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Summer is finally here. And while you’re enjoying the pool and popsicles and longer days, what better time than now to think about tax savings for clients!
As you have likely heard by now, the SECURE 2.0 Act of 2022 brought many changes for retirement plans and retirement plan sponsors. Among them: new tax credits to incentivize the adoption of new retirement plans and the making of employer contributions to those plans.
Modified Start-Up Credit: SECURE 2.0 modifies a prior start-up credit by increasing the percentage of startup costs used in calculating the credit.
Before SECURE 2.0, the credit equaled 50% of an eligible employer’s eligible startup costs, generally up to an annual $5,000 cap (limited by the number of non-highly compensated employees).
SECURE 2.0 increases the credit to cover 100% of eligible startup costs for employers with 50 or fewer employees. The $5,000 cap and limit based on non-highly compensated employees remains.
“Eligible startup costs” generally includes ordinary and necessary costs to set up and administer the new plan and educate employees about the new plan—therefore this change makes it nearly free for employers with 50 or fewer employees to start a plan.
Employer Contribution Credit: SECURE 2.0 adds a new credit for small employers that provide employer contributions to a new defined contribution plan.
For the first five years of the plan, small employers are entitled to a tax credit for the employer contributions made to each employee who earns less than $100,000 (as indexed), up to $1,000 per employee. In the year the plan is established and the next year the tax credit is equal to 100% of this amount. It is then phased out over the next three years: 75% of contributions up to the cap in year three, 50% of contributions up to the cap in year four, and 25% of contributions up to the cap in year five.
The full credit is available to employers with 50 or fewer employees. The credit is phased out for employers with between 51 and 100 employees.
This provides an incredible incentive for small employers to provide employer contributions in the first 5 years of the plan! Small employers can take advantage of these tax credits now.
This is a great time to familiarize yourself with this change, to think of client prospects who may benefit, and to reach out to your TPA partner to make sure existing clients know of these potential tax savings.
by Hannah Munn, Partner, Poyner Spruill
Hannah’s practice is focused in the areas of Employee Benefits and Executive Compensation. She works with business owners and HR executives to understand and manage employee benefits and executive compensation arrangements. She routinely represents clients before the Internal Revenue Service, Department of Labor, and Pension Benefit Guarantee Corporation and has extensive experience in virtually all aspects of employee benefits.
