If your business hasn’t offered retirement accounts to your employees, you should consider doing so now, thanks to new tax credits available under the Setting Every Community Up for Retirement Enhancement (Secure) Act.
A Wall Street Journal report reveals that more small businesses in the U.S. are taking advantage of these tax credits to provide 401(k) programs to their employees. The Secure Act makes it more appealing for employers to offer retirement plans. According to Ronald Ulrich, VP of Product Consulting and Compliance at ADP Retirement Services, this can potentially lead to better retirement outcomes.
Rhett Stubbendeck runs an insurance company called LeverageRx in Omaha, Nebraska and introduced a 401(k) retirement program for all his employees in January. Of his 20 employees, 15 have already enrolled in the program, which offers a 100% match of contributions. The IRS sets the 401(k) contribution limit for 2023 at $22,500 for employee contributions and $66,000 for combined employee and employer contributions.
Stubbendeck found that offering this benefit is more affordable for his business now, as 401(k) providers offer plans that cover all administrative costs with a single flat fee. Additionally, the Secure Act includes a $1,500 credit for setting up a plan with automatic enrollment, where every employee contributes to a retirement account unless they choose to opt-out.
To qualify for the tax credit, your business must have at least one “non-highly compensated” employee who earned less than $135,000 in 2022 and who is not the business owner. The credit amount depends on the number of non-highly compensated employees and is capped at $5,000 per year. Your business could receive a total of $15,000 in tax credits by year three, with the potential to earn $16,500 over three years with automatic enrollment.
Previously, businesses with fewer than 100 employees were eligible for a three-year tax credit of up to 50% of administrative costs, with an annual limit of $5,000. The Secure Act increased this credit to cover 100% of costs for new plans sponsored by businesses with up to 50 employees. There is also a new credit for employer matching contributions, up to $1,000 per eligible employee (those making less than $100,000), or $5,000 in total contributions per year for five years.
These changes create a win-win situation for both employers and employees, making it easier for both to increase their retirement contributions. Offering 401(k) matching can help organizations save money on taxes and reward their employees.
Some states, like California, Oregon, Illinois, Colorado, and others, require businesses to either start their own retirement plan or enroll their employees in state-automated programs called auto-IRAs. In these plans, IRA contributions for 2023 are capped at $6,500, or $7,500 for those over age 50, which is less than what can be contributed to traditional 401(k)s.
Depending on the size and needs of your business, 401(k) plans may be more advantageous for both business owners and employees, as they provide a wider range of investment options and are eligible for tax credits, according to Steve Abbott, head of public policy and government affairs at Gusto, a company that offers payroll, benefits, and HR management software for businesses.
