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How the SECURE Act Affects Employer Plan Tax Credits


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How the SECURE Act Affects Employer Plan Tax Credits


On December 20th, 2019, President Trump signed the further consolidated appropriations act. Included in this bill was the SECURE Act, which contains legislation affecting the small employer’s start credit.

The SECURE Act changes the startup credit for small employers, which are defined as those that had one hundred or fewer employees who earned at least five thousand dollars of compensation from the employer during the previous year.

The enhanced start up credit benefits small employers who establish a set plan, simple IRA plan, or 401(k) plan, which would include defined benefit and defined attribution plans.

Under the old rules, a small employer that established a set, simple IRA, or qualified plan could receive annual tax credits equal to fifty percent of the eligible plan startup cost for the first three taxable years. Beginning with the tax year in which the plan was effective.

The maximum credit was 500 dollars per year.

Under the new rules, a small employer can still receive a credit for the first three years.

The new credit is effective for 2020 and later taxable years.

The credit amount is fifty percent of startup cost up to the maximum permitted credit, which is between 500 dollars and five thousand dollars based on the number of non highly compensated employees eligible to participate in the plan.

More specifically, the credit increases in two hundred and fifty dollar increments for each non highly compensated employee in excess of two, until the maximum credit of five thousand dollars for an employer with 20 or more non highly compensated employees is reached.

In addition to changing the start up credit, effective for 2020 and later taxable years, the SECURE Act provides a new tax credit equal to hundred dollars for small employers that implement automatic enrollment in new or existing 401(k) or simple IRA plans.

This credit would be available for three years beginning with the year that the eligible automatic contribution arrangement is first included in the plan.

For more information on navigating the retirement landscape in the wake of the SECURE Act, contact Ascensus today.