How Small Businesses Can Benefit from the Enhanced Tax Credits of the SECURE Act 2.0

The SECURE Act significantly enhanced retirement savings laws in the United States in 2019, simplifying the process for employers to offer comprehensive retirement plans and enabling employees to save more effectively. Building on this foundation, the SECURE Act 2.0, introduced in December 2022, further expands these benefits, introducing additional incentives tailored for small and medium-sized businesses. This guide outlines the tax advantages provided by these acts and demonstrates how small businesses can leverage them to implement or improve employee retirement plans.

Understanding the SECURE Act and SECURE Act 2.0

The original SECURE Act introduced several key changes to retirement savings regulations. Its primary goal was to make it easier for more Americans to save for retirement by improving access to savings plans and making various retirement-related rules more favorable.

It was followed by the SECURE Act 2.0 in December 2022, which introduced new enhancements and benefits to encourage retirement savings further and offer more substantial incentives for small businesses.  To read our in-depth SECURE Act 2.0 guide, click here.

Key provisions of the original SECURE Act included the following:

1. Increased Required Minimum Distribution (RMD) Age: The age for RMDs increased from 70½ to 72 under the SECURE Act. The age increased to 73 (as of Jan. 1, 2023) and will further increase to 75 (starting Jan. 1, 2033) in the SECURE Act 2.0. This change allows retirees to potentially increase their retirement savings by keeping them invested longer. 
2. Expanded Auto-Enrollment: The SECURE Act encouraged automatic enrollment in retirement plans, which has been shown to increase participation rates in retirement savings plans.
3. Enhanced Small Employer Benefits: Introduced various credits and deductions to incentivize small businesses to start retirement plans. These incentives aimed to reduce the financial burden on small businesses and encourage them to offer retirement benefits to their employees.
4. Multiple Employer Plans (MEPs): Made it easier for unrelated employers to join a single retirement plan. This aimed to reduce administrative costs and simplify plan management for small businesses.
5. Pooled Employer Plans (PEPs): Simplified the process for small businesses to join pooled plans, reducing administrative burdens and costs, making retirement plans more manageable and financially attractive for small businesses.PEPs ease fiduciary burdens for small business owners to allow them to focus on business growth.

The SECURE Act 2.0 expanded the original legislation. It provides increased tax credits, new incentives for employer contributions, and more accessible savings options for employees. By understanding and leveraging these benefits, business owners can create attractive retirement benefits packages that enhance employee satisfaction and retention while offering substantial tax savings for the company. 

These new benefits are discussed in detail below. 

Increased Tax Credits for Starting a Retirement Plan 

The SECURE Act 2.0 significantly increases the startup tax credits available for small businesses. These credits are designed to offset the costs of setting up a new retirement plan (i.e., starting up), making them a financially viable option. 

Previously, startup tax credits covered 50 percent of the plan’s startup costs, up to a maximum of $500 per year for three years. With the SECURE Act, employers were eligible for a tax credit between $500 and $5,000 per year for three years. 

Under the SECURE Act 2.0, eligible employers can now have up to 100 percent of the startup costs, with a maximum credit of $5,000 per year for three years. Below are the general provisions for this tax credit. 

Employer Eligibility

This tax credit is available to employers that:

• Have 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding year.
• Have at least one plan participant who was a non-highly compensated employee (NHCE), which is defined as follows: An employee that owned 5% or less of the employer’s business at any time during the year or a preceding year or received compensation from the business of less than $135,000 in the prior year, or was not in the top 20% of employees when ranked by compensation.
• In the three tax years before the first year, a business is eligible for the credit; the employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by the company, a member of a controlled group that includes the employer, or a predecessor of either.

Eligible Startup Costs

Includes ordinary and necessary costs incurred to set up the plan and educate employees about it (e.g., CPA fees, advisor fees, employee enrollment sessions, etc). 

Credit Amounts

The credit covers a percentage of eligible startup costs that are greater than $500 and less than $5,000 or $250 multiplied by the number of NHCEs eligible to participate in the plan. The maximum credit amount is capped at $5,000 annually for three years.

