Accounting & Tax Tips
March 7, 2024

How the Employer Contribution Tax Credit Benefits Your Small Business

Small business retirement planning is experiencing a significant boost thanks to the newly introduced employer contribution tax credit under the SECURE 2.0 Act. 

For businesses hesitant to set up a retirement plan due to its complexities and costs, this credit may offer the nudge to explore how such plans can benefit employees and improve their financial health.

What Is the New Employer Contribution Credit?

Effective for taxable years after 2022, small businesses can now obtain a tax credit that directly correlates with the contributions made toward their employees’ retirement plans. The goal is to incentivize and make it easier for small businesses to be more retirement-friendly.

The credit centers around defined contribution plans, such as 401(k), SEP (Simplified Employee Pension), and SIMPLE (Savings Incentive Match Plan for Employees), that cater to businesses with a maximum of 100 employees.

How Does the New Employer Contribution Credit Work?

The tax credit is up to $1,000 per employee for each employee earning under $100,000 annually. 

An eligible employer with 50 or fewer employees may receive a tax credit for 100% of employer contributions in the first two years (including the startup year), 75% of employer contributions in the third year, 50% in the fourth year, and 25% in the fifth year. 

The tax credit for an eligible employer with 51 to 100 employees is based on a sliding scale, lowering the $1,000 cap. 

This phased reduction encourages businesses to start contributing early while obtaining maximum benefit from the credit, making the first few years of plan adoption particularly advantageous.

Full service 401(k) provider Employee Fiduciary provides a detailed explanation of the Small Business 401(k) Tax Credits and an incredibly helpful Small Business 401(k) Tax Credit Calculator.   

Employer contributions not eligible for the employer contribution tax credit may still be considered for tax deduction purposes.

Additional SECURE 2.0 Enhancements

Beyond the new employer contribution tax credit, SECURE 2.0 offers several other advantages. Starting in 2023, employers can make Roth contributions to SEP and SIMPLE plans – a significant change as Roth contributions have never been permitted in these accounts before. The growth and withdrawals of Roth are tax-free, making it a potentially lucrative feature for retirement plans.

From 2024 onwards, small business owners can also take advantage of higher contribution limits for employer plans, particularly businesses with 25 or fewer members. Raising the limit means increasing the robustness of retirement benefits, helping small employers compete with larger corporations in attracting and retaining talent.

Additionally, SECURE 2.0 introduces a new tax credit for employers who make military spouses eligible for their retirement plans. This benefit reinforces inclusivity and celebrates equitable participation in retirement savings, reflecting the broader intent of the Act.

Bottom Line for Your Small Business

The introduction of the employer contribution tax credit under the SECURE 2.0 Act represents a vital shift toward supporting retirement readiness among American workers, particularly within the small business sector. 

Not only does it provide financial incentives for companies to contribute to their workers’ retirement funds, but it also positions retirement savings as a core component of employment benefits, enhancing job attractiveness and employee retention for small businesses.

All these components place retirement plans within reach of small businesses that might previously have been deterred due to perceived challenges and/or costs.

See related: 5 Ways the SECURE Act Helps Your Small Business and Employees

Are you planning to leverage the new employer contribution tax credit? Contact us using the FREE CONSULT button below to discuss how to create a financially secure future for your business and employees.

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