Congress waited until the last minute, Dec. 29, 2022, to pass the comprehensive Consolidated Appropriations Act of 2023. While largely a spending bill, one of its components, the SECURE Act 2.0, is a far-reaching set of changes and additions to the federal laws governing retirement plans.

The new guidelines, which become effective over the next several years, make clear that Congress is aware of the need to increase the savings rate among our aging population through private industry-sponsored retirement programs. Projections change periodically, but Social Security is now expected to face a serious problem in meeting its payout obligations in 2035 to 2037.

And so, private industry to the rescue.

Or at least Congress hopes that will be the case through increased employer interest in adopting a company retirement plan. The SECURE Act 2.0 also includes new rules encouraging employees to participate more fully in their company plans, including required “auto enroll” provisions starting in 2025.

Raising employee plan participation, of course, is dependent on employers taking the initial step of adopting a 401(k) retirement plan. Many companies currently don’t offer this type of benefit to their employees, despite the many state and federal income tax benefits inherent in company retirement plans. For example, income tax deductions for both the employer and participating employees, protection from virtually all creditors, and tax-deferred growth on account accumulations.

In a bid to sweeten the pot, the SECURE Act 2.0 was drafted to include important new enticements for employers to step up and initiate qualified retirement plan coverage for their employees.

The more straightforward incentives to entice a company to adopt a 401(k) plan in 2023 provide for two direct federal income tax reduction credits:

• A new 2023 dollar-for-dollar tax credit for employer contributions made to a qualifying “startup plan” with 100 or fewer employees, although it begins to phase out for those with more than 50 employees.

• An enhanced three-year tax credit for employer costs in “establishing and administering” an eligible employer’s plan with 50 or fewer employees.

Those new or enhanced tax credits generally are available to companies that haven’t had a “qualified employer plan” in effect for the immediately preceding three years. Accordingly, a hypothetical XYZ Co. with 50 employees in 2023 is potentially eligible for both such tax credits, so long as XYZ did not maintain a 401(k) plan, defined benefit plan, simplified employee pension, or simple individual retirement account in 2020, 2021, or 2022.

The enhanced tax credits now available include a credit for employer contributions in 2023. In 2022 and prior years, XYZ would have received an income tax deduction for employer-plan contributions. In general employer contributions to a qualified retirement plan are deductible expenses that reduce the company’s taxable income.

Starting this year, XYZ will instead get a direct tax credit for each $1,000 matching or profit-sharing contribution made on behalf of an eligible employee covered by the company’s 401(k) plan. A “lookback rule” provides for a cutback in this credit where XYZ employed more than 50 workers in 2022.

Generally, the company can lower its federal income tax bill by up to 100% of its contribution amounts—as much as $50,000 in 2023—and again in 2024. The credit remains available through 2027 at a declining percentage level.

IRC Section 45E(f), which provides for the new contribution credit, appears even to include business owners with wages of $100,000 or less in the group of employees whose $1,000 contribution triggers the credit. Further, matching or profit-sharing contributions that are subject to a plan vesting schedule also appear to qualify.

Included in the incentives is an expansion of the existing startup-cost tax credits for employer-paid expenses incurred in establishing and administering an eligible plan. Previously, this maximum $5,000 yearly tax credit could be applied to reduce 50% of plan startup costs with a cap of $250 for the year per eligible nonowner and other “highly compensated” employees.

The SECURE Act 2.0 raises the plan expense credit to 100% of such cost—again up to $5,000 for the year. As before, the full credit is available for 2023, 2024, and 2025 for plans implemented this year.

These new rules aren’t “revenue raisers” for the government. However, they underscore Congress’ belated realization that small employers may be the key to providing retirees with a source of income in their retirement years.

Clay Randall is a co-founder at Randall & Hurley Inc., a Spokane-based retirement administration services company. He can be reached at 509.838.5500.