Tax Credits To Start A 401(k) Plan

Do I Receive a Tax Credit For Starting A 401(k) Plan?

            Under the SECURE 2.0 Act, eligible small businesses may qualify for tax credits when establishing a new employer-sponsored retirement plan, such as a 401(k) or 403(b) plan. These incentives may help offset certain startup and administrative costs associated with sponsoring a retirement plan.

           Employer-sponsored retirement plans can be valuable tools for attracting and retaining employees while providing participants with a tax-advantaged opportunity to save for retirement. The availability and amount of any tax credit will depend on the employer's specific circumstances and eligibility requirements.

Who is eligible to recieve a tax credit for starting a 401(k) Plan?

            An employer may be eligible for the Retirement Plan Startup Tax Credit if the following requirements are met:

• The employer had 100 or fewer employees who received at least $5,000 in compensation for that employer in the preceding year.
• The plan includes at least one non-highly compensated employee (NHCE) who is eligible to participate.
• During the three taxable years preceding the first credit year, substantially the same employees were not covered by another employer-sponsored retirement plan sponsored by the employer, a member of a controlled group that includes the employer, or a predecessor employer.

Eligibility for retirement plan tax credits depends on an employer's specific circumstances and satisfaction of applicable IRS requirements. Employers should consult their tax advisor regarding eligibility and available tax benefits.

How Much Are the Tax Credits?

          The amount of available retirement plan tax credits depends on several factors, including the specific credit being claimed, the number of employees, and the employer's circumstances. Generally, eligible employers with up to 50 employees may qualify for a larger percentage of certain available tax credits, while employers with 51 to 100 employees may qualify for a reduced credit amount. Depending on eligibility, employers may be able to take advantage of:

• The Retirement Plan Startup Cost Tax Credit
• The Employer Contribution Tax Credit
• The Automatic Enrollment Tax Credit

Eligibility requirements, credit amounts, and applicable limitations vary. Employers should consult their tax advisor regarding qualification and the potential tax benefits available to their business.

Credit for Start-Up Administrative Costs

              Start-Up Administrative Costs can include set up fees by a Record Keeper or Third Party Administrator.  This tax credit is capped at the lesser of $5,000 or $250 times the number of eligible non-highly compensated employees.  This credit helps offset some of the one time fees associated with starting a plan. 

Credit for Employer Contributions

              This tax credit provides eligible employers with an incentive for making employer contributions to a new defined contribution retirement plan. For eligible employers with up to 50 employees, the credit may equal up to 100% of eligible employer contributions, up to $1,000 per employee annually for employees earning no more than $100,000 (indexed for inflation). For employers with 51 to 100 employees, the credit is generally reduced and subject to phase-out rules.

Subject to applicable eligibility requirements and limitations, the employer contribution tax credit is generally available for up to five years:

• Year 1: Up to 100% of the available credit
• Year 2: Up to 100% of the available credit
• Year 3: Up to 75% of the available credit
• Year 4: Up to 50% of the available credit
• Year 5: Up to 25% of the available credit

Eligibility requirements, credit amounts, and applicable limitations vary. Employers should consult their tax advisor regarding qualification and the potential tax benefits available to their business.

Credit for Automatic Enrollment

             SECURE 2.0 generally requires many new 401(k) and 403(b) plans to include an eligible automatic contribution arrangement (EACA), subject to certain exceptions. Employers that implement an eligible automatic enrollment feature may be eligible for an additional tax credit of up to $500 annually for up to three years. Eligibility requirements and limitations apply.

Want To Get Started Or Have Questions?

            Retirement Wealth Partners can help you establish, monitor and execute a group retirement plan for your business.  If you have any questions about these tax credits or if a 401(k) plan is right for you, please give us a call so that we can help you navigate this process!