Ready to Start a Retirement Plan? These Tax Breaks Make It Easier.

For small businesses, offering a retirement plan such as a 401(k) or SIMPLE IRA is much more than an employee perk. It’s a powerful way to attract and retain talented employees.

Yet for many business owners, the cost of starting and maintaining a plan has been a barrier. The expenses involved –from administrative fees to employer contributions – can feel daunting when you’re managing a small operation with tight margins.

But if you don’t offer a retirement plan, you risk losing high-value staff to a competitor with a more attractive benefits package. And contributing to your team’s long-term financial security is an important way to support them both personally and professionally.

That’s where the SECURE 2.0 Act comes in. With business-friendly provisions that took effect a couple of years ago, this legislation built on the original 2019 SECURE Act (Setting Every Community Up for Retirement Enhancement). SECURE 2.0 expands and introduces valuable tax credits that can make offering a retirement plan significantly more affordable.

Here’s a closer look at how these federal tax breaks could help your business set up and maintain a robust retirement plan.

1. Startup Costs Tax Credit

The Startup Costs Tax Credit, which was expanded by SECURE 2.0, helps cover the necessary expenses of setting up and administering a retirement plan, such as recordkeeping, third-party administrator fees, retirement-related employee education, and other services.

• Who’s Eligible: Employers with 100 or fewer eligible employees who did not maintain a similar plan in the past three years.
• Value: Depending on an IRS formula, this tax credit could range from $500 to $5,000, based on the number of non-highly compensated employees (NHCEs) eligible to participate.
• What’s Changed: Previously, only 50% of eligible costs could be covered. Under SECURE 2.0, the smallest businesses (up to 50 employees) can now cover 100% of their costs, up to the annual limit.
• Duration: Available for the first three years of the plan.

This expanded tax credit may substantially reduce or even fully cover the costs of launching your plan.

2. Employer Contribution Tax Credit

Introduced in the SECURE 2.0 Act, this credit is designed to offset the cost of employer contributions made on behalf of employees who earn $100,000 or less.

• Who’s Eligible: Employers with 100 or fewer employees.
• Value: Up to $1,000 per employee per year for smaller businesses. For those with 51 to 100 employees, the amount of the credit that can be claimed each year is reduced based on the number of employees over 50.
• Duration: Available for the first five years of the plan, but the amount of the credit phases down after the first couple of years.

Employer contributions are a key incentive for employees to participate in defined contribution plans such as a 401(k). This credit helps offset the cost of making those contributions while supporting your business during the critical early years of its retirement plan.

3. Automatic Enrollment Tax Credit

The Automatic Enrollment Credit is a benefit from the original SECURE Act that rewards employers for adding an Eligible Automatic Contribution Arrangement (EACA) to their new or existing plan, which automatically deducts an employee’s contribution from their paycheck unless they choose to opt out.

• Who’s Eligible: Available to employers with 100 or fewer eligible employees.
• Value: A $500 per-year tax credit.
• Duration: Available for the first three years that the feature is in place.

Because many new plans must include auto-enrollment starting in 2025 – with some exceptions, such as for very small businesses — lots of plan sponsors will qualify. The auto-enrollment feature is also a great way to boost employee participation.

Putting It All Together

The real strength of these tax credits lies in how they can work together. A qualifying small business may be able to stack all three credits based on their startup costs, employer contributions, and use of automatic enrollment.

Depending on the size of your business and contributions, this can translate into thousands or tens of thousands of dollars in potential tax credits to defray the costs of getting your retirement plan up and running.

Start a Retirement Plan With Expert Support

While these tax credits are a valuable opportunity, there’s a lot to consider – from the complexities of choosing a plan to the conditions that must be met to qualify for these federal tax benefits.

With decades of retirement plan experience and insight into key factors related to SECURE 2.0 and ERISA guidelines, ENB can help you seize this opportunity to strengthen your workplace.

Reach out to our retirement plan experts to get started.

 

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The information in this article is for general information purposes only. For tax information and guidance relative to your specific situation, please consult your tax advisor.