Thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, small business owners have the opportunity to lower their taxes when they start a retirement plan for their employees.
Plan participants are able to wait longer before they are legally required to begin taking money out of their accounts. Here, Ubiquity answers all your questions about how businesses claim SECURE Act tax credits by starting a new plan or adding auto-enrollment, and how plan participants can calculate their Required Minimum Distributions.
As a small business, you could qualify to earn up to $16,500 in tax credits over a three-year period by starting a qualified retirement plan with auto-enrollment.
Start-Up credit up to ? Start-up Credit is $250 per non-highly compensated employee but no less than $500 in total and not to exceed $5,000 per year. The credit shall not exceed 50% of total cost per year. The start-up credit is available for the first three years of the plan. x
Auto-enrollment credit up to ? Annual credit of $500 applies to plans who add an automatic-enrollment provision to the 401(k) Plan. x
Total tax credits up to
Slide left/right to see full table.
This calculator is for illustration purposes only and should not be construed as tax advice. Users should consult a tax professional regarding specific tax needs, credit availability and amount. For further information please visit the IRS website.
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.
Small businesses setting up NEW 401(k) plans may claim tax credits worth the greater of:
A business adding auto-enrollment to an existing 401(k) can claim:
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.
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:
For tax purposes, an NHCE is a plan participant who:
*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:
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:
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.