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Secure Act 1.0 and 2.0: Increased Tax Credits for Small Employers with New Retirement Plans #2

SECTION ONE

Changes to the credit for Small Employer Retirement Plan Start-up Costs with Secure Act 2.0

  • Effective for taxable years beginning after December 31, 2022, the start-up credit for adopting a retirement plan increases from 50% to 100% of administrative costs for small employers with up to 50 employees. The credit remains at 50% of administrative costs for employers with 51 – 100 employees.
  • Secure Act 1.0 did not specifically state employers joining existing multiple employer plans (MEP) would be eligible for the credit. Secure 2.0 corrected this and stated that the start-up credits are available to employers that join an existing MEP, regardless of how long the plan has been in existence. The MEP rule is retroactively effective for taxable years beginning after December 31, 2019. Qualifying employers should review their start-up costs to determine if it’s beneficial to amend prior tax returns to take the credit.

Credit for Small Employer Retirement Plan Start-up Costs & Auto-Enrollment Credit – Secure 1.0

  • Credit for Start-up Costs – Years beginning 2020

Qualifying Employer

    1. Have at least one non-owner employee.
    2. Have no more than 100 employees who received at least $5,000 of compensation.
    3. During the prior three years preceding the first credit year, the employer did not maintain a qualifying employer retirement plan.

Calculating the Credit

50% of the qualified start-up costs paid or incurred during the tax year. Qualified start-up costs include expenses paid for establishing or administering the employer plan and the retirement-related education to employees about the plan. The credit is limited to the greater of:

    1. $500, or
    2. The lesser of:
      • $250 for each non-highly compensated employee eligible to participate in the plan, or
      • $5,000 for the first tax year and the following two years.
        NOTE: Employers can elect to treat the year preceding the establishment of the plan to be the first credit year.
  • Credit for Auto-Enrollment
    Credit of $500 for the first tax year that automatic contribution enrollment is started. Allowed in each of the following two tax years, provided the auto-enrollment continues.
  • Total Maximum Credits
    Maximum credit amount combined $5,500 per year, up to three years ($16,500).

SECTION TWO

Credit for Small Employer Retirement Plan Start-up Costs & Auto-Enrollment Credit – Secure 2.0

Credit for employers with 51 – 100 employees – same as above.
Credit for employers with up to 50 employees increased per below.

  • Credit for Start-up Costs – Employers with 50 or less employees. Years beginning 2023.

Qualifying Employer

    1. Have at least one non-owner employee.
    2. Have no more than 50 employees who received at least $5,000 of compensation.
    3. During the prior three years preceding the first credit year, the employer maintained a qualifying employer retirement plan.

Calculating the Credit
100% of the qualified start-up costs paid or incurred during the tax year. Qualified start-up costs include expenses paid for establishing or administering the employer plan and the retirement-related education to employees about the plan. The credit is limited to the greater of:

    1. $500, or
    2. The lesser of:
      • $250 for each non-highly compensated employee eligible to participate in the plan, or
      • $5,000 for the first tax year and the following two years.
        Note: Employers can elect to treat the year preceding the establishment of the plan to be the first credit year.
  • Credit for Auto-Enrollment
    Credit of $500 for the first tax year that automatic contribution enrollment is started. Allowed in each of the following two tax years, provided the auto-enrollment continues.
  • Total Maximum Credits
    Maximum credit amount combined $5,500 per year, up to three years ($16,500)
  • Claiming the Credits
    The tax credits are calculated on IRS Form 8881, Credit for Small Employer Pension Plan Start-Up Costs.

SECTION THREE

Credit for Employer Contributions – Secure 2.0 – Starting 2023

A credit is allowed for employer contributions to qualifying plans (excludes elective deferrals and contributions to a defined benefit plan). The credit is available for employees making less than $100,000 per year. This $100,000 limit is adjusted for inflation in years beginning after 2023.

Calculating the Credit
The credit is available for the year the plan is established and the following four years. The applicable percentages are as follows:

      1. 100 percent for the year the plan is established.
      2. 100 percent for the first year following the year the plan is established.
      3. 75 percent for the second year after.
      4. 50 percent for the third year after.
      5. 25 percent for the fourth year after.

The credit is limited to $1,000 for each employee. This can be a significant tax credit.

Phase-Out
The contribution credit above applies in full to an eligible employer that had no more than 50 employees during the tax year preceding the first credit year and who received at least $5,000 of compensation from the employer during that tax year. The credit phases out for employers who exceed this 50-employee threshold and is completely phased out at 100 employees.

Employers who believe they may be eligible for these credits should consult with their Tronconi Segarra & Associates tax advisor to determine eligibility and amount of credit.

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