Maximizing Tax Benefits – How the SECURE 2.0 Act Can Benefit Businesses

Maximizing Tax Benefits – How the SECURE 2.0 Act Can Benefit Businesses

Tax Benefits

Taking advantage of tax credits and deductions helps reduce your taxable income, thus decreasing your tax liability. Starting in 2024, SECURE 2.0 will allow employers to match student loan payments as if they were contributions to their retirement plans. This will enable employees to pay down their debt and save for retirement at the same time.

Employer Matching or Profit-Sharing Contributions

For businesses with fewer than 50 employees, the new guide to the SECURE 2.0 Act provides an attractive tax incentive to start a retirement savings plan. Under the law, businesses can claim credit for their startup costs for a defined contribution or a SIMPLE IRA plan by matching employee deferrals or contributing profits. The credit covers 100% of employer contributions in the first two years, then reduces to 25% in the following three years. The amount eligible for the credit can be at most $5,000. The SECURE 2.0 Act also clarifies that joining a multiple employer or pooled employer plan counts as establishing a new plan for purposes of the startup credit. Several other notable features of the SECURE 2.0 Act include:

  • Small businesses join MEPs to reduce administrative burden and increase access to retirement savings options.
  • Penalty-free withdrawals from retirement accounts for adoption or birth expenses.
  • Broader part-time worker eligibility for employer-sponsored plans.

It also enhances the current Saver’s Tax Credit for low-to-mid-income workers by replacing it with a new “Saver’s Match” for employers that can provide this benefit. A final important aspect is lowering the required minimum distribution (RMD) tax from 50% to 25% for participants who do not take their RMD by age 70.5. This change will help encourage individuals to continue prioritizing retirement savings in their budgets.

Defined Contribution Plans

For businesses sponsoring a defined contribution plan, SECURE 2.0 increases the existing startup credit to 100% of the plan’s first two years (including the startup year), 75% in the third year, 50% in the fourth year, and 25% in the fifth year. This additional credit is capped at $5,000 per employer and is available for the first three years of a new plan. It also allows employers to perform a top-heavy test on excludable and non-excludable employees separately rather than on all eligible employees, so small businesses will have less incentive to remove lower-paid and part-time workers from the plan. Finally, the new law expands age limits for catch-up contributions, meaning more employees over 50 can make these more significant contributions. Employees can use this provision to reduce the amount of student loan debt they carry and save for retirement at the same time. As a result, many employees who would otherwise have to borrow or take hardship withdrawals from their retirement savings accounts can now use their employer contributions to pay off their debt and start saving. The new law also allows businesses to offset company contributions for an employee’s student debt repayment instead of salary deferrals into the employer’s retirement plan.

Defined Benefit Plans

The SECURE 2.0 Act allows a business owner to deduct the startup cost of a defined benefit plan. This is a significant incentive for small businesses to offer this “must-have” benefit to help them compete with larger companies and attract top talent. A new requirement also automatically makes it easier for employees to participate in a workplace retirement plan. This is good news for employers and employees because it can help people save more for retirement while reducing taxable income. Another significant change is that catch-up contributions are now available to workers aged 50 and over, regardless of their age when they started working at the company. This will allow people to get more of their income into tax-deferred savings accounts to build wealth while avoiding paying higher taxes in retirement. As a result of these changes, many people are more confident that they will have enough money saved for a comfortable retirement. However, many people are still struggling to save. A recent study found that almost half of Americans are at risk of insufficient retirement savings. This is where legislative initiatives like the SECURE 2.0 Act can help.

Defined Contribution Plans with a Roth Option

A significant obstacle for many employees when preparing for retirement is having enough money. With so much debt and a shrinking social safety net, saving can be challenging, especially for those who are self-employed or small business owners. The SECURE 2.0 Act provides tax credits that make it more affordable for these businesses to offer a retirement plan for the first time. For companies with 50 or fewer employees, the bill increases the small plan startup credit from 50% to 100% of eligible costs (capped at $5,000 per year) for the first three years that the plan exists. It also clarifies that joining a multiple employer plan counts as establishing a new plan for purposes of the credit. The SECURE 2.0 Act also alters Roth contribution rules, allowing high earners to put more into their savings through after-tax contributions. In addition, it introduces a new catch-up contribution limit for workers aged 60 to 63, which will be greater than $10,000 or 150% of the standard catch-up limit. These changes can go a long way in helping close the retirement savings gap.