If you don’t offer your employees a retirement plan, you’re not alone. According to a recent Fidelity survey, two-thirds of small businesses don’t—largely due to the expense.
Yet, retirement plans remain one of the benefits employees prize most, along with healthcare and life insurance. It’s a compelling recruitment and retirement tool. Plus, if you’re like most small business owners, you’re concerned about your own retirement savings, too.
Enter the SECURE Act 2.0. This sweeping retirement reform law—which became effective in January 2023—is designed to help Americans save for retirement. In order to do so, it offers small businesses significant tax incentives for adding a company retirement plan.
That’s why now may be the best time to implement that long-awaited 401(k). Consider these advantages for you and your employees.
Get a Tax Credit for 100% of Start-up Costs
The original SECURE Act already offered start-up credits to small businesses that created a company retirement plan—but SECURE Act 2.0 sweetened the deal. Now, employers with 1-50 employees can take a credit equal to 100% of startup costs for up to three years, subject to a $5,000 annual cap. That translates to a three-year tax credit of up to $15,000.
In addition, businesses with 51-100 employees can still take the original SECURE Act tax credit—equal to 50% of administrative costs—subject to similar conditions.
Earn Tax Credits for Your Employer Contributions
Under SECURE Act 2.0, employers can also earn tax credits for contributing to their employees’ retirement plans for the first five years of the plan.
For employers with 1-50 employees, the tax credit is based on the amount of their contributions, up to $1,000 maximum per employee. The tax credit decreases over the five-year period, based on the following schedule:
Year Percentage of Eligible Employer Contribution
1 100%, up to $1,000
2 100%, up to $1,000
3 75%, up to $1,000
4 50%, up to $1,000
5 25%, up to $1,000
For employers with 51-100 employees, the tax credit is further reduced by the number of employees.
Get a $500 Tax Credit for Auto Enrollment
Starting in 2025, retirement plans established after December 29, 2022 will be required to include an automatic enrollment feature. That means eligible employees will be automatically enrolled in the plan unless/until they expressly opt out.
However, employers that add this feature now are eligible for a $500 tax credit, available for the first three years of the plan—adding another $1,500 in tax credits.
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Advantages for Employees
In order to encourage retirement savings, SECURE Act 2.0 offers many incentives to employees, including:
- Increased catch-up contributions allowed for employees 50 and older – so older workers can save more toward retirement.
- Increased age for required minimum distributions (RMDs) – so workers aren’t required to take funds from their account (and pay taxes on them) until later in life.
- Accelerated eligibility for military spouses – who often miss out on retirement plan eligibility due to frequent moves associated with their spouses’ assignments.
In addition, more advantages will be phased in over the next few years. For example, effective in 2024:
- The 10% tax penalty will be waived on emergency distributions under $1,000 – so workers without savings still have access to emergency funds.
- Employers can elect to match retirement contributions to student loan payments – allowing employees who can’t contribute due to student loans to still accumulate retirement funds.
Add It All Up…
Considering all these advantages, there may never be a better time to create a company retirement plan. It’s a proven way to attract and retain high-performing employees, while helping your team improve financial wellness.
At VensureHR, we offer quality retirement plans at no cost to our clients through our partner, Slavic401(k), a recognized expert in small business retirement plans. Learn more here, or for more information, request a call.