Updated: Apr 18
With the passing of the SECURE Act, employers now have additional incentives to adopt a retirement plan and/or add automatic enrollment provisions to their plan. Effective January 1, 2020, the SECURE Act rolled out an update in tax credits to encourage employers to offer employees options for saving for retirement.
For 401(k) Plans with 20 or more Non-Highly Compensated Employees (NHCE), a tax credit of $5,000 per year would be available over three years. The tax credit is available to cover 50% of the implementation and administrative costs of implementing a Plan!
Specifically, the rule makes credits available:
For the first credit year (year when the Plan is established) and each of the 2 taxable years immediately following the first credit year, the tax credit available is the greater of
$500; OR the lesser of $250 for each NHCE who is eligible to participate in the Plan or $5,000
Ordinary and necessary eligible costs include installation or administrative fees and costs to educate employees about their benefits and options under the plan.
The tax credit is only available when an employer is establishing a new retirement plan, including:
Profit Sharing Plans
Cash Balance Plans
SIMPLE IRAs and SEP IRAs
If the employer offered a retirement plan at any time during the previous three years which covered substantially the same employees as the new plan, the tax credit is not available. For example, an employer who offered a SIMPLE IRA in 2019 who implements a 401(k) Plan effective in 2020 for the same employees, does not qualify for the start-up tax credit for costs associates with the implementation of the 401(k) Plan.
The tax credit is not a deduction. The tax credit reduces the employer’s tax liability dollar-for-dollar. If this tax credit is calculated to equal $2,000, then the employer’s tax liability is reduced by $2,000.
There is an additional tax credit for those who offer automatic enrollment! As if the setup credit isn’t enough good news, the SECURE Act also encourages Automatic Enrollment. For a Plan that implements Automatic Enrollment in 2020 or later, a $500 credit is available in the year that the Automatic Enrollment is implemented and each of the next 2 years. Yes, a new Plan that implements Automatic Enrollment would be eligible for both credits! Unlike the start-up tax credit, the $500 tax credit is available to any employer who elects to add automatic enrollment to their existing plan.
Breaking it down… if an employer were to qualify for the $5,000 annual tax credit for the setup, and if they also implemented Automatic Enrollment, that’s a total of $16,500 in dollar-for-dollar tax credits back to the employer!
Click HERE to print or download more information about the SECURE Act.
Contact us today to learn about setting up a retirement plan for your business, or if you would like to see what credits your new plan will qualify for!
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