Unlocking Big Tax Savings for Small Businesses: How SECURE Act 2.0 Can Boost Your Bottom Line

In recent years, small business owners have faced increasing challenges in attracting and retaining talent, especially in competitive markets. The passage of the SECURE Act 2.0 aims to address some of these issues by encouraging small businesses to offer retirement plans to their employees, through significant tax incentives and broader retirement plan options.

The original SECURE Act (Setting Every Community Up for Retirement Enhancement) of 2019 was a landmark law that helped improve the retirement landscape for millions of Americans. However, SECURE Act 2.0, signed into law in late 2022, expands on these provisions with several key changes that directly benefit small businesses. Here's a closer look at how this law affects small businesses and why it's a game changer when it comes to offering retirement benefits.

Expanding Tax Credits for Small Employers

One of the most notable provisions in SECURE Act 2.0 is the increased tax credits available to small businesses that establish new retirement plans. These tax credits are designed to help offset the cost of setting up and administering plans such as 401(k)s. Under SECURE Act 1.0, small businesses could receive a tax credit of 50% of the administrative costs, up to $5,000 per year, for three years. However, SECURE Act 2.0 significantly enhances these credits, providing further incentives.

• 100% Credit for Administrative Costs: SECURE 2.0 boosts the tax credit to cover up to 100% of qualified startup costs for businesses with 50 or fewer employees. This means a small business can now recover the full cost of setting up a retirement plan, up to $5,000 annually for the first three years. This increased incentive eliminates much of the financial barrier that previously kept small businesses from offering retirement benefits.
• Per-Employee Contributions Credit: One of the new provisions under SECURE 2.0 is a tax credit for employer contributions. For companies with 50 or fewer employees, an additional credit of up to $1,000 per employee is now available for employer contributions made to the plan. This credit phases out gradually for businesses with 51 to 100 employees, offering smaller businesses an opportunity to compete in attracting talent by matching contributions.

Auto-Enrollment for New Plans

SECURE Act 2.0 also introduces an auto-enrollment requirement for new 401(k) or 403(b) plans. Starting in 2025, any new retirement plans established by employers must automatically enroll employees with an initial deferral rate of at least 3%. While employees have the option to opt-out, studies show that auto-enrollment significantly increases participation rates.

For small business owners, this change has two main benefits:

1. Increased Plan Participation: Higher participation in retirement plans not only benefits employees but can also help business owners by spreading plan costs across a broader base.
2. Boosting Employee Retention: Offering retirement plans with auto-enrollment helps small businesses attract and retain quality employees in competitive job markets, reducing turnover costs over time.

Simplified Reporting and Access to Pooled Plans

Another key feature of the SECURE Act 2.0 is the creation of "pooled employer plans" (PEPs). These plans allow multiple unrelated businesses to participate in a single retirement plan, reducing administrative costs and simplifying compliance for small businesses. Previously, small businesses had to establish and maintain their own individual plans, which could be costly and administratively burdensome.

PEPs allow small businesses to offer competitive retirement plans without the overhead of managing them independently. Businesses can benefit from economies of scale, lower administrative fees, and reduced fiduciary liability.

Roth and Catch-Up Contributions: Flexibility for Employees

While the tax credits for employers are perhaps the most exciting part of SECURE 2.0 for small business owners, it's worth noting that employees also gain significant new opportunities for saving. For example, catch-up contributions for employees aged 50 and older will now be required to be made as Roth (after-tax) contributions for high earners. This change allows employees to maximize their retirement savings in a tax-efficient manner.

From the perspective of a small business, offering Roth options can make your retirement plan even more attractive to employees, particularly those who are looking for flexible retirement savings solutions.

Why Small Businesses Should Take Advantage of SECURE Act 2.0

SECURE Act 2.0 provides a remarkable opportunity for small businesses to level the playing field in terms of employee benefits. Traditionally, larger corporations have had an edge in attracting and retaining top talent, partly due to their robust benefits packages. The enhanced tax credits and simplified plan options offered by SECURE 2.0 empower small businesses to offer competitive retirement plans without facing overwhelming administrative burdens.

In addition, the potential for long-term savings on taxes through the per-employee tax credits makes it easier than ever for small businesses to justify the initial costs of setting up a retirement plan. For example, with the per-employee contributions credit and the administrative tax credit combined, a business with 30 employees could save tens of thousands of dollars over the first few years of the plan’s existence.

These financial incentives make SECURE 2.0 a no-brainer for any small business looking to enhance its employee offerings while maximizing tax savings. It's not just about compliance—it's about staying competitive, improving employee satisfaction, and ultimately growing your business.

Conclusion

As a small business owner, the SECURE Act 2.0 presents you with a unique opportunity to invest in both your employees and your business’s future. With substantial tax credits, auto-enrollment mandates, and simplified plan structures, this legislation makes it easier and more affordable than ever to provide meaningful retirement benefits. By taking advantage of these changes, you can establish your business as an attractive place to work, retain your best employees, and reduce your tax liabilities.

In the long run, offering a retirement plan under the SECURE Act 2.0 is not just a smart financial move—it's a competitive edge in the ever-challenging landscape of small business ownership.

This is a pivotal time for small businesses to act, so don't miss the chance to leverage these new provisions. Make sure to consult with your financial professional, like myself, to take full advantage of the SECURE Act 2.0 and position your business for long-term success.