By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
For many business owners, one of the most challenging aspects of sponsoring a retirement plan is staying abreast of the ever-changing retirement legislative and regulatory landscape. Over the past few years, the retirement plan industry has seen some major legislative activity with the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, shortly followed by SECURE Act 2.0 in 2022. Although the overall assessment has been positive, with key provisions focused on increasing retirement savings and expanding retirement coverage for employees, many business owners have found the task of fully understanding the more than 90 provisions in this massive legislation a frightening endeavor.
Given the complexity and scale of the retirement legislation, along with the varying effective dates, there are a few items that could prove to be very helpful to small business owners looking to establish a new retirement plan and enhance retirement savings.
Business Owner Tax Credits – The tax credits for small business owners are designed to eliminate some of the cost barriers for establishing a new retirement plan. The credits cover the startup cost associated with establishing a new retirement plan, as well as any employer contributions (matching or nonelective contributions) during the initial years of a new retirement plan.
- The Startup Cost Tax Credit permits business owners to receive a credit covering 100% of startup expenses up to a maximum of $5,000 for the first three years of a new retirement plan. Eligible startup expenses for this credit include recordkeeping fees, employee educational expenses and costs associated with plan administrator and financial advisor compensation.
- The Employer Contribution Tax Credit is designed to help offset the employer contributions (matching or non-elective contributions) during the initial few years of a new retirement plan. The credit is limited to a maximum of $1,000 per employee and is only applicable to employees earning no more than $100,000 per year.
There is also a specialized tax credit for business owners that makes it easier for military spouses to participate in a retirement plan by enhancing eligibility and vesting provisions. These credits can be used together and can significantly reduce fees and expenses for small business owners establishing a new retirement plan.
Increased Contribution Limits – SIMPLE IRAs, which are designed to be a cost-effective solution for small business owners in need of a retirement plan that permits both employee elective deferrals and employer contributions (matching or non-elective), now have received increased contribution limits.
- Employee elective deferral and catch-up contribution limits (for employees aged 50 and over) were automatically expanded to 110% of the applicable annual contribution limits (based on Cost of Living adjustments) for employers with 25 or fewer employees. For 2024, this increased the salary deferral amount from $16,000 to $17,600 and the catch-up from $3,500 to $3,850 for these businesses.
- Employers with 26 to 100 employees can also make the increased deferral and catch-up contribution limits available, but they must commit to an enhanced employer contribution of either a 4% match or 3% nonelective contribution (instead of the customary 3% match or 2% nonelective contribution requirement for SIMPLE plans).
- Additionally, employers can now make a nonelective contribution to the SIMPLE plan of the lesser of $5,000 or 10% of compensation on behalf of eligible employees. This enhanced employer contribution is at the discretion of the employer.
Roth Contributions to SEP IRAs and SIMPLE IRAs – Contributions to SEPs and SIMPLEs are now permitted to be made as Roth (after tax) contributions, whereas previously they could only be made on a pre-tax basis. Employers should consult with their retirement plan providers on their ability to receive Roth SEP or SIMPLE contributions, as many retirement plan providers are still finalizing the operational capability to handle this type of contribution and may delay availability until 2025.
NOTE: Recent retirement plan legislation has also expanded Roth contribution opportunities to other retirement plan designs, including employer contributions (matching and nonelective) with 401(k)s, 403(b)s and governmental 457(b) plans.
There’s no doubt that the scale and scope of recent retirement plan changes have been a nightmare for many business owners to fully digest. Yet, there were key themes that both business owners and their employees can benefit from in eliminating barriers for establishing a new retirement plan and increasing contribution levels. Be sure to consult with your legal and tax advisor to understand how these tax credits might impact you, and reach out to your financial advisor for any questions related to recent legislation impacting employer retirement plans.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.