$5,000 New Tax Credit Available For Businesses

As part of the SECURE Act, effective January 1, 2020, substantial tax credits is available to employers with fewer than 100 employees who establish 401(k) or other retirement plans.

To start a 401(k) Plan, a tax credit of $5,000 per year for three [3] years is available to cover 50% of the implementation and administrative costs. That’s a total of $15,000 over three years.

The rule states:

For the first credit year (year when the Plan is established) and each of the 2 taxable years immediately following the first credit year, the tax credit available is the greater of –

• $500, OR

  • The lesser of:$250 for each Non Highly Compensated Employee [NHCE] who is eligible to participate in the Plan, or

  • $5,000

Ordinary and necessary eligible costs include installation or administrative fees and costs to educate employees about their benefits and options under the plan.

The tax credit is only available when an employer is establishing a new retirement plan, including 401(k), 403(b), Profit Sharing Plan, Cash Balance Plans SIMPLE IRA or SEP IRA. If the employer offered a retirement plan at any time during the previous three years which covered substantially the same employees as the new plan, the tax credit is not available. For example, an employer who offered a SEP IRA in 2019 and wants to implements a 401(k) Plan effective in 2020 for the same employees, will not qualify for the start-up tax credit.

Note that a tax credit is different from a deduction. A tax credit reduces the employer’s tax liability - dollar-for-dollar. For e.g. a tax deduction calculated at $5,000 will only reduce taxable income by that amount, while a tax credit calculated to equal $5,000 will reduce the employer’s tax liability by $5,000.

The SECURE Act also encourages Automatic Enrollment. For a Plan that implements Automatic Enrollment in 2020 or later, a additional $500 credit is available in the year that the Automatic Enrollment and each of the 2 taxable years immediately following the initial year. And you guessed correctly that a new Plan that implements Automatic Enrollment would be eligible for both credits. For what about those with existing plans - there is also a benefit available for you. The $500 tax credit is available to an employer who elects to add automatic enrollment to their existing plan.

For employers considering offering a retirement plan for their business, now is a good time to consider establishing one. Benzer Capital is here to assist. Click here to request a one on one consultation and implement a best in class 401K for your business, while obtaining the tax credit.