Boosting Retirement Savings for Small Businesses and Sole Proprietors: The Impact of the SECURE Act

The landscape of retirement savings for small businesses and self-employed individuals has been significantly enhanced by the SECURE Act and its successor, the SECURE 2.0 Act. These landmark pieces of legislation introduced a variety of tax incentives aimed at making it more affordable and flexible for small employers to offer retirement plans. The goal is simple: to encourage more businesses to provide retirement options, ultimately strengthening the financial security of their employees.

A key provision is the enhanced tax credit for the startup costs associated with establishing a new retirement plan. Before the SECURE 2.0 Act, a small business could claim a credit of up to 50% of its qualified startup costs, with a maximum of $500 per year. The new law dramatically increases this benefit. Businesses with 50 or fewer employees can now claim a credit for 100% of their qualified startup costs, with an annual cap of $5,000 for the first three years the plan is in place. This translates to a potential savings of up to $15,000. For slightly larger businesses with 51 to 100 employees, the credit remains at 50% of startup costs, also capped at $5,000 per year for three years. Qualified startup costs include the ordinary and necessary expenses of setting up and administering the plan, as well as educating employees about it.

In a further effort to make retirement plans more attractive, the SECURE 2.0 Act also introduced a new credit to help businesses with the cost of making contributions to their employees’ plans. This credit is available for up to five years, calculated as a percentage of the employer contributions made to non-highly compensated employees, with a cap of $1,000 per employee per year. For businesses with 50 or fewer employees, the credit is 100% of contributions for the first two years, phasing down to 75% in year three, 50% in year four, and 25% in year five. The credit is reduced for businesses with 51 to 100 employees, with the percentages decreasing by 2% for each employee over 50.

For small businesses that want to simplify plan administration and boost employee participation, an additional tax credit is available for adding an automatic enrollment feature. By including this feature in a new or existing plan, a business can claim an extra $500 per year for three years. This credit is provided on top of the startup and employer contribution credits, offering yet another incentive to make retirement saving accessible for employees.

Beyond small businesses with employees, the SECURE 2.0 Act also brought a crucial change for sole proprietors who use a Solo 401(k) plan. Previously, a new plan had to be established by December 31st of the tax year. Now, a sole proprietor can set up a new Solo 401(k) as late as their tax-filing deadline, including extensions, and still make contributions for the prior tax year. This flexibility is a game-changer, especially for a business owner who has an unexpectedly profitable year and wants to maximize their tax-advantaged retirement savings after the year has ended. The new rules specify that both employee salary deferrals and employer profit-sharing contributions can be made by this extended deadline. This provides a significant window of opportunity, allowing business owners to accurately calculate their annual income and determine the maximum possible contribution they can make to their retirement fund.

In conclusion, the SECURE Acts have created a more supportive environment for retirement savings. The combination of enhanced tax credits for plan startup costs, new credits for employer contributions, and the additional credit for automatic enrollment makes it more financially viable for small businesses to offer plans. Simultaneously, the extended deadlines for establishing and contributing to a new Solo 401(k) provide much-needed flexibility for sole proprietors. These changes collectively empower small businesses and individuals to take meaningful steps toward a more secure financial future.

 A Note on Financial and Tax Planning

Before you decide to enroll in a new retirement plan for your business and take advantage of the available tax incentives, you should always consult with your financial professionals. A Certified Public Accountant (CPA) and a Certified Financial Planner (CFP) can provide you with personalized advice tailored to your unique financial situation and business goals.