Tax advantages for startup retirement plans

Enhancements to retirement plan tax credits for small business owners

The SECURE 2.0 Act of 2022 introduced important enhancements to the SECURE Act of 2019 tax credits to help small businesses make it more affordable to start a retirement plan.
Tax advantages of startup retirement plans

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What are the tax credits?

Small employers with 50 or fewer employees may now apply 100% of their qualified start-up costs toward the start-up tax credit formula (employers with 51-100 employees may apply 50% of qualified start-up costs, as originally established in the SECURE Act of 2019) up to $5,000 per tax year for the first three years.

For businesses sponsoring a new plan, the new legislation also offers a tax credit for employer matching or profit-sharing contributions for the first five years of the plan. The credit is for businesses with up to 100 employees, but the credit is reduced by 2% per employee over 50 employees earning less than 100,000/year. The maximum credit is $1000 per year for each of those employees. The tax credit gradually reduces over five years.

What are the qualified start-up costs?

Qualified start-up costs generally refer to ordinary and necessary expenses an employer paid or incurred in connection with the establishment or administration of an eligible employer plan, and retirement plan-related employee education..

Employers should refer to IRS Form 8881 and consult their tax or legal professional for a more specific determination.

Other tax credits

Under SECURE Act of 2019, employers with 100 or fewer employees who add an Eligible Automatic Contribution Arrangement (EACA) are eligible for a $500 annual tax credit for three years. This is a one-time tax credit for each year of the 3-taxable-year period beginning with the first taxable year the employer includes an EACA.

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What's next?

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* Greater of $500 or the lesser of $250 x NHCEs eligible or $5000.

Simply Retirement by Principal® 401(k) plan recordkeeping, and administrative services are provided through Decimal, Inc. dba Ubiquity Retirement + Savings ("Ubiquity"). Ubiquity is not affiliated with any plan and investment administrative services provided through Principal Life Insurance Company® or affiliated with any company of the Principal Financial Group®. Principal makes available the Separate Accounts and collective investment trusts for customers to select them through Simply Retirement by Principal. All other services and mutual funds are provided by service providers not affiliated with any company of the Principal Financial Group. Refer to related documents and agreements for more details on plan services available.