$90 million in 401(k) tax credits from the SECURE Act

The SECURE 2.0 Act passed at the end of 2022, and it provides even more tax credits for small business owners starting new 401(k) plans than the original 2019 law. In light of the new legislation, we took a moment to look back and estimate the impact it may have had on our customers.

We discovered that over the past four years, our customers were able to access over $90 million in potential new plan tax credits through the SECURE Act.

Here’s how we got there:

From 2020 to 2022, we helped our customers start over 30,000 new 401(k) plans, including 14,500 in 2022 alone. Thanks to the SECURE Act, for every new small 401(k) plan established, sponsors are eligible for a minimum of $500 from the new plan credit. They're also eligible for another $500 for the new plan auto-enrollment credit. (All Guideline plans feature auto-enrollment.) Added together, plan sponsors of new small 401(k) plans can claim a total annual credit of $1,000 or more per 401(k) plan.

These credits apply annually for the plan's first three years, bringing the total to $3,000 or more for each new small 401(k) plan. Applied against the 30,000 new plans our customers opened from 2020 to 2022, we arrive at $90 million in total potential tax credits.¹ You can find the IRS tax form here to claim the new plan credits for your 2022 taxes.

Now that we’ve broken down the math, here’s how the SECURE Act applies to you as a business owner and steps you can take to maximize your tax credits:

1. Call your accountant

If you've signed up for a new 401(k) plan since the beginning of 2020, we encourage you to talk to your accountant about claiming the tax credits and point them to Form 8881. Note that any excess credit in one year can be carried over, so many of our customers can actually benefit from these credits over four tax years instead of three. And for some of our customers, the tax credits may offset the entirety of their costs to Guideline for the first few years.²

2. Be sure you understand the new provisions

The passing of SECURE 2.0 at the end of 2022 made these tax credits even more compelling.

The legislation eliminated the existing 50% cap on administrative fees for plans with 50 for fewer employees, expanding coverage to 100%. This means eligible businesses that signed up for new plans after the new year are eligible to use the new SECURE 2.0 tax credit expansion to offset their annual 401(k) plan costs on their tax return. Plans with 51 to 100 employees can still take advantage of the original 50% credit.

SECURE 2.0 also provides an additional credit for employer contributions, up to $1,000 per employee (earning $100,000 or less). Employers with up to 50 employees are eligible for the full credit, which begins to  phase out for employers with 51 to 100 employees.  

The new tax credit provisions, effective as of January 1, 2023, significantly increase the benefits of offering a 401(k) plan for the smallest businesses and also provide monetary incentive for employers to start a safe harbor plan, which can make plan administration less of a burden in the long run.

3. Estimate your costs

To help you understand how the SECURE 2.0 provisions might impact your bottom line, we created a calculator to help you estimate the costs of starting a new 401(k). (Spoiler: In some scenarios, the net costs can be zero over the first three to four years, if you consider plan costs offset by tax credits.)²

What if I started a new 401(k) plan before 2023? Can I still qualify for the more generous SECURE 2.0 tax credits?

Yes. SECURE 2.0 retained the 3 year tax credit allowance for brand new 401(k) plans. This means if you started a new 401(k) plan in 2021 or 2022, then you are eligible to take advantage of the more generous SECURE 2.0 tax credits for your 2023 taxes when you file in 2024.

Can the tax credits be used to offset AUM fees?

Please note that these new tax credits only apply to the administrative fees to employers as the plan sponsors and not fees charged to participants such as asset-based fees (or assets under management fees).

With over a dozen states like California, Colorado, Connecticut, Oregon, and Illinois requiring businesses to offer retirement plans, there's never been a better time to start planning for the future. A 401(k) plan can benefit your company in many ways, including boosting employee loyalty, driving growth, reducing tax obligations, and more benefits that can last for years. Get started with Guideline today.

The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax advice that considers all relevant facts and circumstances. Guideline makes no representations or guarantees with regard to investment performance as investing involves risk and investments may lose value. Clients should consult a qualified investment or tax professional to determine the appropriate strategy for them.

¹ The calculation is a simplified representation of possible tax credits that may have been available to employers who established new 401(k) plans at Guideline effective in or after 2020. The actual savings realized may be higher or lower as this is a hypothetical and based on the assumption that all 30,000 newly established plans were eligible to claim at least the minimum allowed under these two specific credits. Business owners of Guideline plans do not provide their tax credit eligibility information to Guideline.

² This illustration is for informational purposes only and is based on Guideline's interpretation of prevailing law, which is subject to change at any time. It does not take into account a business entity's specific circumstances. It is not intended to provide tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before determining any tax filing position. No warranty or representation, express or implied, is made by Guideline, Inc., nor does Guideline, Inc. accept any liability with respect to the analyses, calculations, and data set forth herein. Furthermore, Guideline's fees may be subject to modification in the future. Any tax credits your company is eligible for cannot be directly applied to your Guideline invoice.