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It’s Time to Revisit Secure Act 2.0

It’s Time to Revisit Secure Act 2.0

May 09, 2024

Effective for 2023, SECURE 2.0 Act was implemented and created substantial changes to retirement plan tax credits for small employers. Certain key provisions expanded available tax credits and may provide significant tax benefits for small businesses who want to start a retirement plan. 

Take a look at the overview of these new tax credits below.

Retirement Plans Startup Cost Tax Credit

Employers may qualify for a tax credit of up to $5,000 for the ordinary and necessary expenses associated with initiating an SEP, Simple IRA, or qualified plan. This credit is applicable to employers during the first three years of the plan and directly reduces taxes on a dollar-for-dollar basis.

To determine if you qualify, consider the following requirements:

  1. Eligible Employer Criteria:
    • A business with 100 or fewer employees who received at least $5,000 in annual compensation.
    • The employer must not have established any other retirement plan covering the same employees in the three years preceding the new plan.
    • Qualified Business must have at least one non-highly compensated employee. Highly Compensated Employee is defined as:
      • Owned more than 5% of the business, or
      • Received more than $150,000 compensation in 2023 and was in the top 20% among all employees if ranked by compensation
  1. Qualifying Retirement Plans include:
    • 401(k) Plans and 403(b) Plans
    • SEP IRA Plans
    • Simple IRA Plans
    • Defined Contribution Plans
    • Defined Benefit Plans
  1. Eligible Startup Costs include:
    • Administrative expenses
    • Training fees incurred to educate employees about the plan
  1. Credit Amount
    • Employer with 1-50 employees: 100% of Qualified Startup Cost  
    • Employer with 50-100 employees: 50% of Qualified Startup Cost
    • Employer with over 100 employees: 0% of Qualified Startup Costs
    • Credit Limit:
      • Minimum Credit Amount is $500
      • The Maximum Credit Amount is limited to the lesser of $250 for each eligible employee and not highly compensated or $5,000 for the first credit year and each of the following two years.

Example 1 – Employees Less Than 50

Qualified Employer pays annual plan costs of $3,500 and has 10 eligible employees, including 8 non-highly compensated employees.

Credit Calculation: $3,500 x 100% (fewer than 50 employees) = $3,500

Maximum Credit: 8 non-highly compensated employees x $250 = $2,000

The total year 1 tax credit is $2,000 based on the maximum credit limit

Example 2 – Employees between 50 – 100

Qualified Employer pays annual plan costs of $5,000 and has 60 eligible employees, including 50 non-highly compensated employees.

Credit Calculation: $5,000 x 50% (more than 50 employees) = $2,500

Maximum Credit: 50 non-highly compensated employees x $250 = $12,500, but capped at maximum limit $5,000

Actual Credit Available: Lesser of Calculated Credit Amount and Maximum limit = $2,500 

The total year 1 tax credit is $2,500, limited to 50% of employer plan costs.

Example 3 – Employees Over 100

Qualified Employer pays annual plan costs of $8,000 and has 120 eligible employees, including 70 non-highly compensated employees.

Credit Calculation: $8,000 x 0% (more than 50 employees) = $0

The total year 1 tax credit is $0, 0% of employer plan costs.

 

Employer Contribution Credit

Employer Contribution Credit is available for small employers after 2022. The tax credit is an applicable percentage of qualifying employer contributions made for each employee with no more than $100,000 annual compensation, up to $1,000 per employee per year, over the plan’s first five years. 

To determine if you qualify, please find the following eligibilities:

  1. Eligible Employer Criteria
    • Must have had no more than 100 employees during preceding tax year
    • Must have at least one employee who received no less than $5,000 compensation during preceding tax year
    • Must have at least one employee who is not a highly compensated employee. Highly Compensated Employee is defined as:
      • Owned more than 5% shares of the business, or
      • Received more than $100,000 annual compensation in the preceding year (if preceding year is 2023).
  1. Qualifying Employer Contributions
    • Any contributions made to an eligible employer plan
    • Not including contributions made for employees who received wages over $100,000 during the year or preceding year.
  1. Qualified Employer Plan
    • Same as the plans defined above in Startup Cost Tax Credit paragraph. 
  1. Credit Phase-Down Schedule
    • The credit percentage phase downs over the first five years of adopting a qualified employer plan according to the schedule below.

Phase-Down Schedule

Year 1

Year 2

Year 3

Year 4

Year 5

100%

100%

75%

50%

25%

Example

Qualified employer has 21 employees, 10 making less than $100K, 9 of the 10 participate and each contribute $3,000 a year; Employer match is 50% of employee’s contributions.

Employer Match: 50% x $3,000 employee = $1,500 for each of 9 employees, but cap of $1,000 per employee is used to calculate credit amount (see below).

Credit Calculation: 100% x $1,000 = $1,000 for each 9 employees


Small Employer Auto-Enrollment Credit

Small Employer Auto-Enrollment Credit is available for employer who enrolls in an eligible automatic contribution arrangement retirement plan. 

To determine if you qualify, please find the following criteria:

  1. Eligible Employer Criteria
    • Must have had no more than 100 employees during preceding tax year.
    • Must have at least one employee who received no less than $5,000 compensation during preceding tax year.
  2. Qualified Employer Plan
    • Same as the plans defined above in Startup Cost Tax Credit paragraph.
  3. Credit Amount
    • $1,500 credit in total for the first three years:
      • $500 for the first tax year that an eligible employer enrolls in an eligible automatic contribution arrangement plan.
      • $500 for each of the following year, only if employer continue to maintain the arrangement.

Example

Qualified employer has 50 employees. The employer started to enroll in an eligible automatic contribution arrangement plan starting 2022. 

1st Year Credit: $500

2nd Year Credit: $500

3rd Year Credit: $500

 

State Mandated Retirement Plans

Increasingly, states are considering implementing mandatory state retirement plans for employers. It's crucial for employers to understand how state legislation will impact their businesses and ensure compliance with these evolving laws. Here are some states with active mandatory programs or recently passed legislation:

California

  • California mandates a Roth IRA retirement program called Calsavers for employers with 5 or more employees.
  • Employers must enroll in either the Calsavers program or their own retirement plan annually by the end of each year.
  • Noncompliance penalties range from $250 to $500 per eligible employee.

Colorado

  • Colorado enforces a mandatory Roth IRA retirement plan called Colorado Secure Choice Savings Program for employers with 5 or more employees.
  • Noncompliance penalty is $100 per eligible employee, up to $5,000 annually.

Illinois

  • Illinois has a mandatory Roth IRA program called Illinois Secure Choice Savings Program for employers with 5 or more employees.
  • Noncompliance penalties range from $250 for the first fiscal year to $500 per employee for subsequent years.

Maryland

  • Maryland enforces the "Maryland$aves Secure Choice Program" for businesses operating for more than 2 years with at least one W-2 employee.
  • No penalty has been levied for noncompliance yet.

New Mexico

  • New Mexico has passed legislation regarding a state retirement plan program, with a target implementation date of July 1, 2024.
  • Employers with 5 or more employees for more than two years will be impacted.

New York

  • New York has passed legislation regarding a state retirement plan program, with details still under discussion.

Washington

  • Washington enforces a voluntary Marketplace retirement program called Washington Small Business Retirement Marketplace.

Ensuring compliance with these state-mandated programs is essential for employers to avoid penalties and uphold their legal obligations.

The information provided here is for general introduction purposes only and should not be construed as legal or tax advice. Tax laws and regulations can vary by jurisdiction and individual circumstances. For more details, please consult with your financial services agents, legal and tax advisors.