Recognizing that many employees of small businesses are not covered by an employer sponsored retirement plan, both Congress and the Virginia General Assembly have been proactive in passing legislation that encourages more retirement plan participation.
From Congress, we have the Secure Act 2.0, aka SECURE 2.0. There are two important provisions made available to small employers in 2023.
For employers with no retirement plans, SECURE 2.0 provides for “starter” 401(k) or 403(b) plans. Congress is encouraging employers to fund retirement savings for employees to “kick start” retirement savings, anticipating that tax-deferred compounding of earnings will encourage both employers and employees to continue making contributions. These starter plans limit salary deferrals to a maximum of $6,000 plus catch-up contributions for those over age 50, amounts that are much smaller than standard 401(k) and 403(b) plans. Automatic enrollment of employees is required, but an employee may elect out. These starter plans simplify administration by deeming that the discrimination tests are satisfied, although notice of the plan to all employees is required.
For employers with 50 or fewer qualifying employees, SECURE 2.0 provides an increased tax credit of up to 100% of administrative costs (limited certain per employee limits) up to a maximum annual cap of $5,000. In addition, there is an additional 100% credit of up to $1,000 per employee for employer contributions made for employees earning less than $100,000 during the first and second year of the plan and continues at a lesser credit rate for the following 3 years.
Employers with 51-100 qualifying employees can qualify for a similar but lesser credit for employer contributions and a 50% credit for administrative costs. There are also additional credits for contributions for military spouses who are participating in certain employer plans.
Those employers with no more than 50 employees – that qualify for the 100% credit level – will be able to assist most of their employees with retirement savings with zero out of pocket cost. Those with up to 100 employees will want to calculate the after-tax cost of contributions for employees, accounting for the credit that applies for an employer of their size. Employers claiming these tax credits will reduce their tax deductions for contributions to the plan by a like amount.
Under state legislation passed in 2021, private-sector Virginia businesses meeting certain criteria — 25 or more eligible employees, operating for more than two years, and not offering a retirement savings option — will be required to enroll in RetirePath Virginia. The pilot program is scheduled to begin in early 2023 and phased enrollment is scheduled to start by July 1, 2023. RetirePath Virginia will be simple to administer and fee-free for employers. Employee participation will be voluntary.
The new program will be administered by Virginia529, the agency that now provides college savings plans. Virginia529 is currently seeking employers who wish to participate in a pilot program. See https://www.retirepathva.com/program-pilot if interested.
The RetirePath Virginia program is not a substitute for a qualified plan such as an employer sponsored 401(k) or 403(b) plan. This plan allows an individual with no access to an employer plan to make tax deductible contributions to a retirement savings account through payroll deduction. No employer matching contributions are allowed. If the employer sets up a qualified plan, then that employer is no longer eligible to have its employees participate with RetirePath Virginia.
Any nongovernmental business, industry, trade, profession, or other enterprise in the Commonwealth, whether conducted on a for-profit or nonprofit basis, that employed 25 or more eligible employees for the quarter ending December 31 and the preceding three quarters of the preceding calendar year and has been operating for at least two years prior to Program implementation will be required to offer the program to its employees. All individuals who are (i) 18 years of age or older, (ii) currently employed at least 30 hours a week, and (iii) receiving wages are considered eligible employees. Eligible employers who do not participate with RetirePath Virginia may face noncompliance penalties not to exceed $200 per eligible employee annually.
Specific guidance is still being developed by Virginia529 and should be available later this year.
Please feel free to contact your MUAC advisor for further information on these incentives.