LUTZ BUSINESS INSIGHTS
tax credits increase for companies establishing a retirement plan in 2023!
chris wagner, RETIREMENT PLAN SERVICES, Principal
PUBLISHED: FEBRUARY 13, 2023
On December 29th, 2022, the omnibus spending bill, which included the SECURE Act 2.0, was signed into law. One of the major enhancements included in the act is the increase in tax credits available to small businesses that establish a retirement plan beginning in 2023. A small business is considered to have less than 50 employees.
What is a tax credit? A tax credit is a dollar-for-dollar reduction of the income tax owed. For example, if you owe $5,000 of income taxes but qualify for a $5,000 tax credit, your tax liability would be zero.
Small businesses cite that cost is the biggest reason they do not offer a company-sponsored retirement plan. Under the SECURE Act 2.0, a small business can qualify for a tax credit equal to 100% of the administrative costs for establishing a workplace retirement plan. The tax credit is available for the first three years and capped at $5,000 per year.
Additionally, SECURE Act 2.0 provides a new tax credit for small businesses that make retirement plan contributions on behalf of employees. The credit will be a percentage of the employer’s contribution up to $1,000 per employee. The percentage is 100% in the first and second years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. Full credit is limited to employers with 50 or fewer employees and phased out for employers with 51 to 100 employees.
LET’S REVIEW A FEW EXAMPLES:
1. XYZ Company has ten eligible employees and will implement a 401(k) plan in 2023. Utilizing a retirement plan through Lutz Financial and its partners, estimated administrative costs would be approximately $3,350 per year. If the company pays these administrative costs, the entire $3,350 would be eligible for the tax credit in each of the first three years.
Additionally, if the company decided to make a $1,000 contribution to each of the ten employees’ 401(k) accounts, they would receive an additional tax credit of $10,000 in each of the first two years, $7,500 in the third year, $5,000 in the fourth year and $2,500 in the fifth year.
2. XYZ Company has 50 eligible employees and will implement a 401(k) plan in 2023. Utilizing a retirement plan through Lutz Financial and its partners, estimated administrative costs would be approximately $4,800 per year. If the company pays these administrative costs, the entire $4,800 would be eligible for the tax credit in each of the first three years.
Additionally, if the company decided to make a $1,000 contribution to each of the 50 employees’ 401(k) accounts, they would receive an additional tax credit of $50,000 in each of the first two years, $37,500 in the third year, $25,000 in the fourth year and $12,500 in the fifth year.
In each of the above examples, the company can establish a retirement plan to provide flexibility on whether it wants to contribute to employees and the amounts of those contributions. The company can also have the flexibility to change how they pay administrative costs in the future. It is common for small businesses to pass some of these on to employees.
WHY IS IT IMPORTANT THAT SMALL BUSINESSES PROVIDE THEIR EMPLOYEES WITH ACCESS TO A COMPANY-SPONSORED RETIREMENT PLAN?
According to Forbes, small businesses employ approximately 46.4% 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 offers substantial benefits for the employer. For example, it can present opportunities for ownership, key employees can make meaningful tax-deferred contributions, it enhances a company’s benefits package to attract qualified employees in a competitive job market, and it provides financial security for your workforce. This act incentivizes companies to not only establish retirement plans but also make contributions to employees’ retirement accounts, a true win-win! If you have any questions, please contact us, or learn more about our retirement plan services.
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
CHRIS WAGNER, CFP®, CPFA® + RETIREMENT PLAN SERVICES, PRINCIPAL
Chris Wagner is the Director of Retirement Plan Services at Lutz Financial. With 17+ 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
- CERTIFIED FINANCIAL PLANNER™
- CERTIFIED PLAN FIDUCIARY ADVISOR
- Charles Schwab Retirement Trust and Advisory Board, Member
- Retirement Plan Advisory Group, Member
- National Association of Plan Advisors, Member
- BSBA in Marketing, Midland University, Fremont, NE
- American College of Financial Services, Bryn Mawr, PA
- Marian Jr. Crusaders Basketball Program, Director
- Tax Credits Increase for Companies Establishing a Retirement Plan in 2020!
- Selecting and Monitoring Service Providers
- Strategies to Minimize Fiduciary Liability
- 3(21) and 3(38) Fiduciary Services
- Tips for Administering a Prudent Retirement Plan
- The 2017 To-Do List for 401(k) Plans
- October 1st Safe Harbor 401k Deadline
- How Are You Paying the Company's Retirement Plan Expenses?
SIGN UP FOR OUR NEWSLETTERS!
We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.
About Us | Our Team | Events | Careers | Locations