The Secure Act which was signed into law on December 22, 2019, extended the timing for establishing a retirement plan. For Plan Years beginning after January 1, 2020, a business owner can establish a retirement plan until the due date of the tax return including extension.
Retirement plans can be established for Sole Proprietors or businesses with employees. Plan Sponsors can use two or more plans in combination to provide retirement benefits for employees. A defined contribution plan (e.g. 401(k) Profit Sharing) may be combined with a defined benefit plan (either traditional or Cash Balance) to provide maximum tax deductions and a greater opportunity for retirement savings for the business owner. Defined Contribution Plans have an overall limit of $57,000. Defined Benefit Plans have the ability for much higher contributions.
The Secure Act also granted an expansion of tax credits to help employers afford the setup of these plans. These tax credits will reduce the amount of federal taxes the business will owe.
Credit for Qualified startup costs – Employers are eligible for these credits if they have 100 employees or less who had compensation of at least $5,000 in the preceding year. The credit can be the greater of (1) $500 or (2) the lesser of $250 multiplied by the number of non-highly compensated employees eligible for plan participation, not to exceed the lesser of $5,000 or 50% of the eligible plan expenses. This credit is available for up to three years.
Credit for Automatic enrollment – Employers would be eligible for this credit by adding automatic enrollment to their existing 401(k) plan or by adding to any new plan. The credit is $500 for each of the first three years after this feature is effective.
When combined, these credits can total up to $5,500 per year!
Please feel free to contact NPPG if you have any questions or would like to inquire about setting up a plan.