Tax Credits for Start-Up 401(k) Plans

Financial Services, Small Business

With passage of SECURE Act 2.0, paying for and operating a 401(k) plan might be easier than you think for your small business.

For small businesses with up to 50 employees, SECURE Act 2.0 increases the existing tax credit to 100% of plan start-up costs, capped at $5,000 per employer for each of the first three years. That adds up to a total of $15,000 in potential credits. There are also credits for contributing match contributions.

The Details

The three potential tax credits for new plans starting in 2023 with passage of SECURE 2.0:

Start-up Credit:

A credit of 100% of billed costs capped at $5,000 each of the first 3 years. Calculated by $250 per Non-highly Compensated Employee (NHCE) covered by the plan. Only applies to employers with 50 or fewer employees. The 50% of costs still applies for employers with 51 to 100 employees.

Auto Enroll Credit:

A credit of $500 per year for each of the first 3 years for including an auto-enrollment feature.

Tax Credit on Matching Contributions:

The tax credit is 100% of the match contributed by the employer up to a per-employee cap of $1,000. Contributions to employees with compensation in excess of $100,000, as indexed, are not taken into account. The set percentage is 100% for the year the plan is established and the following year, 75% for the third year, 50% for the fourth year, 25% for the fifth year, and 0% thereafter. The full amount of this tax credit is only available to employers with 50 or fewer employees and phases out for employers with 51 to 100 employees. This is potentially $50,000 in tax credits first two years phasing down over the full 5 years.

Other Items to Note

  • If a business offers a retirement plan for the first time by joining a multiple employer plan (MEP) or a pooled employer plan (PEP), regardless of how long the MEP or PEP has existed, they are still eligible for the credit.
  • SECURE Act 2.0 requires automatic enrollment for new 401(k) or 403(b) plans beginning in 2025. The initial default rate must be between 3% and 10%, including annual auto-escalation of 1%, up to at least 10% but not more than 15%. This does not apply to plans with less than 10 employees.
  • Employers that have offered SIMPLE IRA or SEP plans for a number of years are not eligible for the Start-up credits.

The Solution from M3 is Turnkey

  1. Handles the notices and administration of the plan, known as ‘3(16)’ administration
  2. Oversight on the investments as a ‘3(38)’ investment advisor to the plan
  3. World class resources and education support for your employees
  4. Plan design flexibility to meet your goals

Cost Example

Company XYZ has 15 qualified covered employees and will be giving a match equal to $500 per employee.

The Math on the three tax credits above:

$3,750 in tax credits each of the first three years for plan
related expenses. Multiply the 15
employees * $250 per tax credit = $3,750

$500 in tax credits each of the first three years for having automatic

$7,500 in tax credits for each of the first 2 years phasing down
over 5 years. The average match of $500 * 15 participants = $,7,500

Total administrative and advisory services for this 15 person plan is: $3,968
Using Start up credits and auto enroll credits, net cost = $0 for first 3 years

Total match contributions to employees at $500 each is: $7,500
Using Match credits, net cost = $0 for first 2 years

GRAND TOTAL: $0 for generous match 401(k) plan the first few years in this example with turnkey delivery and educational resources.

M3 Financial has the expertise to help. Contact Charlie Munkwitz for additional details on designing a plan solution that might be right for your group.

Investment advisory services offered through Global Retirement Partners, LLC, dba M3 Financial, an SEC registered investment advisor.

*This is not tax advice or a proposal. Please consult your tax professional to understand the tax implications for your group as exceptions and details exist beyond the above.

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