Start up a 401k and get a tax credit (new from SECURE Act)
There has never been a better time to start a new retirement plan for your employees! New plans are half off or better starting January 1, 2020!
Here’s the background. Part of the SECURE Act’s goal was to increase access to work-sponsored retirement plans. Sadly, not everyone is covered by a plan at work, with estimates hovering around 45%. According to Employee Benefits Research Institute and Vanguard, when a 401(k) is available, 78% of American workers who earn between $30,000 and $50,000 a year take advantage of the opportunity. This IS America’s retirement savings plan!
Today more than 80 million Americans are already participating in a retirement plan where they work. Data also shows that workers who earn between $30,000 and $50,000 a year are 12 times more likely to save at work than on their own...but more than 28 million full-time workers don’t have the opportunity to save for retirement in a 401(k). And, until the SECURE Act was passed, 23 million+ part-time workers didn’t either.
What’s been standing in the way? Starting a retirement plan can be costly to a small business. Start-up costs are often in the neighborhood of $3,000 and ongoing costs around $5,000 annually for micro plans. That increase to overhead is often just enough to deter an owner from starting one when coupled with fiduciary liability and all the administrative hoops of running a plan, including non-discrimination testing. Fees can be paid for out of the plan but thanks to the media’s insistence in a vacuum that 401k plans have “high” fees, that’s going to do nothing but create ill-will — the exact opposite of what offering a plan is about.
SECURE Act to the rescue. Thanks to the SECURE Act, there is now a hefty incentive to help employers get a new plan off the ground! It dramatically expands the tax credit to cover potentially more than half of the cost of a new small business retirement plan. Here’s how:
Under SECURE, the amount of the tax credit is now capped at $250 times the number of non-highly compensated employees (receiving less than $125,000 in compensation in 2019) eligible to participate in the plan up to a $5,000 annual maximum (but never less than $500), limited to 50% of the start-up costs. The credit will apply for 3 years.
Additionally, new 401(k) plans and SIMPLE plans that incorporate auto-enrollment will receive a $500 credit for 3 years. (FYI: Existing plans that convert to auto-enrollment will also be eligible for the credit.)
Let’s do the math for a small employer:
Small business has 15 employees that are eligible NHCEs. 15*$250 = $3,750. —> Max tax credit
New plan is going to cost $4,500. 50% is $2,250 —> cap of the start-up costs eligible for tax credit
Add on automatic enrollment to the plan for another credit: +$500
Total: $4,500 - $2,250 - $500 = $1,750 (62% off!)*
And don’t forget, claim this TAX CREDIT for the FIRST THREE YEARS of the plan!
For a slightly larger small employer:
60 NHCEs * $250 = $15,000 —> Max tax credit is $5,000
New plan is going to cost $8175 —> $4,087.50
Add on automatic enrollment to the plan for another credit: +$500
Total: $8,175 - $4,087.50 - $500 = $3,587.50 (56% off!)*
And don’t forget, claim this TAX CREDIT for the FIRST THREE YEARS of the plan!
If you’ve been putting off starting a new retirement plan, now’s the time to get your plan at half off! Don’t miss out on the tax credit. As always, reach out if you have questions.
*If you want to see truly how the tax credit pans out in better terms than just “hey you paid this out but you get this back” that we listed, visit this blog post from our TPA partners at DWC.
Click here for more small/micro business resources.
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