LUTZ BUSINESS INSIGHTS

 

tax credits increase for companies establishing a retirement plan in 2020!

chris wagner, investment adviser

 

On December 20th, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law.  One of the major enhancements included in the bill is the increase in tax credits available to small businesses who establish a retirement plan after 12-31-2019.  A small business is considered to have less than 100 employees who make at least $5,000 per year. 

Small businesses cite the biggest reason they don’t offer a company sponsored retirement plan is costs.  Under the SECURE Act, the tax credit for the first 3 years equals 50% of the plan’s startup costs up to the greater of $500, or $250 multiplied by the number of Non-Highly-Compensated employees eligible to participate, to a maximum of $5,000 per year.  A non-highly-compensated employee (NHCE) is classified as making less than $130,000 of compensation in 2020 and less than 5% ownership. 

Additionally, a new tax credit equal to $500 for up to 3 years is available if the small business adds automatic enrollment to a new or existing plan.  Automatic Enrollment enrolls employees in the company retirement plan at a pre-determined percentage of pay upon meeting eligibility requirements.  It simply changes the enrollment process by requiring employees to opt out of participating vs going through the process of opting into the plan.  According to research by Vanguard, among new hires, retirement plan participation rates nearly double to 93% under automatic enrollment compared with 47% under voluntary enrollment. 

 

Let’s review a few examples:

  1. XYZ Company has 10 eligible Non-Highly-Compensated employees and implements a 401(k) plan in 2020. XYZ Company would be eligible for up to $2,500 ($250 x 10) per year in tax credits to cover start up and plan administrative costs.  This credit would be available for 3 years assuming they maintain 10 eligible employees.  If the plan includes automatic enrollment XYZ Company will receive an additional $500 tax credit for 3 years.
  2. ABC Company has 40 eligible Non-Highly-Compensated employees and implements a 401(k) plan in 2020. ABC Company would be eligible for the maximum $5,000 ($250 x 40 = $10,000) per year in tax credits to cover start up and administrative costs.  This credit would be available for 3 years assuming they maintain at least 20 ($250 x 20 = $5,000) eligible employees.  If the plan includes automatic enrollment XYZ Company will receive an additional $500 tax credit for 3 years.

 

Why is it important that small businesses provide their employees with access to a company sponsored retirement plan?

According to the U.S. Small Business Administration Office of Advocacy, small businesses employ approximately 48% of the workforce.  A Labor Department report estimates that only half of the workers employed by companies with fewer than 50 employees have access to a retirement savings plan through their employer.  Most workers without access to a company sponsored retirement plan do not save on their own and have little or no retirement savings. 

Implementing a company sponsored retirement plan also provides substantial benefits for the employer.  Opportunities for ownership and key employees to make meaningful tax deferred contributions, an enhanced benefit package to attract qualified employees in the low unemployment job market and a financially secure workforce just to name a few.  Companies can now provide this great benefit at a substantial discount for the first 3 years thanks to the SECURE ACT.  That is a win for everyone!

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2077

cwagner@lutz.us

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CHRIS WAGNER, CHFC®, CFP®, CPFA® + INVESTMENT ADVISER

Chris Wagner is an Investment Adviser at Lutz Financial. With 15+ years of relevant experience, he specializes in providing company and corporate retirement plan consulting and investment advisory services. He lives in Elkhorn, NE, with his wife Kristin, and children Brynn and Owen.

AREAS OF FOCUS
  • Retirement Plan Consulting
  • Investment Product Analysis
  • Provider and Fee Benchmarking
  • Fiduciary Guidance
  • Plan Design Analysis
  • Investment Advisory Services
  • Participant Education
AFFILIATIONS AND CREDENTIALS
  • National Association of Plan Advisors, Member
  • CERTIFIED FINANCIAL PLANNER®
  • Certified Plan Fiduciary Advisor®
  • Chartered Financial Consultant
EDUCATIONAL BACKGROUND
  • BSBA in Marketing, Midland University, Fremont, NE
  • American College of Financial Services, Bryn Mawr, PA
COMMUNITY SERVICE
  • Knights of Columbus, Member
  • St. Wenceslaus, Volunteer Coach

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