The SECURE Act was a major piece of retirement legislation with many different provisions. We’ve already looked at its major provisions, but wanted to highlight the two tax credits that can help small business owners right away: the enhanced Retirement Plans Startup Costs Credit & the new Small Employer Automatic Enrollment Credit. When combined, these tax credits can add up to a maximum of $5,500 per year for three years—up to $16,500 in total!
First, who’s eligible for the tax credits?
Businesses that open a new qualified retirement plan in 2020 may be eligible. If they have fewer than 100 employees who made at least $5,000 in the previous year, and have at least one employee who is a non-highly compensated employee (NHCE). For 2020, an NHCE is an employee who made less than $125,00 in 2019 and did not own more than 5% of the business in 2019 or 2020. Read the full requirements to see if your business is eligible.
Tax credit #1: Retirement Plans Startup Costs Credit
- Covers eligible startup costs required to set up the plan, administer it, and educate employees
- Maximum annual credit limit is now the greater of $500, or $250 per eligible NHCE, up to $5,000
- Credit cannot exceed 50% of eligible startup costs paid or incurred in a tax year
- The credit is subtracted from total federal income tax owed and claimed by filing IRS Form 8881
Tax credit #2: Small Employer Automatic Enrollment Credit
- Applies to new and existing plans that add an automatic enrollment feature
- $500 credit per year for three years
- Credit is added on top of the Retirement Plans Startup Costs Credit
Since all Guideline 401(k) plans feature automatic enrollment, new Guideline plans will be eligible for the Small Employer Automatic Enrollment Credit.*
So, what do these tax credits actually look like? Let’s look at Adam’s Apples, Inc. as an example. Adam has 10 employees in addition to himself, and has decided to establish a Guideline 401(k) plan with a safe harbor nonelective contribution (SHNEC) in 2020. Here’s a breakdown of the annual costs and tax savings associated with his company’s 401(k) plan:
|Annual Guideline 401(k) Administrative Costs|
|Base fee ($39/month)||$468|
|Participant fee ($8/month)||$1,0561|
1100% participation due to SHNEC
|Combined Tax Credit for 2020|
|Total Annual Plan Expense||$1,524|
|Annual Startup Costs Credit||-$762|
|Annual Auto Enrollment Tax Credit||-$500|
|Net Plan Expense2||$262|
2For first three years of plan**
For Adam’s Apples, its Net Plan Expense is $786 for the first three years—a savings of $3,786. And that’s before you consider tax deductions for matching contributions and the tax advantages of Adam’s individual retirement plan!
With the SECURE Act in effect, offering a 401(k) adds up to a really big savings for small business owners, their small business, and the employees who help the business grow.
*Conversion plans that already have auto-enrollment prior to Jan 1, 2020 will not qualify. Conversion plans w/o EACA can qualify the following year.
**Assumes $18,000 would have otherwise be1en paid as a taxable bonus