Modification of start-up credit for small employers
Increases the three-year small business start-up credit from 50% of expenses with a cap of $5,000 to 100% for employers of 50 employees or fewer. Applies to new plans.
Additional credit for those plans that decide to provide an employer contribution of up to $1,000 per employee. The credit is calculated by multiplying the amount contributed to each employee by that year’s applicable percentage (100% in years one and two, 75% in year three, 50% in year four, and 25% in year five).
- Analysis: This will improve employer retirement plan access as it reduces the costs of administration and matching expenses. The full credit is only available to employers with 50 employees and fewer; those between 51 and 100 employees still receive a credit, but the amount is reduced. The credit does not apply to employees with wages in excess of $100,000 (indexed).
- Effective Date: Effective taxable years beginning after 12.31.22
- Plan Type: New plans
New starter K plan
Permits employers that do not sponsor a plan to offer a starter 401(k) (or safe harbor 403(b)) plan. The starter plan requires an auto-enrollment deferral rate between 3% and 15%. The maximum deferral amount is the same as the IRA contribution limit ($6,000 with a $1,000 catch-up at age 50 or older for 2022).
- Analysis: This provides an easy way for small employers to add a cost-effective savings plan. The downside is the contribution limit is lower than traditional employer-sponsored plans and currently is not indexed due to a drafting oversight.
- Effective Date: Effective taxable years beginning after 12.31.23
- Plan Type: New plans
Expanding automatic enrollment and escalation
Requires new 401(k) and 403(b) plans (and plan sponsors who newly adopt a multiemployer plan, or MEP) to include automatic enrollment (minimum default rate at 3% up to a maximum of 10%). The escalation cap is raised by 1% each year until it reaches a minimum of 10% but no more than 15%.
- Analysis: This is positive, as auto-features can substantially improve overall retirement readiness. The required rates are in line with industry best practices. Exemptions include governmental plans, church plans, employers with 10 employees or fewer, SIMPLE 401(k) plans, and employers that have been in existence for less than three years.
- Effective Date: Effective taxable years beginning after 12.31.24
- Plan Type: New 401(k) and 403(b) plans