A Review of Secure 2.0 Act Startup Tax Credits

What is the plan cost tax credit?

• The credit reduces the amount of federal taxes that a small business may owe during each of the first three years of its first-ever retirement plan.
• The credit covers 100% (if 50 or fewer employees) or 50% (if 51 to 100 employees) of the employer’s ordinary and necessary out-of-pocket plan costs up to an annual limit.
• The annual limit is $500 or, if greater, $250 multiplied by the number of planeligible non-highly compensated employees (NHCEs), up to $5,000.

Note: To qualify for this credit, a plan must have at least one participant who is a NHCE.

What SECURE 2.0 changed
Previously, the tax credit covered 50% of eligible employer plan costs. SECURE 2.0 increased the credit to 100% of eligible costs for employers with 50 or fewer employees who were paid at least $5,000 in the preceding year.

What types of plan costs does this credit apply to?

The credit applies to costs paid by the employer to set up and administer the plan, such as financial professional and TPA compensation, recordkeeping fees and employee education expenses. The credit does not apply to plan costs paid through plan assets or investment expenses.

How does this cost credit apply to different plan types and share classes?

In general, the credit amount may be limited for SEP and SIMPLE IRA plans because of their lower administrative costs. Share classes with fees used to help pay plan costs may also have limited benefits. Plans with fee-based financial professionals may pay more plan costs out of pocket, so the credit amount may be greater.

What else should I know about the credits?

• The expanded cost credit and new contribution credit are available for taxable years beginning after 2022.
• The contribution credit and cost credit are separate and distinct. Plans may receive one or both credits.
• If a plan terminates after receiving tax credits, repayment of the credits is not required.

 In addition: Automatic enrollment tax credit Employers can also earn a tax credit for adding or, in the case of a startup plan, including an automatic enrollment feature as part of their plan. The credit is $500 per year for the first three years the feature is included.

 

The credit is only available to employers who had no more than 100 employees with at least $5,000 in compensation in the preceding year. Additionally, to qualify for the credit, the feature must be structured as an eligible automatic contribution arrangement (EACA), following specific notice requirements, and uniformly apply the plan’s default contribution rate.

 

SECURE 2.0 impact: The availability of this tax credit is even more significant due to changes made by SECURE 2.0, which requires certain plans starting after December 29, 2022, to use automatic enrollment. While the requirement is not effective until 2025, employers with plans potentially subject to the requirement may consider including automatic enrollment at the time of launch to benefit from this tax credit sooner. Employers with plans not subject to the requirement also may consider including automatic enrollment to take advantage of the credit.