401(k) Startup Tax Credits Guide

Tradition Wealth Management |
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Retirement

Many small business owners feel hesitant about starting a retirement plan because they:

  • believe their business is too small to qualify for one
  • cannot afford a match
  • believe they are too expensive to set up and manage

Here’s some good news. The SECURE 2.0 Act supports small business owners with tax credits to both encourage starting a new plan and covering the costs to match employee savings.

With these tax credits, business owners can confidently setup a retirement plan, save money, and thrive in an ever-changing economic climate.

 

1. Startup Tax Credit

The Startup Tax Credit is available for employers who establish a new plan to pay for start-up administrative costs. Those might include administrative fees, advisor fees, plan documentation fees, employee education, and any other expense necessary to establish and run the plan. This tax credit often makes it nearly free for employers with 50 or fewer employees to start a plan.

1-50 Employees

  • 100% of eligible start-up costs for 3 years.
  • Maximum credit is the lesser of $5,000 or $250 times the number of eligible non-highly compensated employees.

51-100 Employees

  • 50% of eligible start-up costs for 3 years.
  • Maximum credit is the lesser of $5,000 or $250 times the number of eligible non-highly compensated employees.

2. Employer Contribution Tax Credit

The Employer Contribution Tax Credit is a tax credit up to $1,000 per employee. The credit is available to assist employers when making contributions to their employees’ retirement savings contributions. The tax credit is available for the first five years of the plan. The employees must make $100,000 or less in FICA wages and other restrictions apply.

1-50 Employees

The Employer Contribution Tax Credit is as follows:

  • Year 1 - Up to $50,000 (100% credit)
  • Year 2 - Up to $50,000 (100% credit)
  • Year 3 - Up to $37,500 (75% credit)
  • Year 4 - Up to $25,000 (50% credit)
  • Year 5 - Up to $112,500 (25% credit)

51-100 Employees

Same as above, but phased out based on a number of employees above 50. See your Third Party Administrator (TPA) for Employer Contribution Tax Credit calculation.

3. Automatic Enrollment Credit

The Automatic Enrollment Credit is a $500 tax credit when a plan adds automatic enrollment.

 

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