New Tax Credits for Retirement Plans

February 12, 2021

Recent legislative and executive actions have created new ways to help small and mid-sized employers with delivering more effective and efficient retirement plan solutions for their employees, thus enabling favorable savings into retirement. Businesses that currently have a retirement plan for their employees or setting one up, should familiarize themselves with the new rules. Below are several provisions to consider for small to mid-sized businesses (those that have less than 100 employees).

Increase in tax credit for small employer retirement plan startup costs. 

The new rules incentivize small employers with a credit for new retirement plan start-up costs. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit to:

* The greater of $500, or

* the lesser of:

$250 multiplied by the number of non-highly-compensated, eligible-plan-participant, employees or

$5,000, which is also the annual maximum amount for this credit.

Moreover, the credit can be claimed for each of the first three years of the plan, effectively making the maximum credit amount $15,000.

Small employer automatic plan enrollment tax credit. 

Perhaps not surprisingly, employees tend to contribute to their retirement accounts more often and at a higher rate if they are automatically enrolled in a retirement plan. This is one of the reasons Congress has provided an additional retirement-plan-related credit to small employers that include an automatic enrollment feature in their retirement plan. This $500 credit is made effective beginning in 2020 and can also be claimed for up to 3 years. Moreover, the start-up cost and automatic enrollment credits can be claimed together, thus a small or mid-sized employer setting up a new retirement plan with an automatic enrollment feature can claim up to $16,500 worth of credits.

Employers that are unrelated now can join to create one retirement plan.

Although there are many incentives for employers to setup and maintain retirement plans, the related expenses can be very costly at times. Congress has loosened the rules to make it more accessible for employers to sponsor retirement plans jointly. Beginning in 2021, the new rules will make it easier to create and maintain a multiple employer plan (MEP). A multiple employer plan (MEP) is a retirement plan adopted by two or more employers that are unrelated for income tax purposes. Previously, only “closed” MEPs were allowed, meaning that participating employers must share common organization relationships, such as being in the same industries or being members of an established trade association. However, recently passed legislation has now allowed employers to establish “open” MEPs that can be adopted by unrelated employers and administered by a pooled plan provider, such as a financial services company. This should alleviate the burden of plan management and decrease fiduciary liability for the employer because now the pooled plan provider oversees most administrative responsibilities. Moreover, joining an “open” MEP will also qualify employers for the retirement plan start-up costs and the automatic enrollment credits mentioned above.

If you are considering setting up a retirement plan or adding an automatic enrollment provision to your existing plan to take advantage of the new credits, or if you require any other assistance with your tax planning and/or compliance needs, please do not hesitate to contact one of our knowledgeable team members.

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