It’s common knowledge that 401k plans benefit employees. But a frequent question about these plans is, how can they help employers?
To answer concisely, employers like 401k plans because they save them tons of money. That’s because the IRS now offers businesses tax credits for implementing them. These credits add up quickly and could save owners countless dollars a year, but most owners don’t know what’s available to them.
Given that so many employers are unaware of these credits, we’ve decided to summarize everything you need to know about them below.
Who Are the Credits For?
Known as the SECURE Act, the Setting Every Community Up for Retirement Enhancement Act was enacted on December 20, 2019. This act made it possible for most small businesses that began offering a 401k plan to collect benefits starting on January 1, 2020.
More specifically, this law is designed for eligible small businesses that adopt a new 401k and/or set up a new automatic enrollment feature.
A few key criteria need to be met to be an eligible small business. First, you need to fit the description of what it means to be a ‘small business’ as defined by the IRS. The IRS considers that employers who have one hundred or fewer employees fit into the ‘small business’ category.
Employees must also have received at least $5,000 in compensation from the taxable year, of which (at least) one plan member must not be a highly compensated employee (or HCE).
The IRS defines a highly compensated employee (or HCE) as someone who owned more than five percent of the interest in the business, regardless of how much compensation they earned.
An HCE can be someone who earned or received more than $125,000 (or $130,000 if the year was 2019 or 2020) and was in the top 20% of earners.
Finally, to be eligible, these employees can’t have received benefits or contributions from another plan sponsored by the employer (or in the three years before claiming the credit). They also can’t be part of a plan that the employer is included in or is a predecessor of.
Eligible Tax Years
Employers can claim the credit for the first three years of the plan. Employers are also able to claim the credit for the year before it became effective.
This means you can choose to carry the claim back or forward it to other tax years. Nevertheless, the claim can’t be carried to a tax year beginning before January 1, 2002.
Automatic Enrollment Requirements
Eligible employers who start offering an auto-enrollment feature can get $500 per year in tax credits. This credit is eligible for a 3-year taxable period starting from when the auto-enrollment feature is offered. It’s important to note that this period only begins the first taxable year the employer includes the feature.
There are two major administration responsibilities that need to be met with automatic enrollment features. These responsibilities are outlined in the EACA (the Eligible Automatic Contribution Arrangement requirements).
This legislation dictates that employers are responsible for distributing an annual notice to eligible employees. This notice must explain the plan features, and it must inform employees of their right to say ‘no’ to joining.
Employers are also required to automatically withhold wages from enrolled employees at the plan’s default rate.
This can get tricky for employers who offer an escalating default rate, since they’ll need to ensure the default rate is increasing for enrolled employees each year.
But there is a solution to prevent lags in these administrative duties. Peppermint is a Pooled Plan Provider (PPP). We can take care of all the administration, compliance, and tax preparation – so you don’t have to.
Eligible Startup Costs
Your clients and members expect innovative, customized products and solutions. But the initial cost of 401ks can be high. That’s where the Start-Up Costs Tax Credit can help.
The Retirement Plans Start-Up Costs Tax Credit allows eligible employers to claim 50% of their ‘ordinary and necessary’ start-up costs. Ordinary and necessary start-up costs are costs that should have been incurred to set up and administer the plan. It also includes any costs that went towards educating employees about it.
The Start-Up Costs Tax Credit is 50% of eligible start-up costs. Alternatively, employers can get refunded up to $500 ($250 multiplied by the number of NHCEs participating in the plan, or $5,000).
Employers can claim the credit for up to three years, and they may also want to start claiming the credit in the tax year before the plan becomes effective.
If you do meet the requirements, you can claim the credit using Form 8881 (Credit for Small Employer Pension Plan Startup Costs), which can easily be filled out on the IRS’s website.
Why Do it Alone?
401k plans are not created equal, and 401k administration services, investments, and credits vary. This makes it difficult to know what you’re eligible for in the coming tax season – and, more importantly, how much. That’s why you shouldn’t do it alone.
Peppermint is a Pooled Plan Provider (PPP), which means we take care of all your administration and compliance while making great retirement options possible. Improve employee retention, satisfaction, and recruitment while you and your entire team plan for the future. Get in touch with us by phone at 844-399-8890 or by email at firstname.lastname@example.org so we can tailor the right platform solution that you and your members deserve.
The peppermint blog assumes no responsibility or liability for any errors or omissions in the content of this site. The information contained in this site is provided on an “as is” basis with no guarantees of completeness, accuracy, usefulness, or timeliness. It does not represent or replace actual financial advice provided by a certified financial professional. Since everyone’s situation is different, we always recommend addressing specific questions to your plan provider or certified financial professional. As such, peppermint may not be held liable for your use or reliance on any information contained herein.