New Tax Credits Available for Small Businesses Offering 401(k) Benefits

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In an effort to bolster retirement planning for American workers, the Series 2.0 Tax Act incentivizes small business owners to provide retirement plans to their employees. Under this act, startups that offer 401(k) benefits or similar retirement plans stand to gain substantial tax credits – potentially reaching up to $5,000 per year! Let’s dive into the key components of this act and understand how it can benefit your company and your employees.

Start-Up Cost Credit

One of the prominent features of the Series 2.0 Tax Act is the Start-Up Cost Credit, designed to assist small businesses in the initial implementation of retirement plans. The credit amounts to $250 per eligible employee, with a maximum cap of $5,000 annually. Small businesses with more than 20 employees will benefit from the flat $500 credit, which provides flexibility for claiming this incentive.

Auto-Enrollment Credit

To encourage employers to adopt auto-enrollment features in their retirement plans, the act offers a tax credit of $500 per year for three taxable periods. This credit is applicable from the first taxable year that the employer includes the auto-enrollment feature in their plan. Auto-enrollment is proven to boost retirement plan participation, ensuring that employees are better prepared for their post-retirement years.

Employer Contribution Credit (New in 2023)

The Employer Contribution Credit is a new addition to the Series 2.0 Tax Act, designed to reward small businesses that contribute to their employees’ retirement funds. Eligible businesses with no more than 50 employees can receive a tax credit of up to $1,000 for each employee earning $100,000 or less in the prior year. The credit extends to businesses with 51 to 100 employees, but it gradually phases out by 2% points for each employee over 50.

Phased Implementation of the Employer Contribution Credit

The Employer Contribution Credit is designed to provide long-term benefits to small businesses and their employees. However, it is important to note that the credit is phased out over a five-year period. The phased implementation follows the following structure:

  • 100% in the first and second years
  • 75% in the third year
  • 50% in the fourth year
  • 25% in the fifth year

Case Study: A Small Business Reaping the Benefits

Let’s consider a hypothetical scenario to illustrate the impact of the Series 2.0 Tax Act on a small business with 50 employees. This business decides to initiate a new 401(k) plan with auto-enrollment in 2023, incurring setup costs of $5,000 for the first three years. The employer also contributes $1,000 annually for each of the 20 employees earning less than $100,000.

Year 2023:

  • Auto-enrollment tax credit: $500
  • Employer contribution credit: $20,000
  • Set-up and plan administration credit: $5,000
  • Annual tax credit total: $25,500

Year 2024 and 2025:

  • Auto-enrollment tax credit: $500
  • Employer contribution credit: $20,000
  • Set-up and plan administration credit: $5,000
  • Annual tax credit total: $25,500

Year 2026:

  • Employer contribution credit: $15,000
  • Set-up and plan administration credit: $5,000
  • Annual tax credit total: $20,500

Year 2027:

  • Employer contribution credit: $10,000
  • Set-up and plan administration credit: $5,000
  • Annual tax credit total: $10,000

The Series 2.0 Tax Act provides a powerful incentive for small business owners to embrace retirement planning for their employees. By offering various tax credits, such as the Start-Up Cost Credit, Auto-Enrollment Credit, and Employer Contribution Credit, this act makes retirement benefits more accessible and attractive to workers. Small businesses can not only improve employee satisfaction but also enjoy significant tax savings, fostering a more financially secure future for both employers and employees alike.

FAQ

What if my startup is not yet profitable?

If your startup is not yet profitable, you can still benefit from the Series 2.0 Tax Act by offering retirement plans to your employees. The Start-Up Cost Credit, up to $5,000 per year, helps with setup expenses. The Auto-Enrollment Credit of $500 per year can increase participation. When profitable, the Employer Contribution Credit offers up to $1,000 per employee. Providing retirement benefits is an investment in employee well-being and can attract top talent. Consult a tax professional for guidance.

When can I start taking advantage?

You can start benefiting from the Series 2.0 Tax Act as soon as you offer retirement plans to your employees. Once your plan is in place, you can claim the Start-Up Cost Credit and the Auto-Enrollment Credit. The Employer Contribution Credit is available starting in 2023. Consult a tax professional for guidance and ensure you meet the eligibility criteria.

Can OpStart help me with this tax credit?

Of course! OpStart covers all typical tax filings required for US startups, including income taxes, R&D credits, 1099s, franchise taxes, ERC credits, K-1s, and more. Contact us to learn more and get started.

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