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March 1, 2023

How Secure 2.0 Will Impact Employers’ Tax Situations

Secure 2.0 EmployersThe Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022, otherwise known as SECURE 2.0, is a piece of legislation that focuses on how employers and their employees are able to save for retirement and how it impacts their bottom lines.

Businesses with as many as 50 employees can receive a tax credit when they offer a defined contribution plan to employees. The start-up tax credit permits up to 100 percent of start-up costs ($5,000 annually) to offset administrative expenses to implement a start-up plan. However, for businesses with 51 to 100 employees, the first SECURE Act’s tax credit equal to 50 percent of administrative costs, capped at $5,000, remains in effect.

SECURE 2.0 also allows for an employer tax credit of up to $1,000 per employee, effective Jan. 1, 2023, when the business contributes to defined contribution plans as long as the employee makes no more than $100,000 annually. It’s phased down over a five-year period. For employers with 51 to 100 employees, the credit phases down based on the number of active employees.

Another tax credit is for eligible employers that employ military spouses. Beginning in 2023, employers with up to 100 employees making at least $5,000 annually are able to obtain a general tax credit, up to $500 for three years as long as they meet the following conditions in conjunction with the company’s defined contribution plan:

  • Qualified employees enroll within two months of onboarding.
  • Once qualified, an employee is entitled to plan benefits he wouldn’t otherwise be eligible for until after 24 months of employment, such as the employer deposit of an amount equal to what the employee contributes to his plan.
  • Contributions from the business are assigned in full to the employee.       

The $500 tax credit is comprised of $300 contributed by the employer to the employee and $200 based upon eligible military spouse participation.

Employers may utilize the tax credit during the year the military spouse is onboarded and the following two tax years. Employees also need to attest to their status to qualify.

If an employee is married to someone who is actively serving in the armed services, that person is considered a military spouse. However, if such an individual is considered a Highly Compensate Employee (HCE), he or she must be excluded from this definition based on compensation level.

Based on IRS regulations, there are two different tests that determine if an employee is an HCE and determines eligibility for contribution plan participation by employees and potential tax implications for employers. The first test is an ownership test; the other is a compensation test to determine if an employee is an HCE.

Looking at the compensation test, the IRS’ HCE Threshold for 2022 and 2023 is $135,000 and $150,000 in compensation, respectively. The ownership test looks at whether an employee owns 5 percent of the business during the determination year or within the present plan year. If the same employee has the same 5 percent ownership stake within the lookback year, which is the past 12 months immediately preceding the determination year, they are deemed to meet the ownership test.

While each company has different attributes and must navigate the tax code based on their own circumstances, understanding how the SECURE 2.0 law works is one way to make the most of tax obligations.

Sources

https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf


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