If you're a small business considering launching a 401(k) plan, you might qualify for tax credits. Utilize the 401(k) calculator provided to gauge the costs of initiating a new 401(k) for your business, along with your possible savings!
As you enhance your retirement plan strategy, it’s important to keep in mind how the Secure 2.0 Act will impact you. From tax credits to different requirements in your state, there is a lot to consider, and you can find everything you need to know [here].
*Not all businesses may be able to utilize tax credits, but they can take advantage of other tax deductions.
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Yes, the SECURE Act increased the amount of available tax credits for small businesses as an incentive to start a new 401(k) plan for their employees or increase participation through auto-enrollment. Before the SECURE Act was passed, a business could claim 50% of the qualified startup costs, up to $500 maximum – for a maximum of $1,500 over three years. When combined, the new tax credits can total up to $5,500 per year — or $16,500 for the first three years of the 401(k) plan.
These credits are subtracted from the total federal income tax owed on IRS Form 8881.
To be eligible for the SECURE Act tax credit, a small business must meet three requirements:
- Have 100 or fewer employees earning at least $5,000 in compensation within the last year.
- Cover at least one Non-Highly Compensated Employee with the 401(k).
- Have plan participants who did not contribute to a retirement plan with the same employer, or a predecessor company, within the past three tax years.
For tax purposes, an NHCE is a plan participant who:
-Does not own more than 5% of interest in the business during the preceding year.
-Received less than $150,000 in compensation in 2023 (this figure adjusts annually).
-Did not rank in the top 20% of employees by compensation within the last year.*
*This only applies to plans that have the top paid provision in their Ubiquity plan document. Reach out to your plan sponsor or consult your plan documents to confirm your plan’s specific setup.
No, solo 401(k) plans do not qualify for SECURE Act tax credits, as they do not cover non-HCEs. By nature, a solo 401(k) covers only the business owner and their spouse. However, one noteworthy SECURE Act change affecting solo 401(k) plans is that self-employed business owners can file to establish their plan later – at the tax filing deadline with extensions, rather than on the last day of the plan year.
