Is 2020 Your Year to Start a Retirement Plan?

Piggy Bank with retirement savings message

SECURE Act Increases Tax Credits for Startup Costs & Automatic Enrollment

By Jude Fox, CPA

You already know that owning a business comes with an assortment of challenges, and being able to recruit and retain top talent is one that nearly all business owners face. One strategy for building a top-notch team includes offering a retirement plan. If this is something you considered before, but that the few thousand-dollar start-up costs were not viable for you, now is the time to reconsider!

Thanks to the SECURE Act, offering this valuable employee benefit becomes a more cost-effective consideration to rewarding your workforce and helping them plan for their own futures.

Two Retirement Plan Tax Credits May be Available to You

  1. With the Retirement Plans Startup Costs Tax Credit, you can possibly save over half the start-up costs. This credit is available beginning January 1, 2020, to help you cover some of the costs associated with starting a retirement plan if you meet certain criteria. It includes the following plan types: 401(k), 403(b), SEP IRA, and Simple IRA.

Who Qualifies for the Startup Credit?

This credit is available to all small businesses with 100 or fewer employees provided:

    • Employees receive at least $5,000 in compensation
    • You have not offered a prior plan that employees were eligible for in the preceding three years
  1. By automatically enrolling your new hires on a new or existing retirement plan, you may be eligible for the Automatic Enrollment Credit of $500 for three years.

Who Qualifies for the Automatic Enrollment Credit?

This credit is available to all small businesses with 100 or fewer employees provided:

    • Employees receive at least $5,000 in compensation
    • You recently added automatic enrollment to an existing or new retirement plan

How Much is the Startup Credit?

Prior legislation provided for roughly a 50% savings; an amount increased under the SECURE Act.  You’re eligible for the credit for up to three years beginning this tax year.

The maximum credit available to you is the greater of these two options:

  • $500
  • $250 multiplied by the number of non-highly compensated employees eligible for the plan; up to a maximum of $15,000 in tax credits divided over three years (for those who have at least 20 non-highly compensated eligible employees)

How Do These Credits Work?

  • Company A has recently opened. Its owner is considering establishing an employer-sponsored retirement plan to cover himself, as well as his twenty employees, who are not highly compensated. If Company A adopts a 401(k) plan, and its twenty non-highly compensated employees are eligible to participate, it will be eligible to receive a credit of up to $15,000 split over three years ($5,000 per year).  

  • In addition to establishing a retirement plan, Company A adds automatic enrollment to its plan.  By doing so, Company A is eligible to receive an additional tax credit of $500 per year over three years on top of the $15,000 credit in the example above, for a total of $16,500 in tax credits spread out over 3 years.  

  • Company B has an established 401(k) plan for its 15 employees and amends the plan to include automatic enrollment. None of the employees are highly compensated.  Since the plan was already established, Company B is not eligible for the startup credit of $15,000 but is eligible for the $500 automatic enrollment tax credit for the next three years, totaling $1,500.

    If a plan already has automatic enrollment but adds auto-escalation, the company is eligible for the same $500 tax credit for three years, for a total of $1,500.

  • If Company C has 5 non-highly compensated eligible employees, it would be eligible for a maximum tax credit of $1,250 (5 x $250) per year, for a total of $3,750 over three years.  

Start a Retirement Plan and Get Rewarded

Fewer small businesses than larger ones have retirement plan options for their employees which often makes competing with them for talent an issue. The government is now giving you additional incentive to do good for your team and your company. If you’ve been reluctant to start a retirement plan for your business, this is the year you want to give it another look. Contact us to start taking advantage of the credits available to you!