ESTABLISHING A RETIREMENT PLAN
Offering a retirement plan, such as a SEP, SIMPLE plan, or 401(k), is a great way to attract and retain good employees, which can be tough. But setting up and funding a retirement plan can be expensive. Sure, you can take a federal income tax deduction for your plan contributions, but there is still the cost of setting up and running the plan. I’m writing to let you know about some ways Congress is trying to make it easier for you to do that.
Tax Credits for Setting up a Retirement Plan
Small employers that adopt and keep a retirement plan, such as a profit-sharing, 401(k), SEP, or SIMPLE plan, can qualify for income tax credits.
Credit for Plan Startup Costs. Generally, this credit is available if you have 100 or fewer employees and adopt a retirement plan that covers at least one non-highly compensated employee. If the credit is for the cost of a payroll deduction IRA arrangement, the arrangement must be available to all employees who have been with you for at least three months.
Before 2023, the credit was 50% of qualified startup costs for the plan’s first three years, limited to the lesser of $250 per non-highly compensated employee who is eligible to participate in the plan or $5,000. But the limit is never less than $500. Qualified startup costs are your ordinary and necessary expenses incurred in connection with (1) setting up and administrating the plan or (2) educating your employees about the plan. Note that the credit for isn’t available for solo retirement plans. The Secure Act 2.0 (signed into law on 12/29/22) made some favorable changes to the pension startup credit. First, for tax years beginning after 2022, the credit is increased from 50% to 100% of eligible costs for employers with 50 employees or fewer. The credit also includes a percentage of employer contributions (for employees making $100,000 or less) made during the plan’s first five years of existence (capped at $1,000 per employee).
Credit for Auto-enrollment Feature. If you include an auto-enrollment option in your plan, you may be eligible for a $500 tax credit per year, for up to three years. An auto-enrollment option is an arrangement where your employees are treated as having elected to defer a set percentage of compensation into the plan until they specifically elect not to have salary-deferral contributions made or specifically elect to have such contributions made at a different percentage.
New Deferral-only 401(k) Plans Will Be Available
For plan years beginning after 2023, the Secure Act 2.0 created a new 401(k) plan for employers who don’t currently offer a retirement plan. This deferral-only plan does not require the employer to contribute to the plan. In fact, employer matching or nonelective contributions are not allowed. Employee contributions are limited to $6,000 annually (indexed for inflation after 2024), plus $1,000 in catch-up contributions for employees age 50 and over (indexed for inflation after 2023). Plans are subject to other requirements, such as automatic enrollment, but streamlined rules mean that these plans are generally less costly and less burdensome to administer than traditional 401(k) plans. Similar rules exist for a new 403(b) deferral-only plan.
Conclusion
Hiring and keeping good employees is one of the best ways to ensure your business’s success. We want you to be aware of some ways Congress has made that a little easier. Please call us if you have any questions or want us to assist in getting started on setting up a retirement plan for your employees. We are happy to help.
