There’s never been a better time to start a retirement plan

Thanks to Secure 2.0, the sweeping pension reform bill signed into law late last year, small businesses have new incentives to help their employees set up a retirement plan.

The incentives, which include tax credits that are particularly attractive to businesses with 50 or fewer employees, are designed in part to encourage smaller companies to create retirement plans for their employees — especially the smallest firms, which offer fewer than half (48%). retirement plan, according to research by Anqi Chen and Alicia Munnell of the Center for Retirement Studies at Boston College, which used 2019 data from the U.S. Bureau of Labor Statistics.

But that is changing, inspired in part by more attractive tax incentives and a highly competitive labor market. According to a new survey report released May 2 by the nonprofit Transamerica Institute and its Transamerica Center for Retirement Research, 42% of companies that do not offer a 401(k) or similar plan say they will start sponsoring a plan within the next two years. . Among those unlikely to sponsor a plan during that time, 31% cited cost concerns.

Before discounting plan sponsorship—especially for cost reasons—small businesses should consider the potential financial benefits Secure 2.0 offers. There are eligibility requirements and specific variables that can affect these benefits, so it makes sense to consult with a tax advisor to weigh the various options.

Amy Vaillancourt, Voya Financial’s senior vice president of workplace product, strategy and architecture, said typically these loans are “a huge benefit to employers looking to start plans.”

Here are some key features of the legislation and points to consider in balancing the costs and benefits for both employer and employee.

A large tax credit can reduce plan setup costs

Secure 2.0 created an additional loan to cover administrative costs associated with starting a qualified retirement plan. For businesses with between one and 50 employees, the legislation increased coverage from 50% to 100% of qualified start-up costs. There is an annual limit of $5,000 available for three years. Larger businesses—those with 51 to 100 employees—are still eligible for up to 50% of the plan’s start-up costs.

Employer contributions also create tax advantages

Additionally, Secure 2.0 offers a new five-year tax credit to businesses with up to 100 employees who make employer contributions to the new defined contribution plan. This credit is designed to encourage small businesses to contribute to their employees’ retirement savings. The exact amount of the loan depends on factors such as the number of eligible employees and the number of years that have passed since the plan began.

The credit is especially beneficial for employers with 50 or fewer employees. The credit for these businesses is up to $1,000 per year for each employee earning less than $100,000, and the amount of the credit decreases by 25% each year beginning in the third year, said Marc Scudillo, managing officer of wealth management and corporate benefits at EisnerAmper. .

For larger businesses — those with 51 to 100 employees — the tax credit is based on a sliding scale.

Kelly Gillette, a partner at the accounting firm Armanino, said small businesses using the credit should talk to their tax preparer to understand how deductions for employer contributions will be reduced.

A smaller auto-enrollment loan can offset some of the costs

A $500 tax credit is available for small companies that add auto-enrollment to a new or existing 401(k) plan for the first three years. Gillette said that while the feature won’t be required until 2025, small businesses can choose to do so now and get the credit earlier. Although auto-enrollment tends to increase participation and thus add costs to small businesses, credit can help offset these additional costs.

A startup 401(k) plan does not require an employer match

Employers can now offer a starter 401(k) plan that allows them to take advantage of applicable administrative tax credits, even if they don’t contribute on behalf of employees, Scudillo said. Many small businesses are unwilling or unable to offer employer matching, but having this option can be a significant boon to employees.

According to a recent Natixis Investment Managers survey, 71 percent of respondents said they expect their main source of income in retirement to come from their own savings in an employer-sponsored defined contribution plan.

This new type of plan can be useful for recruiting purposes and helping employees prepare for retirement, Scudillo said. Available for small businesses without an option plan.

Military families are given extra attention in legislation

Military spouses often lose the ability to save for retirement because they may not be able to stay on the job long enough or be eligible to receive retirement benefits. Secure 2.0 offers eligible employers a credit of up to $500 for a military spouse participating in the company’s defined contribution plan if certain conditions are met.

For example, military spouses must be eligible to participate in the plan immediately within two months of enlistment. Also, upon plan eligibility, the military spouse must be eligible for any qualifying or non-elective contributions for which he or she would otherwise be eligible during the two years of service.

The loan is granted for a period of three years and does not apply to high-wage workers.

New Roth IRA options for small businesses

Secure 2.0 allows business owners to offer a Roth version within their SEP IRA and SIMPLE IRA. These are often used by small businesses because they have less administrative responsibility than a 401(k),” said Eric Bronnenkant, Betterment’s head of tax. The ability to offer a Roth option in these plans can directly benefit the owner, but Bronnenkant said, said to be useful for pick-up and storage purposes as well.

The self-employed are not exempt from the legislation

Superannuation legislation has many benefits for all individuals, including the self-employed. One of these benefits is increased ability to transfer more money into retirement after age 50. For people age 50 and older in 2023, it is $7,500 in 2023, compared to $6,500 in 2022. Gillette said that under Secure 2.0, starting in 2025, the catch-up contribution limit will increase for participants ages 60 to 63.

In addition, the age at which people must take minimum required distributions from a traditional 401(k) or traditional IRA has increased. Starting in 2023, Secure 2.0 raised the age at which a person must start taking RMDs to 73. Plus, starting in 2024, there is no RMD requirement for Roth 401(k) and Roth 403(b) plans, so that leaves them. Along with a Roth IRA, this can be a significant benefit, Gillette said.

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