s great news for employers looking to offer retirement plans for the first time,” said Keep.
Small businesses have long struggled with minimal plan creation due to the costs of creating and maintaining a 401(k) plan. This strips employees of any long-term savings for their retirement and can even exclude them from investment options offered to their larger counterparts.
Therefore, it’s no wonder why the industry is excited for the new provisions in the updated legislation. Earlier this month, Ubiquity Founder and CEO Chad Parks expressed his eagerness to see how small businesses respond to the government reimbursement, who now have little ground to ignore implementing a plan.
“At a time when small business owners and their employees need every bit of support they can get to save for retirement, this part of SECURE Act 2.0 puts the government in a position to provide significant assistance to every small business in America,” he said. “There’s no more excuse as to why a small business should not open a 401(k) plan for themselves and their employees.”
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