How SECURE 2.0 employer tax credits benefit small businesses

The SECURE 2.0 Act introduced new and enhanced tax credits aimed to support small business owners in establishing affordable retirement plans. These provisions are designed to encourage employers to offer benefits to their employees by incentivizing retirement savings and alleviating some of the costs associated with starting retirement plans.

Increased start-up credit

For eligible employers with no more than 50 employees and a minimum of one non-highly compensated employee (NHCE), Section 102(a) increased the small employer pension plan startup cost credit from 50% to 100%. This allows employers to claim 100% of qualified start-up costs of up to $5,000, towards starting SEP, SIMPLE, defined benefit and defined contribution plans (including 401(k) plans). The Internal Revenue Code Section 45E defines qualified start-up costs as ordinary and necessary costs to set up and administer the plan and educate your employees about the plan [1].  

The start-up credit is available for up to three years, which includes the initial credit year and the subsequent two taxable years. Employers can elect to implement the first credit year either during the taxable year when the plan takes effect, or the preceding taxable year.

For employers with 50-100 employees the amount of credit is 50% of your eligible startup costs, up to the greater of $500; or the lesser of $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or $5,000 [1].