Tax Credits available for Retirement Plans Through the SECURE act


The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) is a $1.4 trillion appropriations package that was signed into law on December 20, 2019, by President Donald Trump. This act contains significant legislative enhancements for retirement plans that are designed to help encourage retirement savings.

Start-Up Credit for EmployersTax Credits available for Retirement Plans Through the SECURE act  | Dunbar, Bender & Zapf

Back in 2001, Congress provided small employers, those with 100 or fewer employees, with a tax credit that would help encourage them to establish retirement plans for their employees. The Employer plans eligible for this tax credit include any qualified employer plan such as a 401(k) plan, SEP, SIMPLE plan, and SEP.

For the original tax credit, small employers could receive a tax credit of 50% of the cost for establishing an employer-sponsored retirement plan and for two tax years afterward. The 2001 tax credit was limited to $500 per year.

The tax year the employer plan becomes effective is the first credit year.

How Does the SECURE Act Change This Tax Credit?

Under the SECURE Act, the tax credit is expanded to $250 per non-highly compensated employee that is covered by the plan. The tax credit will not be less than $500 per year and no more than $5,000 per year. This means the maximum tax credit is $15,000 (over 3 years) compared to the previous $1,500 (over 3 years).

Who is Eligible for the Tax Credit?

Small businesses are eligible if:

  • They have 100 or fewer employees who have received at least $5,000 in compensation for the prior year.
  • They have at least one plan participant that is a non-highly compensated employee.
  • They have not maintained another plan covering substantially the same employees for the 3 preceding tax years.

What is Considered a Qualified Start-Up Cost?

Any out of pocket expenses directly related to the establishment or administration of the plan may be considered.

New Tax Credit for Automatic Enrollment

Under the SECURE Act, new or existing plans that add an Eligible Automatic Contribution Arrangement may take advantage of another tax credit.

An automatic contribution arrangement (also known as automatic enrollment) is a feature in a retirement plan that allows an employer to enroll an eligible employee in the employer’s plan at a specified percentage of pay unless the employee affirmatively elects otherwise.  For employers that add the provision, a $500 tax credit is available for the year that the arrangement is established and for the following two years if the plan is maintained. This provides a total of $1,500 (over 3 years) in tax credit.

Contact your consultant at Dunbar, Bender, & Zapf today to discuss if you can take advantage of either of these tax credits.