While major legislative tax changes rarely occur, we have had several in the last few years. After being approved in the House in the summer of 2019, the SECURE Act finally passed the Senate and was signed into law by President Trump in December. The SECURE legislation – which stands for “Setting Every Community Up for Retirement Enhancement” – puts in place a number of provisions which are beneficial for small business owners.
The key benefits for small businesses are that they get bigger tax credits for establishing a retirement plan. A small business is defined as a company with 100 or fewer employees earning $5,000/year in compensation.
New Rules Are Effective Immediately
For tax years starting 1/1/2020, the maximum tax credit available under IRC Section 45E (for up to three years) will be increased to the greater of:
- The lesser of:
- $250 * number of non-Highly Compensated Employees eligible to participate in the plan;
Therefore, if you are a small business owner with 1 eligible employees, you would get a $500 tax credit. For a small business with 18 employees, the tax credit jumps to $4,500 (18 * $250). However, if you are a small business with 20-100 employees, your tax credit would cap out at $5,000/year for three years.
Additional Credit for Auto-Enrollment Plans
Auto-enrollment has been shown to increase employee participation in 401K plans significantly. For plans that have the auto-enrollment feature, the plan gets an additional tax credit of $500/year for the next three years. Please note, even if you have an existing plan which has been established and running for decades, if you add this feature, you will be eligible for the tax credit.
If you would like to learn more about how recent legislation may affect your business, I encourage you to give me a call and we can chat about what makes sense for your business.