Dec 07, 2022
To be competitive in today’s job market, businesses need to offer a retirement savings plan in addition to other employee benefits. A salary deferral plan is typically table stakes for companies competing for talent. Workers place an even higher value on a retirement plan benefit that includes employer contributions to help them reach their retirement savings goals. But many employers, particularly small employers, haven’t yet adopted a retirement plan because of the cost and administrative complexity.
To help combat these barriers to plan adoption, Congress passed the SECURE Act of 2019 to simplify certain retirement plan rules and increase the tax credits available to plan sponsors. Congress is currently considering another legislative package, SECURE Act 2.0, which may increase the types of incentives available to help encourage retirement plan adoption.
Advisors can educate prospective plan sponsor clients about the incentives currently in place that may help make it easier for them to adopt a retirement savings plan, like a 401(k) plan.
Extended Plan Establishment Deadline –To give businesses more time to determine their profits and analyze their retirement plan options, the SECURE Act extended the deadline for establishing a qualified retirement plan from the end of the business’s tax year to the business’s tax-filing deadline for that tax year, plus extensions. An employer that can adopt a plan and fund it before the business’s extended tax deadline will be considered to have established a plan as of the last day of the prior tax year.
| Business Type |
Tax-Filing Deadline |
Extended Tax-Filing Deadline |
| Sole proprietors |
April 15 |
October 15 |
| Partnership |
March 15 |
September 15 |
| S corporation |
March 15 |
September 15 |
| C corporation |
April 15 |
October 15 |
EXAMPLE: For 2022, Inga’s IT Services, Inc. has 56 employees. As a C corporation, Inga has until October 15, 2023, to establish a profit-sharing plan for 2022 and take a deduction for employer contributions made to the plan for 2022. If Inga establishes a 401(k) plan, her employees could not begin making salary deferrals until after the plan is established in 2023 because salary deferrals cannot be made retroactively.
Tax-Deductible Plan Contributions – A business that sponsors a retirement plan can take a tax deduction for the contributions it makes to the plan (e.g., matching or profit-sharing contributions). This includes amounts contributed for the business owners. For a 401(k) plan/profit-sharing plan, the deduction is limited to 25% of the aggregate compensation paid to participants (not in excess of $305,000 per participant for 2022) during the employer’s tax year. Unincorporated business owners use a special calculation to figure their maximum deductible contribution. Employee salary deferrals are not subject to the 25% deduction limit, although 2 deferrals are included when calculating total participant compensation. They are also included in the gross wages that employers may claim as a deduction.
Tax Credit for Small Employer Plan Start-Up Costs – Unlike a deduction, which reduces taxable income, a tax credit reduces the amount of taxes owed on a dollar-for-dollar basis. A small employer (a business that did not have more than 100 employees who earned at least $5,000 for the preceding year) may be able to claim up to $15,000 in tax credits over three years to offset the costs of establishing and administering a plan, including the cost of educating employees about the plan. To be eligible, the plan must have at least one non-highly compensated employee (generally an employee who earns less than $150,000 per year and is not a more than 5% owner) eligible to participate in the plan, and the business cannot have maintained a qualified retirement plan covering substantially the same employees during the three years preceding the first year the business is eligible for the credit. The amount of the credit available is 50% of qualified start-up costs incurred or paid during a tax year, up to the greater of
- $500, or
- The lesser of (a) $250 times the number of non-highly compensated employees eligible to participate in the plan, or (b) $5,000
The credit is available for three years and may be claimed for expenses incurred in the year before the year the plan is in effect.
Tax Credit for Small Employers That Include Eligible Automatic Enrollment Feature in Plan –A small employer may also claim a $500 tax credit for each of the first three years its plan includes an eligible automatic enrollment feature. The credit is available for new or existing plans. Employers can claim this credit in addition to the credit available for qualified plan start- up costs.
Deductible Administrative Expenses –Businesses that pay for plan administration expenses (rather than having them debited from participant accounts) may generally take a deduction for those expenses. Expenses that are deducted may not also be used to claim the credit for qualified plan start-up costs.
Spread the News
These tax and other incentives may provide the funding boost some small employers need to adopt a retirement plan for their employees. Financial advisors can educate prospective retirement plan clients about these incentives in addition to helping them explore plan types, features, and costs.
This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Consult your own tax, legal and accounting advisors before making any decisions. Newport and its affiliates do not provide tax, legal or accounting advice.
Newport Group, Inc., an Ascensus Company, and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. 20221206-2619408