Businesses with 2 to 100 employees have up to three tax credits available to help reduce costs during the first five
years. There must be at least one Non-Highly Compensated Employee (NHCE) to qualify for the credits.
The first tax credit is equal to the greater of $500 or $250 per NHCE with a cap of $5,000 applied to 100% of the costs you incurred. For employers with 51 to 100 employees the credit can be used on 50% of the costs incurred. Any start-up costs paid by the employer, but not covered by the tax credit, may be deducted as a regular business expense by the employer as well. See below for specific examples.
The second tax credit is equal to 100% of the amount the employer contributed to each of the first 50 employees making $100,000 or less (in the prior year), capped at $1,000 per employee. In the third year the credit is 75% of contributions, 50% in the fourth year, and 25% in the fifth year. The credit percentage per employee is reduced for the number of employees between 51 and 100. This tax credit is available for taxable years beginning after December 31, 2022.
What is the possible tax credit when there are 10 employees receiving employer contributions?
The third tax credit available is an additional $500 annual credit for using an auto-enrollment feature in a new or existing plan. The credit is available for the first taxable year in which the employer’s plan contains an EACA or QACA and the following two taxable years. Employers will need to weigh the possible additional administrative and fiduciary burdens of automatic enrollment versus the cost savings. Although unintentional, this credit is available for solo plans.
How much is the auto-enrollment tax credit worth over three years?
Note: To be eligible for the tax credits, the plan must be a start-up plan. For the 3-year period before the effective date of the plan, the employer, or any member of a controlled group including the employer, cannot have had a plan that benefitted substantially the same employees. Eligible plans are a qualified plan, SEP or SIMPLE. The auto-enrollment credit can be applied to an existing plan only if the auto-enrollment feature is ADDED to a plan on or after January 1, 2020, and is in addition to the start-up tax credit. The auto-enrollment credit is NOT linked to the number of NHCEs eligible for the plan, nor the costs associated with the auto-enrollment feature.
1. Small employer: an employer which had no more than 100 employees who received at least $5,000 in compensation from the employer for the preceding year.
2. Start-up Costs: any ordinary and necessary expenses which are paid by the employer in connection with the establishment or administration of the plan (e.g., plan document, set up fees, 5500 filing, testing, educational meetings, asset management fees).
DISCLAIMER: This summary of tax credits is for informational purposes only and should not be considered legal or tax advice. You should consult your CPA or financial advisor to properly determine if you are eligible for any of the tax credits.