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Boost Your Retirement Savings with Employer Contribution Credits-Starting in 2023.



Maximize Your Tax Savings with SECURE 2.0's Employer Contribution Credit


Employer Contributions Credit:

  • Applies to 401(k) plans, SEPs, and other qualifying plans.

  • First-year credit can be claimed starting in 2023.

  • Credit is for matching or non-elective contributions, not elective deferrals.

  • No credit for employees earning more than $100,000.

  • Contributions for sole proprietors and partners are covered.

  • Credit is claimed on Form 8881.

  • Credit begins to phase out for businesses with more than 50 employees.

  • Applicable percentages for the credit:

  • Years 1 and 2: 100%

  • Year 3: 75%

  • Year 4: 50%

  • Year 5: 25%

  • Can apply to plans established prior to 2023, but the first credit year will be 2023.

  • Credit reduces deductions.


Example 1:

  • Sole proprietor with no employees sets up a SEP in 2023.

  • Funds enough to get the maximum employer contribution credit.

  • Example contributions and applicable credit percentages are provided for the years 2023 to 2027.

Year

ER Contribution

Applicable %

Credit

2023

$1,000

100%

$1,000

2024

$1,000

100%

$1,000

2025

$1,333

75%

$1,000

2026

$2,000

50%

$1,000

2027

$4,000

25%

$1,000

Totals

$9,333


$5,000

Example 2:

  • Cutting Edge Tax Strategies, LLC, established a SEP plan in 2019.

  • Credits for contributions are calculated based on the remaining eligibility period and applicable percentage.


Conclusion

The SECURE 2.0 Act introduces significant credits and incentives for small business retirement plans, encouraging more businesses to establish and maintain retirement plans for their employees. These provisions help businesses offset the costs associated with setting up and contributing to retirement plans, ultimately benefiting both employers and employees.

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