At the beginning of the year, we posted a blog discussing the ways that the Secure Act 2.0 promised to provide changes to help many Americans’ retirement plans, including over 90 updated retirement plan provisions. More recently, a provision was passed expanding fee-for service planning opportunities for small business clients and their employees. So, let’s take a look at what this means for you.
When Congress passed the Secure Act 2.0, they increased the incentives for small businesses to create new retirement plans, particularly for businesses with 50 or fewer employees. “Beginning in 2023, an eligible employer with 50 or fewer employees may claim up to 100% of its qualified startup costs for adopting and maintaining a new SEP, SIMPLE IRA, or qualified plan (like a 401(k) plan), and the credit may be claimed for three years. Employers with 51 to 100 employees are subject to the limits specified in the original Secure Act.”
Under the Secure Act, qualified startup costs for retirement plans are defined as the ordinary and necessary expenses paid or taken on by a small business to establish a qualifying retirement plan, and educate employees regarding the plan. How these retirement plan admin fees are paid is either by the participant or the sponsor, depending on the set-up and structure of the plan. Many retirement plan fees are paid by plan participants and are not eligible expenses that can be claimed under the qualified start-up cost tax credit, which is why you want to be careful when analyzing what method is best to pay for the plan admin and education expenses. One method that is very attractive is a fee-for-service engagement with a financial planner.
A fee-for-service engagement allows businesses to qualify for the qualified start up cost tax credit. “Under a fee-for-service engagement, costs paid by the employer to establish, administer, and provide employee education for a new retirement plan all qualify as eligible expenses that the business can claim on its tax return.” Companies with 50 or less employees are able to claim 100% of eligible expenses, up to a maximum of $5,000, for each of the first three years from the start of the new retirement plan, deeming as a very attractive incentive for not only the employer but also the plan participants.
If you own a small business and are thinking about implementing a new retirement plan for your company, let us know as we are here and happy to help establish the plan and educate your employees on the plan details and financial literacy. This tax credit is a great benefit for employers to take advantage of, and we are happy to help you understand it further. If you have any questions, email info@shermanwealth.com or schedule a complimentary 30-minute call here.
