Business Owner Education: Secure Act 2.0 gives Business Owners free 401(k)s

Welcome back to Quiver Financial’s business education, where we educate you the business owner on strategies you should be implementing into your practice to grow and protect your business.

I’m Justin Singletary and I’m joined again with Patrick Morehead.  Today we wanted to share with you an interesting provision in the Secure act 2.0.

If you started or are looking to start a 401k in 2023 listen up.  These Tax credits are huge and a potential game changer for your business.

Tax Credit Covers 100% of New Plan Costs for the First Three Years: This credit can be applied to 100% of your qualified business 401(k) costs such as plan setup and administration. That's up to $15,000 in tax credits over the first three years to offset setup and administration charges for the maintenance of your plan. Most small business wouldn’t incur half of that to start and cover the plan administration costs. 

Here's How It Works: Your business must have at least one employee, besides you as the owner, who earns less than $150,000 a year (a Non-Highly Compensated or NHC employee) to qualify for a tax credit. The tax credit received is the greater of $500 or $250 per NHC employee with a cap of $5,000 applied to 100% of the costs you incurred. So, if your ShareBuilder 401k business cost is $1,200 annually and you have 10 or fewer eligible employees, your tax credit is $1,200 in year one or $3,600 in total over the first three years fully offsetting these costs.

Providing an Employer Match Provides Tax Credits of $1,000 per Employee Employer contributions are typically 100% deductible already. But now businesses with 1-100 employees can receive tax credits too! If you have less than 100 employees, you can qualify for tax credits of up to $1,000 per employee for your first 50 employees for your employer contributions. This applies for those employees earning less than $100,000 per year. The applicable percentage is 100% in the first (year plan begins) and second tax years up to $1,000 per employee, 75% in the third year, 50% in the fourth year, and 25% in the fifth year, and none for subsequent years. Note, there are some added tax credits for employees 51-100 as well, but a lesser percentage. There is no qualification for the credit if you have more than 100 employees. Lastly, for those contributions you receive a tax credit, those likely don't qualify for tax deductions. However, the amount not covered by the credit should be deductible. You'll want to review with your tax accountant.

Here's How It Works: In year one, let’s say your business contributes $15,000 to the plan and you have 10 employees who earn less than $100,000 and all received over $1,000 in employer contributions. You just qualified for $10,000 in tax credits in year one. Let’s keep things constant for this example, so your number of employees and contributions are the same throughout the next five years. You’d receive tax credits of $10,000 in year two, $7,500 in year three, $5,000 in year two, and $2,500 in year three for a total of $35,000 over the five years. That’s powerful stuff! 401(k) plans are truly more affordable than ever for businesses with 1-50 employees.

Auto Enrollment Credit: Auto-enrollment tax credit An eligible employer that adds an auto-enrollment feature to their 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.