SECURE 2.0 New Tax Credits for Employers & Savers

SECURE 2.0 seeks to increase retirement benefit plan coverage of U.S. workers, specifically by small employers, and increase eligible employees’ retirement savings. Putting their money where their mouth is, so to speak, Congress created new tax credit incentives and enhanced existing credits to encourage eligible employers and small business owners to offer retirement plans to their employees. These new tax credits could offset plan expenses and administrative costs, including employer contributions and employer matching, for up to the first three plan years. For individuals, instead of receiving a non-refundable tax credit for saving in a retirement plan or IRA, eligible individuals will receive a government matching contribution directly deposited into their retirement account or IRA.

Tax Credits for Small Employers

The following tax credits or enhancements to existing credits are available to small employers (1–100 employees) that adopt a retirement plan, effective in 2023 and later tax years. (Some credits were available prior to 2023.)

QUALIFIED Start-Up Costs

(Sec. 102 amends existing tax credit)

Small businesses have been able to claim a non-refundable startup credit to offset some or all the costs of establishing and administering a qualified retirement plan, SEP, or SIMPLE IRA plan, including the cost of educating employees about the plan. A $500–$5,000 credit is available for each of the first three years of the plan and may be claimed for expenses incurred in the year before the year the plan is in effect. The amount of tax credit available depends on the number of employees who received at least $5,000 from the business in the preceding year. The SECURE Act 2.0 increases the credit available to employers with 1-50 employees from 50% of plan costs to 100% of plan costs.

Step 1: Qualify for the credit.

To qualify for this tax credit, the business

• Must have 100 or fewer employees who received at least $5,000 from the small business in the preceding year,
• Must have at least one non-highly compensated employee participating in the plan, and
• Cannot have covered substantially the same employees in a 401(a), 403, SEP or SIMPLE IRA plan in the three preceding taxable years.

Step 2: Determine the percentage of plan costs an employer may claim.

• 1–50 Employees: 100% of plan costs incurred or paid during a tax year
• 51–100 Employees: 50% of plan costs incurred or paid during a tax year

Step 3: Determine the dollar amount of credit.

The credit amount is based on the number of non-highly compensated employees eligible to participate in the plan.

• 100% or 50% (as applicable) of plan administration costs up to $500 or, if greater, $250 multiplied by the number of employees
• The maximum credit is $5,000.

The SECURE Act 2.0 (Sec. 111) also clarifies that this tax credit is available for small employers that join a Multiple Employer Plan (MEP) or Pooled Employer Plan (PEP) regardless of when the MEP/PEP was established.

Plan Contributions

(Sec. 102 amends existing tax credit)

SECURE 2.0 added a new tax credit for small employers with a defined contribution plan, SEP or SIMPLE IRA plan. Employers may claim a tax credit for a percentage of plan contributions they make on behalf of participants. Contributions for participants whose compensation exceeded $100,000 (for 2023) cannot be counted.

Automatic Enrollment

(existing tax credit)

Small employers (1–100 employees) may claim a $500 tax credit for each of the first three years they incorporate an eligible automatic contribution arrangement (EACA) into their qualified retirement plan or SIMPLE IRA plan. The credit is available for new plans or existing plans that adopt an EACA.

Although this tax credit was not modified by SECURE 2.0, it should become more popular because SECURE 2.0 requires new 401(k) and 403(b) plans established after December 29, 2022, to include an auto-enrollment feature, effective January 1, 2025. Small plans subject to the mandate would be eligible for this tax credit incentive.

Military Spouse Employees

(Sec. 112 adds new tax credit)

SECURE 2.0 adds a new tax credit for small employers (1–100 employees) with a defined contribution plan, SEP or SIMPLE IRA plan if they employ the spouse of an active military member and allow the spouse employee the eligibility to participate in the plan right away. The military spouse cannot be a highly compensated employee, and the employer must allow the military spouse to

• Participate in the plan within two months of hire,
• Be eligible for any matching or nonelective employee contribution they would have been eligible for otherwise after two years of service, and
• Be 100% vested in employer contributions made on their behalf.

Each year, the employer may claim a $200 credit for employing an eligible military spouse and claim 100% of employer contributions up to $300, for a maximum tax credit of $500 per military spouse. The credit may be claimed for a military spouse’s first three years of participation in the plan.

Saver’s Tax Credit

(Sec. 103 adds new tax credit)

Another provision of SECURE 2.0 enhances the existing Saver’s Tax Credit for low-to-mid-income workers. The new Saver’s Match will replace the nonrefundable Saver’s Credit with a 50% government matching contribution when this provision becomes effective in 2027. Although the effective date is a few years away, the mechanics of claiming, receiving, and tracking the match will take some time to fine tune. Until the IRS provides additional guidance, here are the requirements for the new Saver’s Match.

The government will provide up to a 50% match on up to $2,000 of an individual’s qualified retirement savings contributions. The maximum available match will be $1,000. Qualified contributions include salary deferrals to a 401(k), 403(b), governmental 457(b), or SIMPLE IRA plan, and IRA contributions.

To be eligible for the Saver’s Match, an individual cannot be

• Age 18 or older,
• Claimed as a dependent on another person’s return, or
• A student,
• A non-resident alien.

An individual must also have income that falls below or within a certain modified adjusted gross income phase-out range, depending on their tax status. If the individual’s income falls within the phase-out range, the rate of their matching contribution will be reduced until it reaches zero for income that exceeds the top of the phase-out range:

• Married, filing a joint tax return: $41,000–$71,000
• Head of household: $30,750–$53,250
• Single: $20,500–$35,500

The federal government will pay the match as soon as practicable after the eligible individual has filed a tax return, made a claim for the matching contribution, and provided information as to where the matching contribution should be deposited. An individual may have a Saver’s Match deposited to a 401(k), 403(b), governmental 457(b) plan or an IRA – if the employer or IRA custodian agrees to accept it. For matches under $100, individuals may choose to take a tax credit instead.

For matches deposited into an employer plan, they will be considered

• Pre-tax,
• Fully vested,
• Subject to the distribution rules for deferrals (but not eligible for a hardship distribution), and
• Disregarded for plan contribution limits and nondiscrimination tests.

SECURE 2.0 includes additional provisions that increase the taxation on plan or IRA distributions from accounts that have received Saver’s Match contributions to help prevent individuals from distributing this money before retirement. SECURE 2.0 also allows individual to avoid taxation if they repay the early distribution.