SECURE Act Tax Credit Q&As
Among other things, the SECURE Act increases the credit limitation for small employer pension plan startup costs by changing the calculation of the flat dollar amount limit on the credit to the greater of: (1) $500, or (2) the lesser of: (a) $250 for each employee of the eligible employer who is not a highly compensated employee and who is eligible to participate in the eligible employer plan maintained by the eligible employer, or (b) $5,000.
The legislation also created a new small employer automatic enrollment credit of up to $500 per year to employers to defray startup costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment.
Q1: By joining a multiple employer plan/pooled employer plan (MEP/PEP), is a plan sponsor eligible for the credit?
A1: We believe the answer is yes (assuming the employer would be eligible for the credit). This question comes up regularly so we will try to get the IRS to confirm this.
Q2: I was under the impression the 50% rule on the tax credit was legacy. The new rule says the greater of: (1) $500, or (2) the lesser of: (a) $250 for each employee of the eligible employer who is not a highly compensated employee and who is eligible to participate in the eligible employer plan maintained by the eligible employer, or (b) $5,000. The credit applies for up to three years?
A2: For taxable years that begin after Dec. 31, 2019, the credit is equal to 50% of the eligible expenses. The minimum credit is $500, and the maximum is $250 times the number of eligible non-highly compensated employees, with a maximum credit of $5,000.
Q3: How do not-for-profit organizations receive the 403(b)-start-up credit for offering new plan? Is the credit applicable to non-profit organizations?
A3: The credit is not applicable to tax-exempt entities because it is not a refundable credit. Therefore, the credit is not available for the adoption of a 403(b) plan. The types of plan that can qualify for the credit (for plan sponsors that are subject to taxation) are qualified plans under 401(a), annuity plans under 403(a), simplified employee plans under 408(k), and SIMPLE plans under 408(p).
Q4: Does the credit include first year admin cost or specifically the start-up cost?
A4: Eligible expenses include those incurred for establishing or administering the plan and retirement related education of employees with respect to the plan for the first three years.
Q5: Does adding 401(k) feature to existing profit-sharing plan count towards the credit?
A5: No. The credit based on starting a plan and adding a 401(k) feature to a plan is not a new plan. If the profit-sharing plan was started less than three years ago, then additional costs associated with the 401(k) feature would be eligible.
Q6: I thought the auto enrollment credit was only good if put under an eligible automatic contribution arrangement (EACA) provision, any truth to that?
A6: That is correct. The law provides that it must be an EACA to qualify for the credit. A qualified automatic contribution arrangement (QACA) feature will satisfy the definition of an EACA and will, therefore, qualify for the credit.
Q7: I assume companies joining a PEP would not get the tax credit.
A7: See the first question.
Q8: If they go into MEP, do they lose credit?
A8: See A1.
Q9: Does the credit include safe harbor plans, too?
A9: Yes, the credit is for the first three years of a plan and it does not matter what features are in the plan for those three years.
Q10: Will providers/recordkeepers provide any type of tax form to aid in the claiming of the credits?
A10: We don’t know if providers will come up with a form. But the IRS will need to update Form 8881 so that would be a worksheet.
Q11: Those credits are for each year, correct?
Q12: So, $5,000 each year or $15,000 over three years?
A12: Yes, per year. For taxable years that begin after Dec. 31, 2019, the credit is equal to 50% of the eligible expenses. The minimum credit is $500, and the maximum is $250 times the number of eligible non-highly compensated employees (NHCEs), with a maximum credit of $5,000.
Q13: How does the new plan credit apply to employers joining a PEP? Does the PEP get the credit, or will the adopting employer get the credit? Or possibly both?
A13: We believe an employer would be eligible for the credit (not the PEP), but we need to confirm with the IRS.
Q14: Is the new tax credit of $250 per NHCE limited to 50% of plan cost?
A14: Yes. The credit is limited to the lesser of 50% of the plan costs or the new ($500/$250 per participant) cap.
Q15: Do small-employer start-up credits apply to solo 401(k)s?
A15: The credit isn’t based on the type of plan (and a solo 401(k) is just a 401(k) plan). But if the plan doesn’t cover any NHCEs, then you don’t qualify for the credit.
Q16: Would the start-up credit extend to businesses that move from a simplified employee pension (SEP) to a 401(k)?
A16: Generally, no. A SEP is a plan for purposes of the credit. So, if the SEP has been in existence for three years, then switching to a 401(k) is not a new start-up plan. If you only had the SEP for one year, then switching to the 401(k) would still be within the three years for start-up credits and you would still have two years for the credits to apply to the 401(k) costs.
Q17: If a PEP plan is put in place, will the small employer realize the $500 credit if they set up the plan for auto enroll?
Q18: More than two NHCEs would not be a $5,000 credit would it? It reads, the “lesser of $250 per or $5,000.” So, 3 x $250 = $750, so that would be $750, not $5,000, right?
A18: Correct. It is the lesser of $250 per NHCE or $5,000.
Q19: The section 104 and 105 credits are each available ONLY to plans in which at least one NHCE participates, right?
A19: Correct. See IRC 45E(d)(1)(B).
Q20: If a startup plan has both a startup cost for example of $1,000 but there are ongoing fees of more than $5,000, does the tax credit count towards the ongoing administration fees?
A20: Yes. IRC 45E(d)(1)(A) states that it is expenses for the establishment or “administration” of a plan.
Q21: On the startup credit, if an owner had a solo 401(k) in prior years, then hired employees and created a 401(k) plan for the owner and all the employees, would they be eligible for the startup credit?
A21: IRC 45E(c)(2) provides that you cannot have a qualified plan in the three-year period preceding the year the credit is being taken if the prior plan covers “substantially the same” employees. However, a solo 401(k) is a 401(k) plan covering one person. So, it’s not a new plan and the first credit year is based on when the plan was established. If the solo 401(k) plan had been terminated, then one could argue that the plan covers a substantially different group of employees. But termination of that plan and establishment of a new 401(k) plan would be a problem under the 401(k) termination rules if done within one year.
Q22: Do you mean more than $5,000 in the small employer definition?
A22: It is at least $5,000. So, it’s not more than $5,000; it’s $5,000 or more. See IRC 408(p)(2)(C)(i), which is what 49E(c)(i) refers you to for the definition of eligible employer.
Q23: If an existing plan wants to add auto-enrollment to get the new $500 credit, I’ve read and heard you say it must be an EACA. Aren’t EACAs only allowed to be added on the first day of the plan year? If so, does that effectively preclude an existing plan from adding this until Dec. 1, 2021?
A23: An existing plan can add an EACA mid-year as long as it only applies to new participants. If it will apply to all participants, then it is correct that it can only be added at the beginning of a year.
Q24: What if an employer starts up two plans?
A24: If it is a DB/DC combo plan, then the plans are aggregated and treated as one plan.
Q25: Does the start-up credit apply to a SEP?
A25: Yes, it applies to a SEP. The credit is not limited to qualified plans. IRC Section 45E refers to IRC Section 4972(d) for the definition of a plan. That section includes qualified plans, 403(b) plans, SEPs and SIMPLE IRAs or 401(k)s.
The topics addressed on this page are for information purposes only and should not be construed as specific tax or retirement plan advice. Individuals should consult a tax advisor or attorney for questions regarding specific tax or legal needs.