IRS SECURE 2.0 “Grab Bag” Guidance – plan startup/contribution incentives

This is the third of our articles on recent IRS “Grab Bag” guidance on certain provisions of SECURE 2.0 (Notice 2024-02) – guidance with respect to SECURE 2.0’s plan startup/contribution incentives.

Background

SECURE 2.0 includes –

Increased startup costs credit: An increase in the 3-year credit related to small employer startup costs for employers with no more than 50 employees from 50% to 100% of startup costs.

New contributions credit: A new 5-year credit for matching and nonelective contributions (to qualified plans other than DB plans) for employers with no more than 100 employees. The credit is limited to $1,000 per year for any employee whose wages are $100,000 or less. The credit is a percentage of the contribution made with respect to the employee, equal to: 100% for the first taxable year in which the plan is established; 100% for the second taxable year; 75% for the third taxable year; 50% for the fourth taxable year; and 25% for the fifth taxable year. The credit is phased-out for employers with more than 50, but no more than 100, employees.

Guidance

The Grab Bag guidance:

• Re-affirms that the 5-year contributions credit is a separate credit, not subject to the limits on the startup costs credit.

• Clarifies the timing requirements for eligibility for the startup costs credit:

  • The startup costs credit is available for the three year period (the “startup costs credit period”) beginning with the taxable year the plan is established or, at the employer’s election, the year before that.

  • An employer is eligible for the startup costs credit only if (1) it had no more than 100 employees for the taxable year preceding the startup costs credit period and (2) has no more than 100 employees for the taxable year for which the startup costs credit is claimed or is within the statutory 2-year grace period. (Briefly, the statutory grace period provides that, except in the case of acquisitions, an employer that satisfies the “no more than 100 employees” rule in year one “will be treated as an eligible employer for the two years following the last year the employer was an eligible employer.”)

  • The increased startup credit is subject to similar rules, substituting 50 employees for 100 employees.

  • For purposes of these rules, a plan is treated as being established on the date it becomes effective for the employer.

• The timing requirements for eligibility for the contributions credit work in a similar way:

  • The 5-year contributions credit period begins with the first taxable year during which the eligible employer plan is established.

  • An employer is eligible for the startup costs credit only if (1) it had no more than 100 employees for the taxable year preceding the contributions credit period and (2) has no more than 100 employees for the taxable year for which the contributions credit is claimed or is within the statutory 2-year grace period.

  • The $100,000 limitation on employees taken into account for the contributions credit only applies to wages, not earned income. Thus, for example, the credit may be taken for a self-employed individual or a partner with significant “earned income” but no “W-2” wages.

  • The contributions credit is taken in the same taxable year that a deduction would be.

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In our final article in this series, we will briefly review/note other “Grab Bag” guidance relevant to plan sponsors.