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Business Tax Incentives

With the passing of the Secure Act 2.0, there are now even more reasons why starting a retirement plan may make sense for your small business. Effective January 1, 2023, in order to encourage employers to establish new retirement plans, substantial tax credits are now available for employers with 100 or fewer employees.

New Plan Credit – The tax credit is available to cover implementation and administrative costs of establishing a plan up to a maximum of $5,000 per year for a total of three years!

Let’s look at a few examples of how the credit works with business owners of varying sizes
O’Brien Consulting

1 Owner

1 Non-Highly Compensated Employee

Tax Credit = $500 ($250 x 1 = $250; $500 > $250)
Teal Field Industries

1 Owner

14 Non-Highly Compensated Employees

Tax Credit = $3,500 ($250 x 14) 
Dean’s Golf Shop

2 Owners

35 Non-Highly Compensated Employees

Tax Credit = $5,000 (credit is limited to the lesser of $5,000 or $250 x 35 = $8,750)

The above is for illustrative purposes only and does not include any actual client information.

Employer Contribution Credit – Employer gets a credit of up to $1,000 per employee (only employees making under $100,000) for the amount of the employer contributions. It phases out based on the number of employees above 50. The percentage also phases out over five years.

Auto-Enrollment Credit – The SECURE Act also created a separate new tax credit for any business that adds an auto-enrollment feature to a new or existing retirement plan. This credit, of up to $500, is available for the first three years for small employers that add an automatic enrollment feature to a qualified retirement plan or SIMPLE IRA plan.

Other Incentives – In addition to the enhancements made with the passing of the SECURE Act, there are other tax incentives that employers can take advantage of by offering a retirement plan to their employees:

  • Some administrative fees can be a tax-deductible business expense.
  • Employer contributions are exempt from federal, state, and payroll taxes if they fall under 25 percent of the total compensation paid (or accrued) during the year to eligible employees participating in the plan.
  • Since business owners are also employees, you can take advantage of your company’s plan yourself, with tax-advantaged contributions, tax-deferred growth, and higher contribution limits than IRAs!
  • Your retirement plan may also have creditor and bankruptcy protection (varies by plan and state).

If you are a business owner and have not yet established a retirement plan for yourself and your employees, consider taking advantage of these new credits by establishing a new retirement plan. Schedule time with your Stifel Financial Advisor to discuss which plan or plans make the most sense for your business.

Frequently Asked Questions

New Tax Plan Incentive

Q: What is considered an eligible employer?

A: Employers that qualify for this tax incentive must meet the following criteria:

  • Had 100 or fewer employees who received at least $5,000 in compensation for the preceding year;
  • Had at least one plan participant who was a non-highly compensated employee; and
  • In the three tax years before the first year the business is eligible for the credit, the employees were not substantially the same employees who received contributions or accrued benefits in another plan sponsored by the employer, a member of a controlled group, or a predecessor.

Q: Can the tax credit cover 100% of the start-up administrative costs?

It can cover 100% of the start-up costs for an employer with 1 to 50 non-highly compensated employees (up to $5,000). The credit covers 50% of costs if the employer has 51 to 100 non-highly compensated employees.

Which plans qualify for the new plan tax incentive?

A: Eligible plans include 401(k) plans, 403(b) plans, profit sharing plans, cash balance plans, SIMPLE IRAs, and SEP IRAs. Such businesses are defined as businesses with 100 or fewer employees receiving $5,000 or more of compensation.

Q: What expenses are considered when determining the credit?

A: The term “qualified startup costs” means any ordinary and necessary expenses of an eligible employer that are paid or incurred in connection with the:

  • Establishment or administration of an eligible employer plan, or
  • Retirement-related education of employees with respect to such plan.

If expenses are used as tax deductions, they are not eligible for the tax credit.

Q: In order for a business to claim the credit, how do plan expenses need to be paid?

A: In order to claim the tax incentive, the cost of establishing the plan and education costs need to be paid directly by the employer/business owner and not out of plan assets.

Auto Escalation Incentive

Q: Does the plan have to be established in 2023 or later to get the auto escalation credit?

A: The auto-enrollment option tax credit is based on when the auto-enrollment option itself is added, not when the plan is created. An existing qualified plan can still earn the credit by adding an auto-enrollment option in 2023 or beyond.

Q: Is the auto-escalation credit available to 403(b) plans as well?

A: Yes, the credit applies to 401(k), 403(b), and SIMPLE IRA plans.

Stifel does not provide legal or tax advice. You should discuss your particular situation with your legal and tax advisors.