Maximizing New Small Business 401(k) Tax Credits
With the recent changes introduced by the SECURE 2.0 Act, small businesses that offer qualified retirement plans, such as 401(k)s, may now be eligible for several tax credits that can significantly offset the costs associated with launching and maintaining these plans.
To be considered a qualified small business for these credits, your client must have had 100 or fewer employees who earned at least $5,000 in compensation in the prior year. Additionally, the plan must cover at least one non-highly compensated employee (NHCE), and the business must not have sponsored another plan in the three tax years before establishing the current plan, unless the plans do not cover substantially the same employees.
The Credit for Small Employer Pension Plan Startup Costs allows qualified small businesses to claim a tax credit for their 401(k) startup costs for up to three years after establishing the plan. For businesses with 50 or fewer employees, the credit covers 100% of eligible costs, up to a maximum of $250 per NHCE, but not more than $5,000 or less than $500 in any single year. For businesses with 51 to 100 employees, the credit covers 50% of eligible costs, with the same per-NHCE and annual limits.
Starting in 2023, small businesses may also be eligible for a credit based on the cost of employer contributions to the plan. For businesses with 50 or fewer employees, the credit can be up to 100% of contributions in the first two years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. The credit has a maximum of $1,000 per eligible participant with wages of $100,000 or less. For businesses with 51-100 employees, the credit percentage is reduced by 2% for each employee over 50.
Small businesses that add an eligible automatic contribution arrangement (EACA) or a qualified automatic contribution arrangement (QACA) to their 401(k) plan can claim a tax credit of $500 per year for a 3-year taxable period, beginning with the first taxable year the employer includes the auto-enrollment feature.
Beginning in 2023, small businesses that employ an NHCE who is a military spouse may receive a credit of up to $500 for each spouse that participates in the plan, subject to several requirements.
Tax professionals are in a unique position to help your small business clients significantly reduce the costs associated with offering their employees a 401(k) plan. Encourage your clients to consult with you to confirm their eligibility and develop a comprehensive tax strategy that takes advantage of these valuable opportunities. By doing so, you can help them attract and retain top talent while minimizing their tax liabilities and promoting long-term financial well-being for their employees.
Gallop polls suggest that businesses that offer benefits such as 401(k) plans to their employees experience on average 70% less turnover than small businesses not offering benefits. If employee turnover costs a small business about half the annual salary of that position, offering benefits becomes a significant savings to small business owners. But because upfront costs can seem daunting, many business owners still don’t consider what benefits they can offer. Supporting
clients by making them aware of credits available to them can save them much more than just tax dollars.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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