Retirement is a time to disconnect from the grind of the working world and spend time with loved ones, pursue a passion, or travel the world. Unfortunately, the reality is that many will simply not have the savings needed to fund retirement. According to the National Institute on Retirement Security (NIRS), the average working household has almost no retirement savings. The median retirement savings for all households is $3,000 and $12,000 for near retirement households. Unfortunately, the reality is many will not have enough saved to live comfortably. It is estimated that 92% of households do not meet conservative saving targets based on age and income.
A key driver of the problem is that many do not have access to a workplace retirement plan which makes it more difficult to save. To address the problem, President Biden recently signed the SECURE Act 2.0 into law. Included as part of the Consolidated Appropriation Act of 2023, the legislation calls for a multitude of changes to regulations designed to expand access, foster additional savings, and reduce plan administrative burdens. It also features tax incentives available to small employers for administering a plan. To help clients, prospects, and others, Selden Fox has provided a summary of the key details below.
Small Employer Tax Incentives
- Retirement Plan Start Up Costs Tax Credit – This incentive is available to eligible small employers for the costs of starting a SEP, SIMPLE IRA, other qualified plan (including a 401k plan). Under prior regulations, an employer was permitted to take a credit equal to 50% of eligible startup costs eligible for a three-year period. SECURE Act 2.0 changed this to allow a credit equal to 100% of eligible startup costs for businesses with less than 50 employees.
- Employer Contribution Credit – For small businesses that create a new defined contribution plan, a credit is now available for employer matching contributions. The credit covers 100% of matches in the year of adoption and subsequent year, then annually reduces to 75%, 50%, and 25% in the fourth year after adoption. The maximum credit amount is $1,000 per participant. Companies with 50 or fewer employees receive the full benefit of the credit with lesser amounts available for larger organizations.
- Automatic Enrollment Credit – Any plan established after December 29, 2022, is now required to have an automatic enrollment feature no later than 2025. To help offset the costs, eligible small employers can claim a credit of $500 per year for the first three years automatic enrollment is maintained. It is only available to those with 100 or less employees. Unlike other credits, there are no lesser amounts available to larger employers.
- Military Spouse Plan Eligibility Credit – Small employers can receive a tax credit for allowing military spouses to enroll in the plan within two months of being hired. These participants must be deemed eligible for matching and non-elective contributions and be 100% vested immediately. The credit amount is equal to $200 per military spouse and 100% of employer contributions up to $300 made on their behalf, for a maximum $500 tax credit.
The SECURE Act 2.0 calls for several changes over the next few years designed to expand access to, increase participation in, and make retirement savings easier for workers. It also provides new and expanded tax incentives for Chicagoland small employers offer retirement plans. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Selden Fox can help. For additional information call 630.954.1400 or click here to contact us. We look forward to speaking with you soon.