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401(k) and Simple IRAs Tax Credits

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401(k) Tax Credits
DISCOVER SUBSTANTIAL INCENTIVES FOR
PROVIDING A RETIREMENT BENEFIT

A retirement plan can represent a big expense for employers, especially small businesses. The government has developed valuable tax benefits that are specifically aimed at helping the smallest companies — those with less than 100 employees


Who gets the tax credits? 


For employers to take advantage of these credits, they need to meet the following criteria.

  1. Had 100 or fewer employees who received at least $5000 in compensation in the preceding year
  2. Had at least one participant who is a non-highly compensated employee (NHCE) 
  3. In the 3 years prior, employees were not 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.

What is a highly-compensated employee (HCE)?


In the preceding year, received compensation of more than $135,000 (if the preceding year was 2022) or more than $150,000 (if the preceding year was 2023).

or

Owned more than 5% of the interest in the business at any time during the preceding year. 

Read on to get the details about 3 valuable tax credits.


Administrative Credits


COVERS THE EXPENSE INVOLVED IN ESTABLISHING A NEW 401(K) PLAN
100% of qualified startup costs What are qualified startup costs?
Expenses incurred by a business to: up to $5000 per year for 3 years


  • Those with 50 or fewer employees can claim 100% of startup costs

  • Those With 51-100 employees can claim 50% of the startup cost

What is the maximum I can receive?

The maximum is $5000 per year, although it is reduced for very small companies. If a business has fewer than 20 employees, use this formula: $250 x number of NHCEs = max credit


What are qualified startup cost?


Expenses incurred by a business to:

  • Establish or administer a retirement plan

  • Educate employees about the plan

Contribution Credits


HELPS OFFSET THE EXPENSE OF PROVIDING CONTRIBUTIONS TO EMPLOYEES ACCOUNTS
100% of employer contributions


Businesses with 50 or fewer employees

Businesses With Less Than 50 Employees Can Receive Credits Totaling 100% Of The Amount Spent On Contributions To Employee 401(K) Accounts, With The Amount Getting Reduced Over 5 Years

Tax credit schedule
Year 1 - 100%
Year 2 - 100%
Year 3 -   75%
Year 4 -   50%
Year 5 -   25%


Businesses with 51 - 100 employees
.
A sliding scale is used to calculate the tax credit for businesses with 51-100 employees. The percentage is reduced by 2 points for every employee over 50. The 5-year tax credit schedule is still applied.

EXAMPLE
A business has 70 employees number over 50= 20
20 x 2 points = 40% reduction (or 60% total)
100% x 60%
100% x 60%
 75% x 60%
 50% x 60%
 25% x 60%

Auto-enroll Credits


PROVIDES AN INCENTIVE TO USE AN AUTOENROLLMENT PROVISION IN YOUR PLAN
$500 per year for 3 years


Small businesses can claim this $500 credit for using an auto-enrollment feature in their 401(k) plan. This applies to both new and existing plans, so even if you have had a plan in place for many years, adding this provision triggers the tax credit for 3 years. Who is eligible for the credit?
Have less than 100 employees that were paid at least $5000 in the prior year Meet the Eligible Automatic Contribution. Arrangement (EACA) criteria.

Use an automatic enrollment feature A QACA Safe Harbor plan will meet the EACA requirements.

Ask us if a QACA plan is right for your business.

IMPORTANT

Beginning in 2025, almost all 401(k) plans will be required to use an auto-enrollment feature.

 For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.