SECURE Act: Business Tax Credits for Retirement Plan Startup Costs and Automatic Enrollment Provisions (Sections 104 and 105)

In an effort to encourage employers to adopt a retirement plan and promote certain automated features, the Act (1) enhances an existing business tax credit relative to startup costs, and (2) implements a new credit for plans that utilize an automatic enrollment provision.

Effective for tax years beginning after December 31, 2019, the business tax credit associated with the startup costs will be increased from $500 to a maximum of $5,000. This credit is available to “small” employers with fewer than 100 employees, but is not available for solo 401(k) plans where participants in the plan comprise solely the owner (or sole proprietor or partner) and his/her spouse. The credit may be taken in the tax year it is actually incurred as well as the next two subsequent tax years. As such, any plan established during the 2017 tax year or later may be eligible for the increased credit amount.

The specific amount of the eligible credit is a function of the employer’s demographics, providing a minimum credit of $500 or, if greater, $250 for each non-highly compensated employee who is eligible to participate in the plan up to a maximum of $5,000. In other words, to qualify for the maximum credit amount of $5,000, the newly established plan must be available for at least 20 non-highly compensated employees.

NOTE: For 2020, a non-highly compensated employee is any employee who earned less than $125,000 in 2019 (prior year), as indexed, and does not own 5% or more of the employer sponsoring the plan, either directly or indirectly via family attribution.

Further, those employers that include an automatic enrollment provision in the startup plan are eligible for an additional credit of $500. Similar to the startup credit, the automatic enrollment credit may be taken in the year that the plan/provision is effective as well as the next two subsequent tax years.

The automatic enrollment credit is also available for existing retirement plans that implement an automatic enrollment provision for tax years beginning after December 31, 2019.

These credits, when considered in combination with the expansion of multiple employer plans/pooled employer plans (as addressed in Section 101 of the Act), provide small businesses with compelling solutions for implementation costs, ongoing retirement plan service fees, and the administrative and fiduciary responsibilities that historically have deterred many businesses from implementing retirement plans.

Interested in learning more about the SECURE Act? Download the SECURE Act eBook from the Schneider Downs Retirement Solutions team for a full overview of provisions and highlights at www.schneiderdowns.com/secure-act-ebook.

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC).  SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services.  Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.