As a small business owner, you may not be required to offer your employees a retirement plan—but with enticing tax credits available to small businesses under the SECURE 2.0 Act, this could be a good time for small business owners to at least explore the option.
If you're a small business owner who is thinking about adding a retirement plan to your list of employee benefits, however, there are some things you should know before you choose a plan and get the ball rolling.
First, it's important to understand the many different tax credits that are available to small businesses when they offer employee retirement plans, ranging from startup cost credits to credits on employer-sponsored contributions.
When you think about it, there are a lot of costs associated with even offering a retirement plan at your small business. Not only will you incur some expenses to create accounts, but you will also need to provide paid training to your employees on the new benefit and what it means for them.
Fortunately, tax credits are available specifically to offset some of these costs. Specifically, the Retirement Plan Startup Costs Tax Credit is a federal credit offered to small businesses with 100 or fewer employees.
The credit, which is available for the first three years of the plan being offered, totals up to 100% (with a maximum of $5,000 per year) of such eligible expenses as:
To claim this credit, you'll need to file IRS Form 8881, so be sure to keep detailed documentation on these costs for each year you offer the retirement plan.
Another tax credit to explore if you're a small business owner offering a retirement plan to your employees is the eligible automatic contribution arrangement (EACA) credit. This nonrefundable credit, which is also available for the first three years that a plan is offered, maxes out at $500 per year.
Qualifying for the credit is simple enough. Employers are simply required to have 100 or fewer employees and add an automatic enrollment feature to a new or existing retirement plan with a uniform default contribution percentage. If you decide to go this route, be advised that you are required to provide employees with notice of the automatic enrollment process and contribution rates, as well as the option for them to opt out.
If you'll be contributing to your employees' retirement plans, you might also be eligible for an employer contribution tax credit. This credit can be a little more complicated because it is calculated per each employee and is the lesser of:
It is also worth noting that, in claiming this credit, the percentage of employer contributions used to calculate the credit phases out over a period of five years—dropping from 100% for the first year and down to 25% by year five. Still, this credit can be a great way to lower the cost of employee retirement plan funding.
Aside from the tax benefits you can enjoy as a small business owner by offering a retirement plan, doing so may also help you compete with larger businesses for top talent while improving employee retention. At the same time, you'll be making it easier for your hard-working employees to save for retirement while boosting your reputation as an employer that genuinely cares about its workers.
With so many retirement plan options available, you might be wondering how to select the right plan for your employees' needs. Ultimately, this will require you to carefully assess your own workforce and compare common plan options, including:
No matter which type of plan you decide on for your team, be sure to carefully compare providers and keep employees in-the-loop at all times.
Tax credits can make setting up a retirement plan for your small business employees more attainable than ever. The key, of course, is to do your research and carefully document all aspects of the rollout so you can maximize your credits. If you need guidance in choosing a plan or optimizing your tax credits as a small business, don't forget to set up a consultation with your trusted tax advisor.
If you have any questions or would like additional information, please contact us.