Secure Act Tax Credit Calculator

Cost is one of the big obstacles to the adoption of employer-sponsored 401(k) plans, particularly for companies employing less than 100 workers. The SECURE Act went into effect on January 1, 2020, permitting eligible small businesses to claim a tax credit for adopting a new 401(k) plan or adding a new automatic enrollment feature to an existing plan.

New 401(k) Plans

Small businesses setting up NEW 401(k) plans may claim tax credits worth the greater of:

• 50% of qualified startup costs to set up, administer, and educate employees.
• $250 per eligible Non-Highly Compensated Employee, to a maximum of $5,000.

New Auto-Enrollment Feature

A business adding auto-enrollment to an existing 401(k) can claim:

• A $500 tax credit for each of the first three years the new feature is used.

Did the SECURE Act Increase Tax Credits for Small Businesses?

Yes, the SECURE Act increased the amount of available tax credits for small businesses as an incentive to start a new 401(k) plan for their employees or increase participation through auto-enrollment. Before the SECURE Act was passed, a business could claim 50% of the qualified startup costs, up to $500 maximum – for a maximum of $1,500 over three years. When combined, the new tax credits can total up to $5,500 per year — or $16,500 for the first three years of the 401(k) plan.

How to Claim the SECURE Act Tax Credits

These credits are subtracted from the total federal income tax owed on IRS Form 8881.

To be eligible for the SECURE Act tax credit, a small business must meet three requirements:

• Have 100 or fewer employees earning at least $5,000 in compensation within the last year.
• Cover at least one Non-Highly Compensated Employee with the 401(k).
• Have plan participants who did not contribute to a retirement plan with the same employer, or a predecessor company, within the past three tax years.

What Is a Non-Highly Compensated Employee (NHCE)?

For tax purposes, an NHCE is a plan participant who:

• Does not own more than 5% of interest in the business during the preceding year.
• Received less than $130,000 in compensation in 2020 (this figure adjusts annually).
• Did not rank in the top 20% of employees by compensation within the last year.*

  *This only applies to plans that have the top paid provision in their plan document. Reach out to your plan sponsor or consult your plan documents to confirm your plan’s specific set up. 

No, Solo 401(k) plans do not qualify for the SECURE Act tax credits, as they do not cover non-HCEs. By nature, a Solo 401(k) covers only the business owner and his or her spouse. However, one noteworthy SECURE Act change affecting Solo 401(k) plans is that self-employed business owners can file to establish their plan later – at the tax filing deadline with extensions, rather than on the last day of the plan year.

The automatic enrollment adds the following administrative responsibilities:

• Eligible employees must receive annual notice explaining the feature.
• Automatically enrolled participants must have their wages withheld at the default deferral rate.
• Plans with escalating default rates must increase the default deferral rate for each employee each year.

On the bright side, auto-enrollment is a feature that can help increase the percentage of employees participating in the small business 401(k), thus allowing highly-compensated employees the ability to reach their maximums without causing the plan to fail non-discrimination testing. Alternately, small business owners who worry about the testing may consider adopting a Safe Harbor amendment and making contributions on behalf of NHCEs.

The SECURE Act of 2019 also changed the rules for Required Minimum Distributions by increasing the age at which you must begin taking money out of your retirement account. If you were born on or after July 1, 1949, your first RMD will be the year you turn 72. If you were born prior to that date, the age remains 70 ½. The RMD is still calculated the same way – by dividing your 401(k) balance as of December 31 of last year by your life expectancy factor taken from the IRS Uniform Lifetime Table.

There is some flexibility when considering how to fulfill your RMD obligations:

• If you have multiple 401(k)s, you must calculate the appropriate RMD for each individually.
• When taking the RMD from IRAs, however, you can choose to take it all from one account or withdraw from each.
• You can make a one-time withdrawal or take automatic distributions from eligible accounts.†
• You don’t have to spend your RMD. Once you take it out, you can reinvest in a taxable account.

Once you take the RMD out of your accounts, it is taxed as regular income by federal, state, and local governments for that particular year. Failure to do so can result in IRS penalties. If you are worried about maximizing your saved retirement earnings or passing on inheritance, it’s worth speaking to a financial adviser.

If you’ve just inherited a deceased loved one’s 401(k) plan, be aware that the SECURE Act could increase your taxable income significantly in the near future. Prior to the SECURE Act, non-spousal beneficiaries could opt to take only the Required Minimum Distribution over their life expectancy, rather than taking all the money at once. This tax advantage disappears with the SECURE Act, which requires non-spousal beneficiaries to liquidate the inherited 401(k) account within 10 years of the original plan holder’s death.

†If your plan is with Ubiquity Retirement + Savings, automatic distributions are unavailable at this time.

The SECURE Act extended the deadline for new plan adoption and updates from the last day of the tax year to the due date of the year’s tax return, including extensions.

Contact Ubiquity for low-cost small business retirement plans for a flat monthly rate, with no additional fees for AUM or per-person.