What is the SECURE Act auto-enrollment tax credit?
A $500 tax credit has been created for small employers who add an EACA to their retirement plan. The credit is available for 3 taxable years.
What are the requirements to be an EACA?
EACA stands for “Eligible Automatic Contribution Arrangement”. The requirements to be an EACA are as follows:
- Unless an employee makes a different election, the employee is defaulted to a uniform contribution percentage.
- The employer must provide an EACA notice before the beginning of each plan year.
- For a newly eligible participant, the EACA notice should be provided a reasonable time prior to entry. If it is not practical to provide the notice prior to entry, it should be provided before the first pay date from which contributions are withheld.
- Generally, an EACA can only be added mid-year for new entrants.
Can an employer get both the startup tax credit and the SECURE Act auto-enrollment tax credit?
Yes.
What is the first tax year for the SECURE Act auto-enrollment tax credit?
2020
Can existing plans get the SECURE Act auto-enrollment tax credit?
Yes, if they add an EACA feature to the plan.
Does the additional automatic enrollment credit apply to only certain kinds of automatic enrollment plans?
Yes. It applies to the addition of EACA which includes QACAs.
If a plan already has an existing auto-enrollment feature, can the sponsor qualify for the SECURE Act auto-enrollment tax credit?
Only under limited circumstances. The auto-enrollment tax credit only applies when an EACA is added to a plan. So, if a plan is already an EACA (including a QACA), adding another EACA or auto-escalation feature will not qualify for the auto-enrollment tax credit.
If a plan has had an EACA for five years and in 2021 they add an auto-escalation feature, can they claim the SECURE Act auto-enrollment tax credit?
No. Adding an auto-escalation feature is not relevant. The auto-enrollment tax credit is only available for the first three years that a plan has an EACA feature.
Can an employer get a tax credit for more than one 401(k) plan if the employer sponsors more than one 401(k) plan and each plan adds an EACA?
No. The $500 credit is an employer level credit. The employer gets the credit with respect to the first plan to which the employer adds an EACA.
If an employer has two plans and adds an EACA to plan A in 2021 and an EACA to plan B in 2023, does the employer get the credit for three years (2021-2023) or five years (2021-2025)?
The three years 2021-2023. Adding an EACA to a second plan does not give the employer a second three-year period.
If an employer added an EACA in 2018 does the three year EACA period start in 2018 or 2020?
The three-year period starts in 2018. So, the employer may only take the credit for 2020 when the SECURE Act became effective. (The employer does not get a special three-year period because the SECURE Act was effective in 2020.)
Can an employer take the auto-enrollment credit with respect to a different plan in years 2 and 3 than year 1?
No. However, special rules apply for spin-offs which may still remain eligible.
Are there any types of employers who are not eligible to claim the auto-enrollment tax credit?
Yes, governmental and tax-exempt entities are not eligible to claim the credit.
Are large employers eligible for the SECURE Act auto-enrollment credit?
No. Like SIMPLEs, the auto-enrollment tax credit is only available to employers that have 100 or fewer employees in the prior year who earned $5,000 or more. The two-year grace period for SIMPLEs also applies when the employee count goes higher than 100 participants.
Can a SIMPLE IRA have an auto-enrollment feature?
Yes. However, the employer may have difficulty finding an SIMPLE IRA agreement that supports auto-enrollment.
Can an employer sponsoring a plan that covers only HCEs qualify for the SECURE Act auto-enrollment tax credit?
Yes. This is different from the new plan startup tax credit which, in part, is based on the number of NHCEs covered by the plan. But, keep in mind that coverage and nondiscrimination requirements may apply if there are NHCEs.
Are plans that only cover the owner of the business eligible for the SECURE Act auto-enrollment credit?
Yes. Again, this is different from the new plan startup credit.
How much is the tax credit?
$500 per year.
How many years can the credit be claimed?
A maximum of three years.
The employer adds the EACA in the fourth quarter of 2020. Does the employer get the $500 tax credit or does the employer need to prorate the credit?
$500. The credit is not prorated. And, remember that EACAs added mid-year may only apply to newly eligible participants.
Can each eligible employer participating in a MEP claim the auto-enrollment tax credit?
Yes, provided the employer meets the other requirements to qualify for the credit.
Does the automatic enrollment tax credit have to be used to pay for expenses of the plan?
No. Unlike the new plan start-up credit (which is limited to ½ of a new plan’s qualified startup costs up to a maximum of $5,000 depending on the number of NHCEs covered by the plan), the auto-enrollment tax credit may be claimed without regard to any particular plan expenses.
If a plan sponsor pays for plan administration fees can it elect to deduct these expenses instead of claiming the auto-enrollment tax credit?
There is no need to choose. The employer can deduct these expenses and qualify for the auto-enrollment tax credit. The SECURE Act auto-enrollment tax credit is different from the new plan startup tax credit. The new plan startup tax credit is limited to ½ of a new plan’s qualified startup costs up to a maximum of $5,000 depending on the number of NHCEs covered by the plan. In addition, the tax code specifically provides that a deduction may not be taken for expenses for which a new plan start-up credit is claimed. There is no similar limitation with respect to the auto-enrollment credit.