The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Colorado is representative of inquiries involving the SECURE Act’s new tax credit for starting a retirement plan. The advisor asked:
“Can you explain the recent changes to the tax credit for employers that start new retirement plans?”
Highlights of the Discussion
The Further Consolidated Appropriations Act, 2020 included a provision from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) that modifies the amount of tax credit a small employer may receive for qualified costs incurred as a result of setting up a new retirement plan for 2020 and later years. Eligible employers (defined later) may be able to qualify for up to a $5,000 tax credit (previously up to $500) for each of the first three years of a plan’s existence.
An eligible employer[1]is one that:
- had 100 or fewer employees who received at least $5,000 in compensation for the preceding year;
- had at least one plan participant who was a non-highly compensated employee (NHCE); and
- In the three tax years before the first year the business is eligible for the credit, the employees were not substantially the same employees who received contributions or accrued benefits in another plan sponsored by the employer, a member of a controlled group, or a predecessor.
The new law increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of either:
1. $500; or
2. The lesser of:
a. $250 multiplied by the number of NHCEs of the eligible employer who are eligible to participate in the plan; or
b. $5,000.
As a result, for each of the first three years, the credit could be at least $500 and up to $5,000, depending on the number of NHCEs covered by the plan. Employers claim the credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs (to be updated for the increased credit amount).
Visit our new SECURE Act resource center!
The term “qualified startup costs” means any ordinary and necessary expenses of an eligible employer which are paid or incurred in connection with the:
1. establishment or administration of an eligible employer plan, or
2. retirement-related education of employees with respect to such plan.
Eligible plans include an IRC Sec. 401(a) qualified plan, a 403(a) annuity plan, a simplified employee pension (SEP) plan or a savings incentive match plan for employees of small employers (SIMPLE) IRA plan.
The law also creates a separate, new tax credit for the first three years of up to $500 for small employers that add an automatic enrollment feature to a 401(k) or SIMPLE IRA plan.
Conclusion
For 2020 and later years, the incentive for small businesses to establish new retirement plans for their workers has become more lucrative from a tax perspective.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2020, Retirement Learning Center, LLC. Used with permission.
