Practical Example

SECURE 2.0 Tax Credits

SECURE Act 2.0 of 2022: Qualified Plan Tax Credits

One big hurdle small business owners face when starting a retirement plan is cost. However, the tax credits that are part of the SECURE Act 2.0 legislation have been enhanced and expanded. These tax credits can significantly reduce the expenses businesses face when implementing their first retirement plan.

Example:

Jack owns ABC Printing. He is the only owner and has 12 employees (all Non-Highly Compensated). Through discussions with his Financial Advisor and Trinity Pension Consultants, it is determined that a 401(k) Safe-Harbor Match retirement plan is the best fit for Jack’s company.

By starting a plan and making the Safe-Harbor Match, Jack is now eligible for an increased tax credit for starting the plan as well as tax credits for contributions to each of his 12 employees.

Start-Up Tax Credit	100% tax credit for the greater of $500 or $250 for each Non-Highly Compensated Employee with a cap of $5,000.

Jack has 12 NHCEs, so his tax credit for starting the plan is $3,000 (12 x $250) assuming the administration costs for the plan is $3,000 or more. This tax credit is applicable for the first 3 years of the plan and for a total 3-year tax credit of $9,000.

Employer Contribution Tax Credit	Additional tax credit based on the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000.

Jack contributes $20,000 in Safe-Harbor Match to his company and each employee receive $1,000 or more. Jack receives a tax credit of $12,000 (12 x $1,000). If the employees and contributions are the same, Jack would receive tax credits of $12,000 in year two, $9,000 (75%) in year three, $6,000 (50%) in year four, and $3,000 (25%) in year five for a total of $42,000 over the first five years.

Takeaway	Over the first five years of the plan, Jack will receive over $50,000 in tax credits! This is in addition to all other tax credits (e.g., auto enrollment), deductions for plan expenses and contributions.