RETIREMENT PLANS STARTUP COSTS TAX CREDIT: SECURE ACT 2.0

No 401k plan? Now is the time to start one! Secure Act 2.0 removes most all cost barriers for small businesses with 1 to 50 employees to start a 401(k) plan plus provides potentially much greater tax credits for those companies that provide an employer match (employer contribution). These tax credits are effective as of January 1, 2023.

Eligible employers may be able to claim a tax credit of up to $5,000, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.) A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.

Tax credit covers 100 percent of new plan costs for the first three years

This credit can be applied to 100 percent of your qualified business 401(k) costs such as plan setup and administration. That’s up to $15,000 in tax credits over the first three years to offset setup and administration charges for the maintenance of your plan. Most small businesses wouldn’t incur half of that to start and cover the plan administration costs.

Here’s how it works

Your business must have at least one employee, besides you as the owner, who earns less than $100,000 a year (a Non-Highly Compensated or NHC employee) to qualify for a tax credit. The tax credit received is the greater of $500 or $250 per NHC employee with a cap of $5,000 applied to 100 percent of the costs you incurred. So, if your 401k business cost is $1,200 annually and you have 10 or fewer eligible employees, your tax credit is $1,200 in year one or $3,600 in total over the first three years fully offsetting these costs.

Amount of the credit

The credit is 50 percent of your eligible startup costs, up to the greater of:

• $500; or

• The lesser of:

• $250 multiplied by the number of NHCEs (Non-Highly Compensated Employees under $100k/year) who are eligible to participate in the plan, or

• $5,000

Eligible startup costs

You may claim the credit for ordinary and necessary costs to:

• Set up and administer the plan (recordkeeping fees, plan admin cost etc.),

• Educate your employees about the plan

BY TRACY CARVER

Providing an employer match/contribution provides tax credits of $1,000 per employee

Employer contributions are typically 100 percent deductible already. But now businesses with 1-100 employees can receive tax credits, too. If you have less than 100 employees, you can qualify for tax credits of up to $1,000 per employee for your first 50 employees for your employer contributions. This applies for those employees earning less than $100,000 per year. The applicable percentage is 100 percent in the first (year plan begins) and second tax years up to $1,000 per employee, 75 percent in the third year, 50 percent in the fourth year, and 25 percent in the fifth year, and none for subsequent years. Note, there are some added tax credits for employees 51-100 as well, but a lesser percentage. There is no qualification for the credit if you have more than 100 employees. This includes prevailing wage contributions made to the plan per employee.

Lastly, for those contributions you receive a tax credit, those likely don’t qualify for tax deductions. However, the amount not covered by the credit should be deductible. You’ll want to review with your tax accountant.

Here’s how it works

In year one, let’s say your business contributes $15,000 to the plan and you have 10 employees who earn less than $100,000 and all received over $1,000 in employer contributions. You just qualified for $10,000 in tax credits in year one. Let’s keep things constant for this example, so your number of employees and contributions are the same throughout the next five years. You’d receive tax credits of $10,000 in year two, $7,500 in year three, $5,000 in year two, and $2,500 in year three for a total of $35,000 over the five years. That’s powerful stuff. 401(k) plans are truly more affordable than ever for businesses with 1-50 employees.

Over the past 15 years, Tracy Carver has worked for two of the largest national prevailing wage solutions providers in the country. For the past six years she has been providing the same compliant solutions and plans through her company, TLC4 Prevailing Wage. Tracy also works closely with the DOL doing seminars and making sure her clients are getting up to date and accurate prevailing wage information.

Carl Oliveri, CPA, CCIFP, CFE, MBA Partner, Construction Practice Leader