• Businesses with 1 to 50 employees – Covers 100% of startup fees
• Businesses with 51 to 100 employees – Covers 50% of startup costs 

Businesses must file IRS Form 8881 with tax returns to claim this credit. It is essential to keep detailed records of the startup costs incurred to ensure the full credit can be claimed.

Learn more about the Retirement Plans Startup Costs Tax Credit on the IRS website. 

Auto-Enrollment Tax Credit

The SECURE Act 2.0 offers a tax credit for businesses that include automatic enrollment features in their retirement plans. This is a powerful tool for increasing retirement plan participation rates, benefiting employees while providing tax advantages to employers.

Eligible employers implementing an auto-enrollment feature to a new or existing plan can receive a flat credit of $500 per year for three years. This credit can also be claimed via IRS Form 8881. (Learn more.)

Additional requirements for the auto-enrollment tax credit include: 

• Available to businesses with 0 to 100 employees who received at least $5,000 in compensation from the employer for the preceding year (businesses are not required to have one NHCE participate in the plan). 
• Auto-enrollment must meet Automatic Contribution Arrangement (EACA) requirements.
• All new retirement plans established after December 2022 must implement an auto-enrollment feature by Jan. 1, 2025. 
• There is also a provision (auto-escalation) that requires that the contribution automatically increase by one percent yearly up to at least 10 percent and no more than 15 percent.

Employer Contributions Credit

A new provision introduced by SECURE Act 2.0 is a tax credit for small businesses contributing to their employees’ retirement accounts. This credit incentivizes employers to contribute directly to their employees’ retirement savings, enhancing the retirement readiness of their workforce.

Under this incentive, eligible employers with up to 100 employees can receive a tax credit of up to $1,000 per employee per year (eligible employees are paid no more than $100,000 in 2024). This credit is claimed through the employer’s annual tax return. 

The credit schedule is structured to provide a substantial incentive in the early years of employer contributions. This varies slightly depending on the number of employees. 

For businesses with 1 to 50 employees, the credit available for each eligible participant is:

• First year: 100% of contribution, up to $1,000
• Second year: 100% of contribution, up to $1,000
• Third year: 75% of contribution, up to $1,000
• Fourth year: 50% of contribution, up to $1,000
• Fifth year: 25% of contribution, up to $1,000

For employers with 51 to 100 employees, the tax credit available is as follows:

• First year: 100% minus 2% for each employee exceeding 50 limit
• Second year: 100% minus 2% for each employee exceeding 50 limit
• Third year: 75% minus 2% for each employee exceeding 50 limit
• Fourth year: 50% minus 2% for each employee exceeding 50 limit
• Fifth year: 25% minus 2% for each employee exceeding 50 limit

Expanded Saver’s Credit

The Saver’s Credit is a tax credit designed to help low—and moderate-income individuals save for retirement. This credit incentivizes retirement savings by providing a direct reduction in the tax liability of eligible individuals who save for retirement. 

The SECURE Act 2.0 expands the eligibility and benefits of the Saver’s Credit, making it more accessible to a broader range of employees. Changes include: 

• Increased Income Limits: The SECURE Act 2.0 raises the income thresholds for eligibility, allowing more taxpayers to qualify for the credit. 
• Higher Credit Rates: The act increases the credit percentages, providing greater tax savings for eligible contributions.
• Awareness and Education: The SECURE Act 2.0 includes provisions to increase awareness and education about the Saver’s Credit, helping more eligible taxpayers take advantage of this benefit.

Employees can claim the Saver’s Credit using IRS Form 8880. Employers should communicate this benefit to their employees to encourage greater participation in retirement savings.

Learn more about the Saver’s Credit on the IRS website. 

Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs)

The SECURE Act and SECURE Act 2.0 simplify the process for small businesses to join Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs).

• MEPs allow unrelated employers to join a single retirement plan, aiming to reduce administrative costs and simplify plan management.
• PEPs further reduce administrative burdens and costs by allowing multiple employers to participate in a single retirement plan, making it more manageable and financially attractive for small businesses.

Any small business looking to join a MEP or PEP is eligible. Contact the Saveday team to learn more about partner payroll providers offering these plans.

