Keeping up to date with 401(k) legislation is crucial for business owners and individuals who are planning for retirement. However, the laws and regulations governing 401(k) plans are constantly changing. The SECURE Act 2.0 includes tax credits that are designed to encourage business owners to start or maintain 401(k) plans for their employees. Moreover, there are potentially greater tax savings for businesses that offer an employer match. It’s important for business owners and individuals to stay informed about these changes to ensure that they are taking full advantage of the benefits offered by these plans.
Key Takeaways:
Business owners starting 401(k) plans are eligible for up to $15,000 of tax credit in the first three years
The tax credit can offset up to 100% of the administration costs and plan fees
An employer match can provide additional tax credits of up to $1000 per employee
Auto-enrollment is now required for new plans, effective 2025
Tax Credits Can Cover 100% of New 401(k) Plan Costs
Capping at $15,000 in tax credits over the first three years, it’s never been more affordable to start a 401(k) plan for your small business.
Beginning in 2023, eligible businesses with 50 or fewer employees can qualify for a credit to cover up to 100 percent of the administrative costs for establishing a workplace retirement plan.
The original SECURE Act gave startup businesses with up to 100 employees a tax credit equal to 50% of administrative costs, capped annually at $5,000. Eligible businesses with 51 to 100 employees remain subject to the original SECURE Act provision. This credit can be applied to 100% of your qualified business 401(k) costs such as plan setup and administration. Most small businesses wouldn’t incur half of that to start and cover the plan administration costs.
Your business must have at least one employee besides yourself (the owner) who earns less than $150,000 a year to qualify for a tax credit. Less than 150,000 a year qualifies as a Non-Highly Compensated Employee.
The credit is equal to the lesser of:
- $500 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan (capped at $5,000)
- $250 multiplied by the number of non-highly compensated employees who actually participate in the plan
The credit can be claimed for each of the first three years of the plan, and it can be used to offset the cost of setting up and administering the plan, including the cost of employee education and communication.
If your Prosperity 401(k) costs $1,000 per year and you have 10 or fewer non-highly-compensated employees, your tax credit would be higher than the charges you incur, completely offsetting the cost by 100%.
This credit is a valuable opportunity for small businesses that want to provide retirement savings opportunities for their employees but are concerned about the cost. The credit can help defray the expenses associated with setting up and maintaining a 401(k) plan, making it more affordable for small businesses to offer these plans to their employees.
It’s important to note that the credit is only available to small businesses that establish a new plan and that it can’t be claimed for existing plans. Businesses should seek the help of their financial and legal advisors to ensure that they are eligible for the credit and to take advantage of the opportunity.
An Employer Match Can Provide Tax Credits of $1,000 per Employee
The SECURE Act 2.0 also includes a tax credit further designed to encourage small businesses to provide an employer match for their employees’ contributions to 401(k) plans. The credit is equal to $1,000 per employee per year and it’s available for three years.
To be eligible for the credit, the business must have 100 or fewer employees. In addition, the employer must provide a nonelective contribution to the plan of at least 3% of compensation for each non-highly compensated employee who participates in the plan for each year the credit is claimed.
This credit, which caps at $1,000 per employee, phases down gradually over five (5) years and is subject to further reductions for employers with 51 to 100 employees.
Businesses should seek the help of their financial and legal advisors to ensure that they are eligible for the credit and to take advantage of the opportunity.
Auto Enrollment Is Now Required for 401(k) Plans
The SECURE Act 2.0 includes a provision that requires 401(k) plans to have an automatic enrollment feature. Beginning in 2025, employees will be automatically enrolled in the plan unless they opt out. The idea behind this provision is to increase participation rates in 401(k) plans and to help more Americans achieve a secure retirement.
Under the new law, businesses are required to automatically enroll new employees in their 401(k) plan at a default contribution rate of at least 3% of compensation. The default contribution rate can be increased by 1% each year until it reaches 6%. This is to ensure that employees are contributing enough to their 401(k) plans to achieve a secure retirement.
Employees have the right to opt out of the plan or to change their contribution rate at any time. However, the automatic enrollment feature is intended to make it easier for employees to start saving for retirement and to increase participation rates in 401(k) plans.
The automatic enrollment feature also requires businesses to provide employees with certain disclosures, including information about the plan’s features and benefits, the employee’s rights under the plan, and the default contribution rate. Overall, the automatic enrollment feature is intended to make it easier for employees to start saving for retirement and to increase participation rates in 401(k) plans.
Seek the Advice of a Prosperity Financial Advisor to Learn More.
In summary, the SECURE Act 2.0 aims to encourage Americans to save more for retirement and make it easier for them to do so. However, it also places additional responsibilities on businesses to ensure that they are in compliance with the new laws. Businesses should seek the help of their financial and legal advisors to ensure that they are in compliance with the new laws and to take advantage of any new opportunities.
There are many changes in the legislation and it can be overwhelming to sift through. Schedule an appointment with a Prosperity 401(k) Advisor today to gain clarity on what the new law means for your small business and how you can get started today.
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