By Andrew Ostlund Senior Wealth Advisor CliftonLarsonAllen Wealth Advisors, LLC Email T. 218.825.2957
This article was originally published on March 23, 2020. It was updated on June 11, 2020 to reflect the latest information regarding the SECURE Act.
If you’ve been on the fence about starting a retirement plan for your business, the arrival of the Setting Every Community Up for Retirement Enhancement (SECURE) Act might present the ideal opportunity. The legislation was signed into law December 20, 2019, and offers new and expanded tax credits for small businesses as an incentive for starting a new qualified retirement plan.
Before delving into how this credit can help, let’s review the IRS’s definition of “small business.” The IRS website outlines the following eligibility requirements for the small business start-up credit:
- You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
- You had at least one plan participant who was not a highly compensated employee; and
- In the three tax years before the first year in which you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.
If you meet this definition, what has changed? Starting in 2020, the small business start-up credit changes from $500 per year to $250 per non-highly compensated employee, with a minimum credit of $500 and a maximum credit of $5,000 per year for the first three years of the plan. The IRS states the credit can be applied to offset 50% of ordinary and necessary costs to:
- Set up and administer the plan, and
- Educate your employees about the plan.
If you were one of the many employers unsure about offering a retirement plan due to cost, the SECURE Act grants an additional incentive to get started.
Remember, there is a difference between a tax deduction and a tax credit. A tax deduction reduces your company’s taxable income dollar for dollar, whereas a tax credit reduces your taxes owed dollar for dollar. Tax credits are often much more impactful to your tax situation when compared side by side to a tax deduction.
Another benefit of the SECURE Act is the deadline change to when a plan must begin. In 2019 and prior years, most retirement plans had to be created by the end of the company’s chosen plan year. Starting in 2020, an employer now has until its tax filing deadline plus extensions to start and potentially fund most retirement plans.
So what does this mean in plain English?
You may be able to offset some or all of your start-up costs if you start a retirement plan in 2020 and beyond. Be wary, though: start-up costs can vary widely and can easily exceed $5,000. It is important to review plan providers and service models to determine which model makes sense for you and your employees. Additionally, starting a qualified plan is a serious venture and, depending on plan structure, may subject your plan to Title I of the ERISA Act of 1974.