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, small businesses can now receive a tax credit for starting a group retirement plan like a 401(k) or 403(b) plan.  Not a tax deduction but a tax credit!  Just for offering a wonderful benefit for their employees.  Qualified employer-sponsored plans not only help employers recruit and retain talent but gives their employees the ability to save for a successful retirement.  

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

           An Employer is eligible to receive the Retirement Plan Startup Tax Credits so long as they meet the following criteria:

• The employer had 100 or fewer employees who received at least $5,000 in compensation for that employer in the preceding year
• The employer had at least one plan participant who was a non-highly compensated employee
• In the three tax years before the first year you're eligible for the credit, your employees weren't substantially the same employees who received contributions or accrued benefits in another plan (401k, 403b, SIMPLE, SEP) sponsored by the employer, a member of a controlled group that includes the employer, or a predecessor of either

How Much Are the Tax Credits?

         The amount of the tax credit depends on the specific credit and how many employees you have.  For employers with 1 - 50 employees they are eligible to receive up to 100% of the tax credit.  For employers with 51 - 100 employees they are eligible to receive up to 50% of the tax credit.  

These employers can utilize the Credit for Start-Up Administrative Costs, Credit for Employer Contributions, and Credit for Automatic Enrollment.

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 new credit provides employers a benefit for employer contributions to a new defined contribution plan.  This credit covers 100% of eligible employer contributions up to $1,000 per employee that earns less than $100,000 (indexed to inflation) for small businesses with 1 - 50 employees.  With companies that have 51-100 employees the credit starts to phase out.  This tax credit (or a portion of it) is available for up to 5 years:

• For the tax year of adoption - 100% of the credit available
• For the 1st tax year after adoption - 100% of the credit available
• For the 2nd tax year after adoption - 75% of the credit available
• For the 3rd tax year after adoption - 50% of the credit available
• For the 4th tax year after adoption - 75% of the credit available

Credit for Automatic Enrollment

              SECURE 2.0 requires plans to add an eligible automatic contribution arrangement (EACA) to new plans.  This inclusion allows companies to receive the automatic enrollment tax credit.  This is a $500 credit and is eligible for up to three tax years.

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!