Maximizing Business Benefits: 401k Tax Credit Strategies with Secure Act 2.0
Written By: Kennedy Schmidgall, CPA
Getting a handle on your business's retirement savings just got more exciting with Secure Act 2.0. In this post, we're going to break down the changes, focusing on tax credits—basically, the perks that can make a big difference in how much you save for retirement. Think of it as your roadmap to a more prosperous financial future without getting bogged down in complicated details. Let's dive in!
Credit for starting a new 401(K) Plan
Secure Act 2.0 has significantly boosted the tax credits for starting a new 401(k) plan, now allowing for a credit up to $5,000 per year for the first three years. The breakdown of this credit varies based on the size of your business:
For businesses with under 50 employees, the credit can offset 100% of retirement plan costs (up to $5,000 maximum per year for three years).
For businesses with 51-100 employees, the credit can offset 50% of retirement plan costs.
If your business has less than 20 employees, the credit is limited to $250 per non-highly compensated employee (earning $150K or more), with a cap of $5,000 applied to 100% of the costs incurred.
Costs eligible for the credit include setup and administration charges for maintaining the plan.
Your business is required to ensure that the plan covers at least one non-highly compensated employee (who is not the owner).
Credit for Setting Up Automatic Enrollment:
Secure Act 2.0 offers a compelling incentive—an extra $500 tax credit—for companies that embrace automatic enrollment. This credit acts as a financial catalyst, rewarding businesses for prioritizing employee retirement savings.
Adopting automatic enrollment translates to employees being automatically enrolled in the company's 401(k) plan by default when hired. This not only simplifies the process of contributing for employees but also sets the stage for increased participation in retirement savings.
This credit isn't exclusive to businesses setting up new plans. If you already have a 401(k) plan in place (that was started in the last three years), implementing automatic enrollment makes you eligible for the additional $500 credit.
To unlock these benefits, businesses need to take the step of adopting an automatic enrollment plan. This commitment not only positions the company for financial perks but also streamlines the retirement savings process for employees.
Credit for Employer Contributions:
Secure Act 2.0 has paved a straightforward path for businesses to boost their employee benefits through employer contribution credits.
Employers with less than 50 employees can claim a $1,000 tax credit per employee (earning less than $100K) annually for contributions. The credit starts at 100% and gradually reduces over five years.
Employers with 51-100 employees also benefit from employer contribution credits, with additional phase-outs over five years.
Businesses must actively contribute to qualify for these credits, aligning benefits for employees with financial incentives for the company.
Companies opting for Safe Harbor must contribute for each employee earning under $100K.
While no minimum contribution is mandated, consistent contributions for all eligible employees are required.
How to Strategically Leverage These Credits:
1. Evaluate Your Retirement Plan:
Start by scrutinizing your existing retirement plan or consider establishing one. The Secure Act 2.0 introduces perks worth exploring, and understanding your eligibility can position your enterprise for tax-efficient retirement planning.
2. Optimize Automatic Enrollment:
If your enterprise isn't already utilizing automatic enrollment, now might be the perfect time to implement it. Beyond its benefits for employees, the additional tax credits offer a compelling reason to streamline participation in retirement savings.
3. Tap into Start-Up Credits:
Small enterprises and startups should seize the opportunity presented by the expanded start-up tax credits. These incentives serve as a catalyst for initiating or enhancing retirement plans, aligning with the broader goal of ensuring financial security for both employers and employees.
In the realm of retirement planning, Secure Act 2.0 is your key to the path of prosperity. By strategically leveraging these credits, enterprises can align their financial strategies with evolving legislation, paving the way for a more prosperous future. It's about making informed choices, capitalizing on the opportunities presented, and ensuring a robust financial future for both your enterprise and your team. Secure Act 2.0 is your guide—time to navigate the financial landscape with confidence on the path to prosperity.
