Tax Credits for Business Owners
By: Peyton Gentry, AIF, CRPS®, Financial Advisor
I hope that title was enough to get you curious. If you are a business owner and you like giving Uncle Sam a tip each year, then this article is not for you. The US Treasury thanks you for your generous donations. However, if you are interested in strategies that can help you attract and retain employees while also putting some money back into your pocket, then please read on.
In a rare moment of bipartisan clarity, Congress has realized that working Americans are facing a real problem: They do not have enough money saved to be able to retire. Social Security was never intended to fully provide for people during retirement, but sadly, that is the reality for millions of Americans. One of the reasons for this is that many people who work for small businesses are never offered any kind of workplace retirement plan that they can contribute to. When money is invested out of each paycheck, especially through payroll deduction, people are much more likely to stay the course and build a retirement nest egg than if they are on their own to figure out where to save.
“The SECURE Act became law in 2019 and brought about several changes to retirement planning—but it didn’t go far enough to entice small business owners to establish new group retirement plans for their employees.”
Recognizing this issue, Congress has been trying to find ways to incentivize retirement saving. The Setting Every Community Up for Retirement Enhancement (SECURE) Act became law in 2019 and brought about several changes to retirement planning—but it didn’t go far enough to entice small business owners to establish new group retirement plans for their employees. However, the SECURE Act 2.0 went into effect in 2023, and it included three distinct and generous tax credits for employers who establish new plans—especially those who are willing to contribute to their employees’ accounts.
Here is the breakdown:
The Startup Credit
What is it? Businesses can receive direct credit for qualified expenses associated with establishing and operating a new retirement plan.
What is a “qualified expense”? These may include recordkeeping fees, plan administration fees, support services from your retirement vendor, and the costs of educating your employees about the plan.
How much can I get? You can get up to $5,000 per year for the first three years that the plan is in place and a total tax credit of up to $15,000 over the course of three years.
Who gets it? – Businesses with 50 or fewer employees receive 100% of qualified expenses up to the $5,000 limit. Businesses with 51–100 employees may receive 50% of qualified expenses up to the $5,000 limit.
The Auto-Enrollment Credit
What is it? Businesses that adopt an automatic enrollment feature on their retirement plans can receive a tax credit for doing so. This is designed to encourage and increase participation in the plan.
How much can I get? You can get $500 per year for the first three years after adding the feature—and a total tax credit of up to $1,500 across three years.
Who gets it? Any business that adds an automatic enrollment feature to their plan—whether it is a brand-new plan or an existing plan that is being amended to include the feature.
The Big One: The Employer Contribution Credit
What is it? Businesses that contribute to their employees’ retirement accounts can receive a tax credit for those contributions. Think matching or profit-sharing contributions.
How much can I get? In years 1 and 2, you are eligible to receive up to $1,000 per eligible employee that receives matching contributions. In year 3 it is up to $750 per eligible employee, $500 per eligible employee in year 4, and $250 per eligible employee in year 5.
Who gets it? To be eligible for this tax credit, you have to meet the following criteria:
• Have no more than 100 employees who received compensation of $5,000 or more in the preceding year
• Not have offered a plan covering substantially the same employees during the previous three tax years
• Only those employees who earned less than $100,000 per year can be included in the calculation for the tax credit
I know that was a lot of information to throw at you, but let’s look at a hypothetical example that will illustrate just how massive these tax credits can be.
Take a business that is establishing a new plan. They have 25 employees, 20 of which earn less than $100,000 per year and are not considered “Highly Compensated” in the eyes of ERISA. The business decides they will make contributions of at least $1,000 per year to each of the employee’s accounts. Let’s say their total administrative costs for the plan are $10,000 per year, all-in.
If the idea of offering a retirement plan for you to save for your own future, to take care of your employees, and to get a nice chunk of change credited back on your tax bill sounds great, then you would be correct! It is great!
If you think this is a bit confusing and would like to see how this works for your business, that is where I come in. Please reach out and we will be happy to run the numbers for you.
Any day that I can help business owners and their employees save for retirement—while also putting more money back in their pocket—is a good day for me.
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