Maximize Your Savings: Unlocking 401(k) Tax Credits for Small Businesses

The original SECURE Act and SECURE Act 2.0 provide significant tax credits for eligible small businesses. There are now three distinct tax credits for 401(k) plan fees or contributions paid by small businesses.

Below is a summary of each tax credit to assist you in determining whether your business is eligible and the potential amount of the tax credit. These credits include the following:

1. Startup Tax Credit– for small businesses who adopt a new 401(k) plan.
2. Employer Contribution Tax Credit– for small businesses who allocate employer contributions to 401(k) plan participants.
3. Automatic Enrollment Tax Credit– for small businesses that add an automatic enrollment feature to a new or existing 401(k) plan.

You must also meet specific criteria to qualify for 401(k) tax credits:

• You have fewer than 100 employees.
• You employ at least one non-highly compensated employee.
• You have not substantially covered the same employees with a 401(k), SEP, or SIMPLE IRA in the preceding three years.

1. Startup Tax Credit

You can take a tax credit for qualified startup costs necessary to establish, administer, or educate employees about a retirement plan. This credit is available for the first three years of the plan.

Employers with 50 or fewer employees qualify for 100% of the tax credit, while those with 51-100 qualify for 50%.

The annual limit is the lesser of $5,000 or $250 times the number of non-highly compensated employees. The minimum tax credit is $500.

2. Employer Contribution Tax Credit

You can take up to $1,000 tax credit by allocating employer contributions to employees earning no more than $100,000 per year. This is a 5-year phase-out credit. You can take 100% of the credit over the first two years, 75% in year 3, 50% in year 4, and 25% in year 5.

3. Automatic Enrollment Credit

Eligible small businesses can claim a $500 tax credit by adding an automatic enrollment feature to a new or an existing plan. This automatic enrollment must meet certain requirements by the IRS and is available for the first three years the feature is effective.