With so much on their plate, many business owners may have missed an important tax credit that offers the owner and the employees’ significant long-term benefits.
And it’s a straightforward process: By establishing a retirement plan such as a 401(k) or SIMPLE IRA plan, a business owner receives a tax credit of up to $5,000 a year for up to three years. To qualify for the credit, the business must have fewer than 100 employees and have not previously sponsored a plan.
The Setting Every Community Up For Retirement Enhancement of 2019 (SECURE) Act increased the maximum credit from $500 to $5,000, effective January 1, 2020. By helping make the plan more affordable at start up, the credit is intended to encourage owners to establish small business retirement plans. In addition, the owners receive full tax deduction for all contributions made to the plan.
In addition, the automatic enrollment provision adds an additional $500 credit for the first three years of the plan (this feature automatically enrolls newly eligible participants). Automatic enrollment and the tax credit are effective in increasing plan participation and deferral rates.
How the tax credit works
The following example shows how the tax credit works and the benefits it provides the business owner:
Sue owns a small business that has grown significantly, but she had not considered a qualified plan before learning about tax credits.
Working with her advisor and accountant, Sue established a 401(k) plan with an auto-enrollment feature, making her eligible for to defray the initial cost of the plan, and a credit of $500 for the auto-enrollment feature. She has made a $5,500 employer contribution to the plan and receives a deduction, which ends up lowering her federal tax liability to $40,000. But with the new credits, her tax bill falls to $34,500.
Determine if a retirement plan is right for you
The expanded tax credit is a great tool to help small business defray the costs of starting a plan. Business owners should discuss the credit with their accountant and advisor to determine if it makes sense for them to establish a plan.
The credit is available for the first three years the plan is in existence and offers real benefits to owners by freeing up tax dollars for other important business purposes.
Our small business retirement plan offering, HUB Retirement Select, is specifically designed for small to mid-sized organizations who want an easy to administer 401(k) plan that addresses fiduciary risk and helps employees save for retirement. Contact HUB to speak to a retirement specialist and learn more about HUB Retirement Services.
Advisory services for HUB Retirement Select offered through Global Retirement Partners, a SEC registered investment adviser and wholly owned entity of HUB International.
HUB Retirement and Private Wealth employees are Registered Representatives of and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisers, which may or may not be affiliated with HUB International. Insurance services are offered through HUB International, an affiliate. Consult your financial professional for additional information about the provision of specific securities, investment advisory and insurance services by each broker‐dealer and investment adviser.