TAX CREDITS FOR SMALL BUSINESS
Small business owners wear many hats. When I started my own financial planning business, I was surprised at how many hours it took to run the office, market my product, and attend to record keeping for compliance. The part I loved – meeting with clients along with preparation and research for the meeting – took a back seat. There did not seem to be time for everything!
Competition for both product and employees is keen, and the small business owner must compete with much larger companies offering attractive benefit packages. Post COVID, help wanted signs seem to be everywhere!?Attracting quality employees can be a challenge for small business owners, especially when a job seeker is considering multiple job offers.?Offering a retirement plan is a benefit most job seekers consider,?and it can be a differentiating factor in their decision-making process.?
Data gathered by SCORE, a nonprofit provider of mentor services to U.S. small businesses, shows that 34% of?small business owners do not have retirement savings plans ?for themselves, and the fewer employees a business has, the less likely it is to offer a retirement plan for its employees.?
On December 29, 2022, President Biden signed the SECURE 2.0 Act of 2022 into law. The Act included almost 100 provisions to offer employers new retirement plan options and enhance existing plans, help cover new retirement plan costs, and encourage both employers and employees to start saving for retirement. This blog will cover provisions in the Act to increase and initiate new tax credits for small business employers.
Although some of the rule changes covered in the other blogs will become effective in the future. Both tax credits described below were effective January 1, 2023.
Increased the Tax Credit for Start-Up Retirement Plans – 2023
This provision is meant to ease the burden of administrative costs to set up a new retirement plan for?businesses with less than 50 employees. This provision increases the amount of tax credit from 50% to 100% of start-up costs. The credit can be taken only for the initial three years of the plan. The maximum credit is $5,000 per year. However, an additional $500 per year credit may be taken if the plan is set up with employee auto-enrollment for a total tax credit of $5,500 per year.
Created a New Tax Credit for Employers with Military Spouse Employees – 2023
Military spouses often do not remain employed long enough to become eligible for their employer’s retirement plan or to vest in employer contributions.?This provision addresses that issue. The tax credit is limited, however, to?businesses with less than 100 employees.
To qualify for this tax credit, a business must allow a military spouse to become eligible for their company retirement plan within?two months?of their hire date. The military spouse will then be eligible for any company match or “non-elective deferral’ that he or she would have formerly been eligible for only after?two years?of service. The military spouse must also be immediately 100% vested in any employer contributions. An employer may rely on their employee’s certification that the employee’s spouse is a member of the uniformed services.
The employer tax credit equals the sum of $200 per military spouse, plus 100% of employer contributions up to $300 per military spouse, for a total maximum of $500 per military spouse. The employer is eligible to take the credit for three years for each military spouse. The employee must earn more than $5,000 but not be highly compensated.
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Closing
The tax credit provisions of the SECURE 2.0 Act of 2022 covered above are meant to not only encourage small businesses to offer retirement plans, but also to ensure that military spouse employees are eligible for and have an opportunity to start saving. Employers benefit by attracting and retaining quality employees and both employers and employees benefit with a start toward a secure financial future.?
Beverly J Bowers, CFP?
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