Are you an employer who has wanted to offer a retirement plan to your employees, but have been hindered by the costs involved? If so, you may be interested in learning about new legislation that may help open the door to the same type of plan that employees at big companies enjoy.
In late 2022, President Biden signed the SECURE 2.0 Act, which, among many other provisions, provides tax credits to business owners who want to open a 401(k) plan.
The tax credit was introduced in the original SECURE Act in 2019, but has been significantly increased in the updated laws. If you have 50 or fewer employees, you can now claim a startup credit that covers 100% of the costs associated with opening and administering a 401(k) plan, up to $5,000 for each of the first three years of your plan. To qualify for this credit, your business must have at least one employee, in addition to you, if you’re the owner, who earns less than $150,000 a year. And you’re eligible for the credit even if you join a multiemployer plan (MEP), which, as you know, is designed to encourage smaller businesses to share the administrative tasks involved in offering retirement plans with benefits fiscal
SECURE 2.0 also introduces an employer contribution credit, which can entitle your business to a tax credit based on employee participation or profit-sharing contributions. This credit is capped at $1,000 per employee and is phased out over five years. It is also subject to further reductions for businesses with between 51 and 100 employees.
Another SECURE 2.0 provision deals with non-elective and matching Roth contributions. Starting this year, employees with 401(k) plans, along with those covered by 403(b) plans for nonprofit groups and 457(b) plans for government employees, can choose to make contributions equal or non-elective as Roth (after-tax) contributions. Prior to this change, employers had to make these matching, non-elective pre-tax contributions. Of course, you’ll need to tell your employees that matching or non-elective Roth contributions count as taxable income. The benefit is that your employees can withdraw Roth contributions and earnings tax-free, as long as they meet certain conditions.
Looking ahead, SECURE 2.0 contains other options to make it easier for business owners to offer retirement plans. Starting in 2024, if you don’t already provide a retirement plan, you can offer a “starter” 401(k) or “safe harbor” 403(b) plan to employees who meet the age and service requirements. These plans have lower contribution limits than a typical 401(k) or 403(b), and you can’t make matching or non-elective contributions. Consequently, a startup plan can be quite attractive for businesses with few employees.
And starting in 2025, 401(k) and 403(b) plans must automatically enroll eligible participants, although employees can opt out. Also, exceptions will be made for companies with 10 workers or less and for companies less than three years old.
The ability to offer a retirement plan is a great asset for employers who want to attract and retain good employees. And the SECURE 2.0 Act can make it easier for you to achieve this goal.
Jennifer Barrett (AAMS) is a local financial advisor at Edward Jones.
225-612-0413 | jennifer.barrett@edwardjones.com
Edward Jones. SIPC member.
Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate planning attorney or qualified tax advisor regarding your situation.
This article was written by Edward Jones for your local Edward Jones Financial Advisor.
