America is in the midst of a retirement savings crisis. Many people are not saving enough to replace their income in retirement, and some have no money saved for retirement. Employer-sponsored retirement plans enable people to save for retirement, but many private-sector workers do not have access to such plans.[1] Small businesses, the backbone of the US economy, have often been hesitant to offer retirement plans due to costs; however, the SECURE 2.0 Act of 2022, offers incentives for businesses to establish employer-sponsored retirement plans.
In addition to helping workers meet their savings goals, retirement plans can help attract and retain talent. For specific guidance about plan sponsorship, small businesses should consult with their legal and financial advisors.
SECURE 2.0 Act Addresses Workplace Retirement Plans
Long gone are the days when employees could expect pension plans that guarantee a steady stream of income in retirement. Today, workers are reliant on a three-pronged system that consists of personal savings, Social Security, and retirement plans.
Although small businesses are less likely than larger companies to offer retirement plans due to their cost, they recognize that offering a plan is important for employee hiring and retention. The Secure 2.0 Act, which builds on the Secure Act of 2019, makes sweeping changes to 401(k)s and similar plans that are particularly attractive to small businesses with 100 or fewer employees.
Secure 2.0 and Small Business Retirement Plans
The Secure 2.0 Act provides the following retirement plan tax credits to small business employers:[2]
- Start-Up Cost Tax Credit. Effective in 2023, small businesses[3] that start a new retirement plan can receive a tax credit that covers 50 percent (for 51 to 100 employees) to 100 percent (for 1 to 50 employees) of eligible startup costs. These costs include advisor fees, document fees, plan documentation fees, and other expenses incurred to set up and run the plan, capped annually at $5,000 for the first three years of the plan. To be eligible for the credit, a business with 50 or fewer employees must have at least one non-highly compensated employee (an employee making less than $150,000).
- Employer Contribution Tax Credit. Employers sponsoring a new defined contribution plan can claim a tax credit for making employer matching or profit-sharing contributions during the first five years of the plan. The percentage is phased, from up to 100 percent in the first and second years to 75 percent in the third year, 50 percent in the fourth year, and 25 percent in the fifth year. Businesses with 50 or fewer employees are eligible for an annual credit of up to $1,000[4] per employee who earns less than $100,000. For businesses with 51 to 100 employees, the tax credit is based on a sliding scale.
- Automatic Enrollment Tax Credit. The Secure 2.0 Act requires that certain plans established after December 29, 2022, use an eligible automatic contribution arrangement (EACA) that enrolls participants in the plan automatically, with a three- to ten-percent salary deferral. This requirement is not effective until 2025, but the credit—$500 per year for the first three years after an EACA is created—can be taken advantage of earlier by businesses that include the automatic enrollment feature.
- Note: The automatic enrollment requirement does not apply to businesses that are less than three years old or those with fewer than ten employees.
These tax credits can “add up to sizable benefits for employers looking to start plans,” a senior official at Voya Financial told CNBC.[5]
Secure 2.0 provides benefits for employees as well, including but not limited to the following:
- Starting in 2024, the Act allows employers to treat student loan payments as retirement plan contributions to qualify for matching contributions in a workplace retirement account, helping employees to both pay down their student debt and get an employer match.
- Beginning in 2024, plan participants can withdraw up to $1,000 per year for emergency expenses without incurring a 10 percent penalty typically imposed by the Internal Revenue Service.
- Starting in 2024, plans can add short-term emergency savings accounts (ESAs) that serve as rainy-day funds for employees.
- In 2023, the catch-up contribution limits were increased for some plans for employees aged 50 and older, making it possible for workers to save more toward their retirement.
- The Act adds a Roth option to retirement accounts that allows employees to choose whether to take an employer contribution match pre-tax or after- This option is already in effect.
- Long-term, part-time employees who work between 500 and 999 hours per year for three consecutive years must now be allowed to participate in their employer’s plan. Starting in 2025, eligible part-time employees who work for their employer for two consecutive years must be allowed to participate in their employer’s plan.
Get Legal Guidance and Tax Advice on Employer Retirement Plans
Small businesses that were previously unable to offer retirement plans because of the expense should now reconsider due to the tax incentives provided under the Secure 2.0 Act. Retirement plans can provide a major advantage for recruiting and retaining employees. Research indicates that having a retirement plan reduces the likelihood of employees quitting in their first year by 40 percent.[6]
Are you unsure if your business is eligible for the tax credits provided by the Secure 2.0 Act? Our small business attorney can help you and your financial advisors sort through this game-changing legislation and how it could impact your business. Schedule an appointment to learn more.
[1] Employer-Sponsored Retirement Plan Access, Uptake and Savings, The Pew Charitable Trusts (Sept. 14, 2016), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/09/employer-sponsored-retirement-plan-access-uptake-and-savings.
[2] Kelsey Mayo, Where Credit Is ‘Due’: Tax Credits for Small Employer Plans Under SECURE 2.0, ASPPA (Feb. 9, 2023), https://www.asppa.org/news/where-credit-due-tax-credits-small-employer-plans-under-secure-20.
[3] I.R.S., Retirement Plans Startup Costs Tax Credit (July 28, 2023), https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit.
[4] Ronald Ulrich, SECURE 2.0: New Small Business Tax Incentives for Retirement Plans, ADP: Spark Blog, https://www.adp.com/spark/articles/2023/03/secure-20-new-small-business-tax-incentives-for-retirement-plans.aspx (last visited Jan. 23, 2024).
[5] Cheryl Winokur Munk, There may never be a better time to create a retirement plan, CNBC: Small Business Playbook (May 15, 2023), https://www.cnbc.com/2023/05/15/there-may-never-be-a-better-time-to-start-a-retirement-plan.html.
[6] Luke Pardue, One Secret to Retaining Top Talent? Offering Retirement Benefits, Gusto (Nov. 3, 2022), https://gusto.com/company-news/one-secret-to-retaining-top-talent-offering-retirement-benefits.
