This is the first in a series of articles on pension changes that are part of the SECURE Act.
The $ 1.4 trillion package of funds signed by President Trump on December 20, 2019, to fund federal agencies through September of this year, included the key legal improvements to retirement savings in over 10 years.
These legislative changes to promote retirement savings are summarized in one of the legislative acronyms of the Congress, the SECURE Act, which is a political abbreviation for the law to introduce every community to improve old age. I’ll cover the most important ones in later blog posts, but for now, here’s a summary of two tax credits that you may find valuable.
1. Increase the tax credit for small start-up costs of employers
In 2001, Congress granted a tax credit to encourage small employers (with 100 or fewer employees) to set up pension plans. Suitable employer plans include all qualified employer plans. 401 (k) plan, SIMPLE plan or SEP.
Original tax credit
Small employers could receive a tax credit equal to 50% of the cost of drawing up and submitting a pension plan to employees for the year of foundation and the two subsequent tax years. The 2001 version limited the credit to $ 500 a year.
How it works: A small business is eligible if:
- It has 100 or fewer employees who received at least $ 5,000 in compensation for the previous year.
- At least one plan participant who is a non-highly paid employee, and
- Employees who have not benefited from an earlier plan you offer in the three tax years prior to the first year are eligible for the credit.
Time of tax credit
The first credit year is the tax year in which the employer plan comes into effect. However, you can extend the credit by one year or by 20 years. Double immersion is not permitted. You will need to reduce each deduction in relation to the start-up costs of the pension plan by the loan amount.
Increased tax credit
The SECURE law extends this tax credit to $ 250 per low-paid employee to whom the plan applies. The balance is no less than $ 500 and no more than $ 5,000. If you do the math, the maximum tax credit is $ 15,000 compared to the previous $ 1,500. The new limit applies to tax years beginning after December 31, 2019.
2. Add a new tax credit for adding an automatic registration
The Safety Act also provides for a tax credit for small employers who change their 401 (k) plans to introduce automatic contribution schemes that require employees to pay 401 (k) contributions by default unless they sign out. The credit is $ 500 for the year the agreement was included in the plan and a total of $ 1,500 for each of the following two years, provided the plan is maintained, of course. This tax credit also applies to tax years beginning on December 31, 2019.
- A tax credit is better than a tax deduction. A tax credit can reduce the tax liability. A tax deduction can be used to reduce the amount of taxable income.
- The two tax credits are not mutually exclusive. A qualified start-up 401 (k) plan could receive tax credits of up to $ 16,500.
- Tax credits are added to the available deductions for employer contributions.
The idea – often wrong – is that 401 (k) plans are too expensive for small businesses to start and maintain. These two tax credits make a significant contribution to taking this idea into the past. Ask your tax advisor whether you can claim one or both tax credits.
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