New and significantly expanded tax credits offer small businesses incentives to launch and offer qualified retirement savings plans for employees.
A majority of Americans lack the savings to retire comfortably; one quarter of adults have no pension or retirement savings at all, according to the Federal Reserve. With both public pension funds and Social Security in dire straits, the shortfall in personal savings is critical.
Congress addressed this problem late last year with the SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement. Significant changes for both employers and employees are designed to encourage savings and increase access to 401(k) plans.
Take Credit for Benefits
To encourage small businesses to offer retirement plans, employers that launch a qualified 401(k), SIMPLE plan or SEP can now claim a tax credit of $250 per eligible employee, up to a total of $5,000. The credit can be claimed for up to three years for a total benefit of $15,000.
This is a tenfold increase over the previous $500 maximum tax credit for the costs of starting and communicating a plan to employees. The credit can be granted for staff who are not classified as Highly Compensated Employees—those who own more than 5 percent of the company or earned more than $125,000 in 2019.
Employers must now include part-time workers in their retirement plan if they have worked for at least 500 hours per year for three consecutive years. This gives part-time staff much-needed access to savings, while allowing owners to count these long-time employees for the tax credit.
Offering a 401(k) program is a good first step to fixing the retirement fund shortfall, but to have an impact, employees must actually take advantage of the program and enroll.
Research shows that making such plans automatic—with an option for employees to opt out of the plan rather than having them affirmatively opt in—can greatly increase employee participation at all age levels and significantly build savings over their lifetime. The SECURE Act adds an incentive for businesses to nudge employees to join by making enrollment the default option.
Businesses that add an auto-enrollment feature to their plan can claim an additional $500 credit. That credit applies in the year that the auto-enrollment was added and for the next two years, for a total credit of $1,500.
Businesses can claim credits for both launching the plan and the auto-enrollment plan, so offering this benefit could bring in as much as $16,500 in tax credits. These credits are in addition to deductions employers can take for their plan contributions.
The new provisions also extend the time period for adopting new plans beyond the end of the year and up to the filing due date for the company tax return.
Additionally, the SECURE Act allows unassociated small businesses to join open 401(k) multiple-employer plans (MEPs, sometimes also known as pooled employer plans, or PEPs). By pooling coverage, employers can reduce administrative time and costs. Under previous rules, only closed MEP plans limited to members in a business association or closely related field were allowed.
The bottom line: if you have always thought it was too costly and cumbersome to offer a 401(k) to your team, it may be time to think again. Significant tax benefits now make it much more feasible. Contact us today to discuss your options!
We are Arbor Wealth Management, a Phoenix-based firm that offers comprehensive financial planning services. We’re partners in your financial future. Like a conductor coordinating a beautiful symphony, we’re intimately involved in your financial future. We take the time to know how each instrument in your personal orchestra is performing, keeping all aspects of your plan in tune. We accomplish this by making sure your finances remain pliable, whether you are in an accumulation or distribution stage in life.