In late December Congress was passing a giant omnibus budget bill. Buried within it was the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0), which contains many retirement (and some other) changes to be aware of. It provides new incentives for employers to offer retirement plans to their employees and for the employees to participate and improve their retirement security. SECURE 2.0 helps employees and their beneficiaries, owner-employees, small businesses, and retirees, and eases costs, administrative burdens, and penalties for inadvertent mistakes. It will also require most plans to be amended to comply with some of its provisions. The 2023 omnibus bill containing the following key provisions for small businesses was signed into law by the President on December 29, 2022.

Bigger tax credit for start-up retirement plans. The SECURE Act improves the small employer pension plan start-up cost credit in three ways for tax years starting after 2022.

First, it makes the credit equal to the full amount of creditable plan start-up costs for employers with 50 or fewer employees (up to an annual cap). Previously only 50% of costs were allowed (which still applies to employers with 51 to 100 employees).

The Act also retroactively fixed a technical glitch that prevented employers who joined multi-employer plans in existence for more than three years from claiming the start-up cost credit.

Perhaps the biggest change is that certain employer contributions for a plan’s first five years now may qualify for the credit. The credit is increased by a percentage of employer contributions, up to a per-employee cap of $1,000: It is 100% in the plan’s first and second tax years, 75% in the third year, 50% in the fourth, and 25% in the fifth. For employers with between 51 and 100 employees, the contribution portion of the credit is reduced by 2% times the number of employees above 50.

In addition, no employer contribution credit is allowed for contributions for employees who make more than $100,000 (adjusted for inflation after 2023). The credit for employer contributions also is not available for elective deferrals or contributions to a defined benefit pension plan.

New credit for military spouses. The Act adds a new tax credit for employers with no more than 100 employees earning at least $5,000 for the preceding year for each military spouse who starts participating in an eligible employer defined contribution plan. Highly compensated employees are excluded from consideration. The annual credit amount for the year the spouse begins participating in the plan and each of the next two tax years is (1) $200 for each plan-participating military spouse, plus (2) up to $300 of related employer plan contributions. This new credit is available for tax years beginning after December 29, 2022.

Retroactive first-year deferrals for sole proprietors. To correct the situation where a sole proprietor can’t make an elective deferral for the first year to a plan created after the close of the year, the Act provides, for plan years beginning after 2022 for a sole proprietor who is the only employee of an unincorporated trade or business, that any elective deferral made by the proprietor’s original tax return due date ending after or with the end of the plan’s first plan year, will be treated as made before the end of that first plan year.

We know that this amount of information is overwhelming, but there is much here that may affect you or your business and induce or require you to change your retirement plan or how you handle your account and distributions. It’s a lot to consider.

Be assured that we can help you with all of this. Please don’t hesitate to call us for more information and our assistance.