How to Maximize Your Small Business Retirement Plan Tax Credit

How to Maximize Your Small Business Retirement Plan Tax Credit

Did you know there’s a retirement plan tax credit that can help small businesses recoup some of their plan-related costs?

One tax credit that’s new and still unknown by many business owners is the Small Business Retirement Tax Credit put into place by the SECURE Act in 2019. This tax credit, as well as the Saver’s Tax Credit, can help both business owners and small business employees save for retirement while saving on their taxes.

As a small business owner, you work hard to build your company and your bottom line. It’s natural that you want to find ways to decrease your tax burden so you can reap more of the rewards of all your work. Here’s how you might be able to do just that.

What Businesses Are Eligible to Claim This Tax Credit?

There are several requirements for businesses to be eligible to claim the Small Business 401(k) Tax Credit. Your business must have had 100 employees or less who were paid at least $5,000 in compensation by your business in the previous year.

You also must have covered at least one non-HCE (Highly Compensated Employee) with your retirement plan. HCEs either own 5% or more of the business in the current or previous year, or were paid at least $125,000 in 2019 ($130,000 in 2020).

Finally, your employees weren’t mostly the same employees who received contributions or accrued benefits in another retirement plan that you sponsored in the three tax years before the first year you are eligible for the credit.

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How Does the Tax Credit Work?

The SECURE Tax Credit allows small businesses like yours to claim a tax credit for adopting a new retirement plan for employees, and also for adopting a new automatic enrollment feature.

This tax credit allows your business to see tax savings for setting up or enhancing your retirement options for employees, in addition to the tax benefits you may receive from contributing to certain employee plans if you choose to do so.

Qualified start-up costs: The limit for claiming a tax credit for starting up a retirement plan – either a SEP, SIMPLE IRA, or qualified plan like a 401(k) – for a small business has been raised. (You can learn much more about all these plan options on the IRS website.)

It’s now equal to 50% of your qualified start-up costs, up to the greater of:

  • $500
  • The lesser of $250 x the number of non-HCEs eligible to participate in the plan or $5,000

This start-up cost credit is available for up to three years. You can claim the credit for the costs that go into setting up and administering the plan. The credit can also be applied toward informing your employees about the new plan and their options.

If you add an auto-enrollment feature to either a new or existing retirement plan, you’re also eligible for a tax break. You can claim up to $500 per year for a three-year period, which begins when you implement the auto-enrollment feature.

Bonus Tax Credit: Saver’s Credit

And for even more savings, you may also be eligible for the Saver’s Credit. This applies if you’re a business owner who is primarily setting up a retirement plan to save for your own retirement. The Saver’s Credit is available for filers under the following income thresholds:

  • $65,000 as a married joint filer in 2020; $66,000 in 2021
  • $48,750 as a head of household filer in 2020; $49,500 in 2021
  • $32,500 as any other filing status in 2020; $33,000 in 2021

This credit is worth up to $1,000 or $2,000 if you’re married and filing jointly. You get the credit for contributing to a qualified retirement account – a traditional or Roth IRA, 401(k), SIMPLE IRA, SARSEP, 403(b) or 457(b) plan. The credit is worth 50%, 20%, or 10% of a maximum contribution of $2,000 (or a total of $4,000 if you’re married filing jointly). Rollovers from an existing account don’t count, only new contributions.

The IRS website has detailed guidelines about this tax credit if you’d like more information.

Executing Your Employer-Sponsored Retirement Plan with a Financial Planner

Many small business owners erroneously believe that employer-sponsored retirement plans are out of reach. In fact, recent legislation is working to make these plans significantly more affordable for smaller sized businesses. That can mean that small business owners are getting increased access to a tool that brings their own retirement within reach, aids in employee retention, and provides a competitive hiring edge.

It’s great when doing good also helps your business do well financially.

Taking advantage of these tempting tax credits and deductions is a good idea – but you shouldn’t do it alone. There are strict requirements about the kinds of plans you can offer your employees, your fiduciary responsibilities as the plan sponsor, and ensuring you’re complying fully with the conditions for receiving these tax credits.

That’s why most small businesses like yours bring a financial planner into the retirement plan offering process. An experienced financial planner can help you choose which plan is right for your business, ensure the plan is set up correctly, and maximize your tax credits while helping you stay in compliance with IRS regulations. Setting up a retirement plan for your small business is risky if you go it alone – get the right help to do it the right way.

The financial professionals at 3 Financial have years of experience helping small business owners navigate the legal and financial landmines of retirement plan sponsorship, while also maximizing benefits.

From her base in Honolulu, Joanna Amberger, owner of 3 Financial, helps business owners uphold their fiduciary duty to employees. Amberger is required by law to act in the best interest of her clients and has the industry knowledge required to do so effectively and tax efficiently.

Choosing a retirement plan for your small business is a pretty big task – and it’s one you shouldn’t undertake alone. Get the right financial help and guidance to pick a plan with the maximum benefit and minimum risk for you and your business by contacting us today.

Disclosure: 3 Financial Group and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.


Joanna Amberger

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