On December 29th, 2022, the omnibus spending bill, which included the SECURE Act 2.0, was signed into law. One of the major enhancements included in the act is the increase in tax credits available to small businesses that establish a retirement plan beginning in 2023. A small business is considered to have less than 50 employees.

What is a tax credit? A tax credit is a dollar-for-dollar reduction of the income tax owed. For example, if you owe $5,000 of income taxes but qualify for a $5,000 tax credit, your tax liability would be zero.

Small businesses cite that cost is the biggest reason they do not offer a company-sponsored retirement plan. Under the SECURE Act 2.0, a small business can qualify for a tax credit equal to 100% of the administrative costs for establishing a workplace retirement plan. The tax credit is available for the first three years and capped at $5,000 per year.

Additionally, SECURE Act 2.0 provides a new tax credit for small businesses that make retirement plan contributions on behalf of employees. The credit will be a percentage of the employer's contribution up to $1,000 per employee. The percentage is 100% in the first and second years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. Full credit is limited to employers with 50 or fewer employees and phased out for employers with 51 to 100 employees.

LET’S REVIEW A FEW EXAMPLES:

1. XYZ Company has ten eligible employees and will implement a 401(k) plan in 2023. Utilizing a retirement plan through Lutz Financial and its partners, estimated administrative costs would be approximately $3,350 per year. If the company pays these administrative costs, the entire $3,350 would be eligible for the tax credit in each of the first three years.

Additionally, if the company decided to make a $1,000 contribution to each of the ten employees’ 401(k) accounts, they would receive an additional tax credit of $10,000 in each of the first two years, $7,500 in the third year, $5,000 in the fourth year and $2,500 in the fifth year.

2. XYZ Company has 50 eligible employees and will implement a 401(k) plan in 2023. Utilizing a retirement plan through Lutz Financial and its partners, estimated administrative costs would be approximately $4,800 per year. If the company pays these administrative costs, the entire $4,800 would be eligible for the tax credit in each of the first three years.

Additionally, if the company decided to make a $1,000 contribution to each of the 50 employees’ 401(k) accounts, they would receive an additional tax credit of $50,000 in each of the first two years, $37,500 in the third year, $25,000 in the fourth year and $12,500 in the fifth year.

In each of the above examples, the company can establish a retirement plan to provide flexibility on whether it wants to contribute to employees and the amounts of those contributions. The company can also have the flexibility to change how they pay administrative costs in the future. It is common for small businesses to pass some of these on to employees.

WHY IS IT IMPORTANT THAT SMALL BUSINESSES PROVIDE THEIR EMPLOYEES WITH ACCESS TO A COMPANY-SPONSORED RETIREMENT PLAN?

According to Forbes, small businesses employ approximately 46.4% of the workforce. A Labor Department report estimates that only half of the workers employed by companies with fewer than 50 employees have access to a retirement savings plan through their employer. Most workers without access to a company-sponsored retirement plan do not save on their own and have little or no retirement savings.

Implementing a company-sponsored retirement plan also offers substantial benefits for the employer. For example, it can present opportunities for ownership, key employees can make meaningful tax-deferred contributions, it enhances a company’s benefits package to attract qualified employees in a competitive job market, and it provides financial security for your workforce. This act incentivizes companies to not only establish retirement plans but also make contributions to employees’ retirement accounts, a true win-win! If you have any questions, please contact us, or learn more about our retirement plan services.

IMPORTANT DISCLOSURE INFORMATION