The Setting Every Community up for Retirement Enhancement Act (SECURE) made sweeping changes to retirement plan law, including an increased small employer tax credit. The 2019 SECURE Act provides the increased tax credit for small employers who implement a new qualified retirement plan. A small employer, generally, has fewer than 100 employees (determined as of the prior year).
The tax credit for implementing a new qualified retirement plan is equal to 50% of the plan’s startup costs up to the greater of $500 or $250 times the number of “non-highly compensated employees” eligible to participate in the plan up to a maximum of $5,000 per year for up to three years. “Non-highly compensated employees” are generally employees who earn $125,000 or less in 2019 or own no more than 5% of the company. The compensation amount used to determine “non-highly compensated” increases each year depending upon cost of living adjustments.
For example, assuming a business that starts a new retirement plan has 15 non-highly compensated employees eligible to participate, the tax credit available to the employer is 50% of the start-up cost limited to the greater of $500 or $250 times 15 employees, or $3,750 per year for three years.
The Act also provides a tax credit for small employers that add automatic enrollment to a new or existing 401(k) plan. The tax credit for adding automatic enrollment to a new or existing 401(k) plan is $500 per year for up to three years and is in addition to the start-up credit. If a business with 15 non-highly compensated employees also added automatic enrollment to their plan, the available tax credit of $3,750 would be increased by $500 for a total of $4,250.
For more information on how small employers can save up to $5,000 on a 401(k) plan or another qualified retirement plan, contact your Aldrich Advisor or David Strom at email@example.com.
This article is an overview of the tax credit for new qualified retirement plans under the SECURE Act and is provided as a service to our clients and friends. It should not be relied upon for tax advice.