The SECURE Act has increased the 401(k)-tax credit for business who start 401(k) benefit plans. Currently, the Secure Act allows eligible employers to qualify for a minimum of $500 tax credit and a maximum of $5,000 for each of the first three years of your plan’s existence.
You qualify to claim this credit if:
• You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
• You had at least one plan participant who was a non-highly compensated employee (NHCE); and
• In the three tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.
The credit is 50% of your eligible startup costs necessary to set up and administer the plan, and necessary to educate your employees about the plan. An eligible employer with 50 or fewer employees may claim a tax credit for 100% of its qualified startup costs. An eligible employer with 51 to 100 employees may only claim a tax credit for 50% of its qualified startup costs.
Additionally, if you choose the automatic enrollment feature of the 401(k) plan, you qualify for another $500 per year for the first three years. The automatic enrollment is a feature where an employer can choose to put all eligible employees into the plan at a set percentage of salary up to 15%.
Please note that if this credit is taken, no deduction is allowed for the startup costs.
To claim this credit, you must file IRS Form 8881 – Credit for Small Employer Pension Plan Startup Costs.
The SECURE Act 2.0 has also enhanced other benefits, including the tax credit for employer contributions provided by small businesses. If you are interested to learn more about this program, please contact our office for more information.