Small Business Owner’s Guide to SECURE ACT Tax Credits

Author: Siân Killingsworth / 9 Aug 2022 / 401(k) Plan Information, Retirement Trends & News, Safe Harbor

If you’ve held off on providing a 401(k) plan to your employees in the past due to startup expenses, then it’s time to look into the SECURE Act tax credit. As of January 1, 2020, small business 401(k)s are eligible for a tax credit that offsets the cost of plan setup and administration for the first three years.

As a small business 401(k) provider, the experts at Ubiquity will provide all the information you need to offer a new retirement plan at a low, fixed cost.

Step 1: Determine your SECURE Act eligibility.

For SECURE Act 2022 eligibility, you must:

• Have less than 100 employees who receive $5,000+ per year in compensation.
• Have at least one plan participant who is a non-highly compensated employee.
• Not have had a 401(k) or other qualifying retirement plan within the past 3 years.

Step 2: Set up your small business 401(k) plan.

Next, you’ll need to work with a small business 401(k) plan provider to set up your plan. You’ll need to create a plan document that complies with IRS Code and outlines all the details of your retirement plan. You’ll also need a trust to hold the plan assets and a broker to help you select funds and execute the investments.

Over the years, your 401(k) administrator will help you maintain 401(k) records, enroll new employees, track employee deductions, provide information to plan participants, and keep your plan in compliance with the law.

Ideally, you will choose a low-cost 401(k) provider that focuses on small business clientele and charges a flat fee for service. Administrative costs can vary considerably, with some providers charging per-person fees and assets under management fees — expenses that grow along with the size of your plan. Alternatively, Ubiquity provides flat-fee plans whose cost will never rise, no matter how much your savings grow.

Step 3: Claim your SECURE Act credit.

When you file your taxes, you’ll need to file IRS Form 8881 to claim your startup tax credit. Taking this simple step can qualify you for a tax credit worth $500 to $5,000, put toward up to 50% of your 401(k) setup and administration expenses. If you choose the automatic enrollment feature, you qualify for an additional $500 per year, dollar for dollar.

These credits can be applied for the first three years of your new plan. In total, you can get up to $16,500 in free money for your business just for starting a retirement savings plan, which can help you save more for your own retirement and make your company more competitive in the job market.

Keep in mind that even after the first three years, you’ll be able to write off any non-elective or matching contributions to reduce your company’s taxable income. What’s more, any money put into your own 401(k) will reduce your personal taxable income. The saved money will gain compounding interest over the years, helping you to feel more financially secure in your retirement.

Questions about 401(k) retirement plans for your small business? Contact Ubiquity today.