SECURE 2.0: Increased Small Employer Plan Start-up Credits Jan 26

Employer Administrative Costs Tax Credit

Current law allows a credit against plan start-up costs for three years for small employers- those with fewer than 100 employees.  The current credit is for up to 50% of administrative costs up to a maximum yearly cost of $5,000.

SECURE 2.0 changes this credit to 100% of start-up costs for small employers with fewer than 50 employees.

The limits are the same: the greater of $500 or $250 per non-highly compensated employee up to $5,000 maximum credit.

Employer Contributions Tax Credit

SECURE 2.0 adds a new tax credit for employer contributions to eligible employer plans. The credit is for 5 years in an amount of up to $1,000 per employee.

Credit is 100% of contributions not to exceed $1000 but is phased out over years 3, 4 and 5:

• 100% of contributions, as limited, in year 1
• 100% of contributions, as limited, in year 2
• 75% of contributions, as limited, in year 3
• 50% of contributions, as limited, in year 4
• 25% of contributions, as limited, in year 5

The full credit is for employers with fewer than 50 employees.  It is phased out for employer with 50 to 100 employees.

No credit is given for any employee whose FICA wages were more than $100,000 in prior year.

No deduction for the contribution which qualifies for the credit.

Effective date:  For tax years after 2022.

Eligible plans:  Defined contribution (401(k), Profit Sharing, Money Purchase), SEP, SIMPLE.

Act Section: 102