Examples of Tax Credit Use

Here are a few scenarios to illustrate how these tax credits can be utilized:

Scenario 1: Starting a New Retirement Plan

ABC Company, a small business with 25 employees, decides to start a 401(k) plan in 2024. The startup costs are $4,000.

• Startup Credit: Under SECURE Act 2.0, ABC Company can claim a tax credit of $4,000 (100% of the startup costs) for the first three years.
• Auto-Enrollment Credit: ABC Company can claim an additional $500 annually for three years by implementing auto-enrollment.

Total tax credits: $4,500 per year for three years.

Scenario 2: Employer Contributions (Over 50 employees) 

LMN Inc., a business with 58 employees, has decided to make employer contributions to its 401(k) plan in 2024. They contribute $1,000 per employee for the first year.

• Employer Contributions Credit: LMN Inc. can claim a tax credit of $48,720 for the first year. 

The maximum credit for LMN Inc. would be $58,000 (58 employees x $1,000). However, since the company has over 50 employees, they would need to reduce the credit by 2% for each employee exceeding the 50 limit. The calculation is as follows: 

• $58,000 (total credit) x 16% (8 employees over 50 x 2%) = $9,280 
• $58,000 (total credit) – $9,280 (credit-reduction amount) = $48,720 

Total tax credits: $48,720 for the first year, with phased reductions in subsequent years.

Practical Application of Tax Benefits

To fully leverage the tax benefits provided by the SECURE Act and SECURE Act 2.0, small business owners should consider the following steps:

1. Evaluate Current Retirement Offerings: If you have one, assess your existing retirement plan to identify areas where you can implement changes to benefit from the new tax credits.
2. Consider Starting a New Plan: If you don’t currently offer a retirement plan, the enhanced tax credits make it an excellent time to start one. The credits can significantly reduce the initial costs.
3. Implement Auto-Enrollment and Auto-Escalation: These features boost employee participation and savings rates and provide valuable tax credits for your business.
4. Explore Employer Contributions: Offering employer contributions can attract and retain talent while taking advantage of new tax credits for these contributions.
5. Consider PEPs: If managing a retirement plan in-house seems daunting, consider joining a Pooled Employer Plan to simplify administration and reduce costs.
6. Communicate Benefits to Employees: Ensure your employees understand the value of your retirement benefits, including how to maximize the Saver’s Credit.

Maximize Tax Benefits with Saveday

By leveraging the SECURE Act 2.0, business owners can create attractive retirement benefits packages that enhance employee satisfaction and retention while offering substantial tax savings. Implementing a retirement plan might seem daunting, but providers like Saveday make it easy.

We offer innovative retirement savings solutions designed for small and medium-sized businesses. Our offerings include a variety of plans to suit different business needs. We also allow you to customize your plans with features like vesting schedules, profit-sharing, and employer matching. Plus, auto-enrollment is a standard feature on all plans making it one less thing to think about.

Committed to simplicity and transparency, Saveday offers competitive plans that are  affordable, with no hidden fees. Our comprehensive services cover fiduciary responsibilities, recordkeeping, government filings, custodial services, and more. This all-inclusive approach ensures businesses only pay for what they need.

Our no-hassle, fully automated system makes plan management and participation straightforward for employers and employees. Most new clients can complete the setup process in 15 minutes or less, with dedicated support for setup, compliance, and ongoing administration.

Choosing Saveday can help businesses maximize the tax benefits available under the SECURE Act 2.0 while simplifying retirement plan management. This partnership ensures your business takes full advantage of the available tax credits. 

Get started with transforming your retirement plan offerings by visiting the Saveday website.

Disclaimer

This article is for educational purposes only and does not constitute legal, tax, or financial advice. The content is based on interpretations of the SECURE 2.0 Act and general tax principles. The author is not a tax attorney or certified public accountant (CPA). Readers are strongly encouraged to consult with a qualified tax professional, CPA, or attorney before making any financial decisions or taking actions based on the information provided in this article. Individual circumstances may vary, and professional advice is essential for making informed decisions. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.