While there have always been tax benefits of 401(k)s for employers, SECURE Act 2.0 is changing the way businesses and workers save for retirement. As a business owner, it’s important to understand how these 401(k) benefits can impact your bottom line and your ability to attract new hires. You can talk to the best payroll system for small businesses or online 401(k) providers to find out more about offering 401(k) contributions.
What Is SECURE Act 2.0?
Signed into law in 2022, SECURE Act 2.0 is an update to the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act 1.0). The goal of the act is to change how Americans save money for retirement.
Under SECURE Act 2.0, the tax benefits of a 401(k) for employers are set to increase. Instead of just getting a deduction, you can now get credits for setting up a plan and making 401(k) contributions. Other than 401(k) tax credit options, this act also changes how student loan repayment affects retirement. Now, employers can provide matching contributions for student loan repayments as well as standard employee 401(k) contributions.
Dealing With a Looming Retirement Crisis
In 2020, a major shift occurred in the workforce. For the first time in United States history, the number of people above working age was more than the number of individuals under working age. For decades, birth rates haven’t kept up with their historical levels.
By 2035, Social Security won’t be able to pay all of its obligations with the money it’s bringing in. SECURE Act 2.0 is one example of a program that is in the works to manage this retirement crisis.
On the employer side, the retirement crisis is also a labor crisis. Workplaces are having to compete for employees, and this competition isn’t going to stop anytime soon. By offering 401(k) benefits to your workers, you can attract top talent, retain current workers, and win the war for talent.
The Top 3 SECURE Act 2.0 Tax Benefits of 401(k)s for Employers
Although the PDF of HR 2954 is around 140 pages long, the actual IRS form you turn in takes up less than a page. While there is a lot of important information about the tax benefits of 401(k) for employers, the major small business benefits boil down to three main features.
1. Receive up to $250 in Setup Fees
Whether you use a payroll system for small businesses or a financial planner, the majority of costs involved in setting up a 401(k) plan are likely covered by a 401(k) tax credit. Under SECURE Act 2.0, you can get a $250 credit per employee for your administrative and setup costs.
The maximum amount your workplace can claim is $5,000. Additionally, you must have less than 50 employees to qualify for 100%. If you have 51 to 100 workers, the credit drops to 50%.
2. Get $1,000 for Employer Matching Contributions
When you make 401(k) contributions, your company can get a major tax break. The 401(k) tax credit varies based on how many years it has been since you started the plan. It is a maximum of $1,000 per worker.
Year 1: 100% of employer 401(k) contributions
Year 2: 100% of employer 401(k) contributions
Year 3: 75% of employer 401(k) contributions
Year 4: 50% of employer 401(k) contributions
Year 5: 25% of employer 401(k) contributions
It’s important to note that this credit is not available for owners or highly compensated employees who earn more than $100,000 a year.
3. Cash in on $500 for Auto-Enrollment
Finally, all businesses can get a 401(k) tax credit worth $500 for setting up auto-enrollment. You can receive this 401(k) tax credit for the first three years of your 401(k) plan. SECURE Act 2.0 requires all new plans to have auto-enrollment, so it’s something future plans have to be set up with anyway.
The Power of the Nudge
Since 401(k) plans were first created, society has learned a lot about human behavior and the psychology behind retirement savings. In a famous book by Richard Thaler, nudges were introduced as small behavioral pushes that get people to make the right choices. For example, grocery shoppers are more likely to buy fruits and vegetables when those foods are placed at eye level.
In SECURE Act 2.0 and modern retirement plans, nudges are used to get people to save. By using auto-enrollment, plans can increase enrollment rates. People are more likely to go along with the default option.
As an employer, psychology works in your favor as well. When you provide benefits, it feels more generous than simply paying the worker the same amount of money.
Retirement Tax Deductions Are Still Available
You don’t have to worry about missing out on 401(k) deductions because of the new legislation. Deductions are still available for 401(k) contributions. The biggest difference is that now you’ll be taking the 401(k) tax credit first. After using up the credit, you can use a deduction for any additional retirement contributions.
Plus, signing up for 401(k) plans isn’t challenging. Through a payroll system for small businesses, you can access 401(k) plans and get educational materials.
Learn More About Setting Up 401(k) Benefits in Your Workplace
SECURE Act 2.0 helps employers through three important 401(k) tax credits. You can get a credit for 401(k) contributions, setup costs, and auto-enrollment features.
To learn more about the tax benefits of 401(k)s for employers, contact our team of small business payroll and HR experts today.