SECURE 2.0 Act – Section 102. Modification of Credit for Small Employer Pension Start-Up Costs

SECURE 2.0 Act – Section 102. Modification of Credit for Small Employer Pension Start-Up Costs

Section 102 of SECURE 2.0 Act (SECURE 2.0) makes some enhancements to the credits under section 45E of the Internal Revenue Code.

Section 104 of the 2019 SECURE Act provided certain eligible employers (generally with no more than 100 employees who received at least $5,000 of compensation) with an election to claim an income tax credit for their qualified costs associated with establishing a new retirement plan for the plan’s first 3 years. The 3-year small business startup credit is currently 50 percent of administrative costs and can generate an annual credit between $500 and $5,000 each year.   

SECURE 2.0 makes several changes to these credits. First, the employer plan start-up credit is increased from 50 percent to 100 percent for employers with up to 50 employees. (Note, employers with greater than 50 employees, but no greater than 100, will continue to qualify for the for the existing 50% credit).  

Additionally, and except in the case of defined benefit plans (which most smaller employers likely don’t offer), an additional credit is also provided based upon employer contributions made. The amount of the additional credit generally will be calculated by applying an “applicable percentage” to the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000.

The full additional credit is limited to employers with 50 or fewer employees; the credit is reduced for employers with between 51 and 100 employees. The applicable percentage is 100 percent in the first and second years, 75 percent in the third year, 50 percent in the fourth year, 25 percent in the fifth year with no credit for tax years thereafter. 

The applicable percentage is reduced by 2 percentage points for every employee over the 50-employee limitation.  Also, employer contributions to an employee’s retirement account are only eligible to be included in the credit calculation if the employee wages for the taxable year are less than $100,000 in 2023 (indexed annually).  

Other Section 45E rules continue to apply.  Both credits are elective.  There is as an employer aggregation test to determine employer eligibility.  There is also the loss of a tax deduction for credits claimed.  And, interestingly, the tax credit associated with the administrative costs (and not the credit calculated on the employer’s contribution) can begin to be claimed for the taxable year preceding the first plan year at the election of the taxpayer. 

Section 102 is effective for taxable years beginning after December 31, 2022.

If you have any questions about SECURE 2.0, please contact a member of the Schneider Downs Retirement Solutions team at [email protected].

This article is part of a series highlighting the impact of the SECURE 2.0 on retirement plan sponsors, participants and retirees. You can view our full catalog of SECURE 2.0 articles here or download our comprehensive SECURE 2.0 eBook here.

About SECURE 2.0

SECURE 2.0 was signed into law by President Biden on Dec. 29, 2022, as part of a $1.7 trillion omnibus spending bill.

This massive piece of legislation builds on the foundation that was laid by the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act to further improve upon the success of the private employer-based retirement system by making it easier for businesses to offer retirement plans and for individuals to save for retirement.

The full text of SECURE 2.0, including provisions that affect pension and cash balance plans, may be found on pages 2,046-2,404 of the omnibus Consolidated Appropriations Act of 2023.

About Schneider Downs Retirement Solutions

Schneider Downs Retirement Solutions has experience in all facets of qualified and non-qualified plan delivery, which allows us to be flexible to the needs and direction of our clients. Our specialized team of advisers and consultants provide objective advice and expertise to help plan sponsors govern their retirement plans appropriately, mitigate risk, improve participant outcomes and support efficient and compliant plan operations. 

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. Registration with the SEC does not imply any level of skill or training.