Navalign Wealth Partners
Retirement Plan Tax Credits: What Business Owners Need to Know in 2024
Friday, October 4th, 2024
business owner meeting with team

As a business owner or 401(k) plan sponsor, you might be eligible for thousands of dollars in tax credits when starting a retirement plan or making contributions to employee accounts. Thanks to the SECURE Act 2.0, passed in December 2022, new tax incentives are available to encourage businesses to launch retirement plans and help their employees save for the future.

This guide will walk you through the key tax credits available for retirement plans and how they can benefit your business.

Overview of the SECURE Act 2.0’s Tax Credits

The SECURE Act 2.0 provides three primary tax credits for businesses launching or enhancing retirement plans:

  1. The Startup Credit: Covers up to 100% of qualifying startup expenses, up to a limit of $5,000 per year.
  2. The Auto-Enrollment Credit: Offers a credit of $500 per year for businesses adding auto-enrollment features to their plan.
  3. The Employer Contribution Tax Credit: Provides up to $1,000 per eligible employee for businesses making employer contributions.

Let’s explore each of these tax credits in more detail.

1. The Startup Credit

The Startup Credit helps offset the costs of establishing a retirement plan. It covers a portion of startup expenses, including fees for recordkeeping, plan administration, and employee education.

  • How much is the credit?
    • Eligible businesses can receive up to $5,000 per year for the first three years, potentially totaling $15,000.
    • The credit is calculated as $250 per non-highly compensated employee (NHCE) eligible for the plan.
  • Eligibility requirements:
    • Businesses with 100 or fewer employees who received at least $5,000 in compensation the previous year.
    • At least one participating NHCE.
    • No other retirement plan sponsored by the business in the previous three years.

Make sure to consult your tax professional and file IRS Form 8881 to claim this credit.

2. The Auto-Enrollment Credit

The Auto-Enrollment Credit encourages businesses to adopt an auto-enrollment feature in their retirement plans. This feature automatically enrolls eligible employees into the plan, which boosts participation rates.

  • How much is the credit?
    • Businesses can claim $500 per year for up to three years, for a total of $1,500.
  • Eligibility requirements:
    • Businesses must implement an auto-enrollment feature in either a new or existing retirement plan.

This credit can be combined with other tax incentives, making it a valuable addition to your retirement benefits package.

3. The Employer Contribution Tax Credit

The Employer Contribution Tax Credit is designed to incentivize businesses to make contributions to their employees’ retirement accounts.

  • How much is the credit?
    • The credit covers 100% of employer contributions for the first two years, up to $1,000 per employee.
    • After that, the credit phases out:
      • 75% of employer contributions in Year 3.
      • 50% in Year 4.
      • 25% in Year 5.
  • Eligibility requirements:
    • The business must have fewer than 100 employees.
    • Contributions are only eligible for employees earning less than $100,000 annually.

This tax credit, combined with other available credits, helps reduce the cost of supporting employee retirement savings.

Why These Tax Credits Matter

Starting or enhancing a retirement plan can be a major financial decision, but these tax credits significantly reduce the burden on your business. By claiming these credits, you can offset setup and administrative costs while supporting your employees’ long-term financial security.

The tax credits provided under the SECURE Act 2.0 offer substantial savings to businesses starting or improving retirement plans. If you’re thinking about launching a new retirement plan or expanding your current one, these credits make it easier to cover the costs. Not only do they help you financially, but they also show your employees that you’re committed to their future financial well-being, making your business more competitive in attracting and retaining top talent.

Make sure you don’t miss out on these valuable tax credits—consult your tax professional to confirm your eligibility and learn how to apply. For any additional questions about your retirement plan, don’t hesitate to contact us. We’re here to help you maximize your benefits!