How Recordkeepers Can Make the Most of Secure 2.0 Startup Tax Credits

The retirement industry is on the precipice of explosive growth. Alarmed by Americans’ lack of retirement savings, the US government has enacted new legislation to incentivize small businesses to offer 401(k) plans and to increase employee participation. Key to those incentives are the SECURE Act 2.0 tax credits.

SECURE Act 2.0 established three tax credits for small businesses that offer retirement savings plans to their employees—two of which are specific to plans established after 2022—including a credit that covers the startup costs of establishing a plan for the first time. 

This presents a golden opportunity for 401(k) administrators: there has never been a better time for small businesses to offer a retirement plan. Recordkeepers are in a position to capitalize on this push, leveraging the urgency SECURE Act 2.0 tax credits are driving among small employers to earn new business and increase revenue from existing customers.

In this article, we’ll cover the new requirements and tax credits of the SECURE Act 2.0, how they’re driving more small businesses to offer retirement plans, and what 401(k) recordkeepers and TPAs need to do to stand out and win these sponsors’ business. 

What are the SECURE 2.0 tax credits?

The Setting Every Community Up for Retirement Enhancement Act of 2022—better known as SECURE Act 2.0—aims to boost individual retirement savings and encourage employers to offer attractive retirement plans by reducing startup expenses. The three tax credits offered under the new provisions are:

• Employer contribution tax credit
• Startup cost tax credit
• Automatic enrollment tax credit

Employers that take advantage of all three tax credits could be eligible for up to $55,500 in tax credits in the first year alone—an enormous potential cost savings. 

The employer contribution and startup cost credits only apply to plans established after 2022; the automatic enrollment credit is also applicable to older plans. All three credits are only available to businesses with fewer than 100 employees.

Employer contribution tax credit

Sponsors offering new 401(k), SEP, and SIMPLE plans are eligible to receive tax breaks for employer contributions, up to a maximum of $1,000 per employee per year. Businesses with fewer than 50 employees can claim up to 100% of their contributions; larger businesses’ claims are reduced by 2% for every employee over 50. These credits can be claimed for up to five years; the percentage decreases each year by 25%, beginning in year three. 

Startup cost tax credit

Sponsors can also claim the startup and maintenance costs of new plans for up to three years. These credits cover 100% of plan costs for employers with fewer than 50 employees and 50% for employers with 51–100 employees. Sponsors can claim $250 for each eligible Non-Highly Compensated Employee (NHCE), up to a maximum of $5,000.

Automatic enrollment tax credit

This is the only credit that applies to retirement plans in place before 2023. Sponsors that incorporate automatic enrollment into their plans under the Eligible Automatic Contribution Arrangement (EACA) before the mandated deadline of January 1, 2025 can earn a $500 annual credit for up to three years.

‍Also read: Secure Act 2.0 Implementation Plan

How can 401(k) recordkeepers leverage SECURE Act 2.0 tax credits?

401(k) recordkeepers have an opportunity to take advantage of the urgency SECURE Act 2.0 is driving among small employers, both through compliance mandates and tax incentives.

Traditionally, small businesses have been less likely to offer retirement plans for a variety of reasons. In addition to the startup costs, small teams may be particularly concerned about the administrative burden of a retirement plan and intimidated by the stringent regulations that govern them. 

That means that while 401(k) recordkeepers can expect an influx of new sponsors seeking their services, they’ll need to be prepared to accommodate these sponsors’ unique needs to stand out among the competition and win new business and establish positive, long-term relationships with customers.

This all boils down to three key strategies:

1. Invest in the sponsor experience — Small businesses are just that—small. They have less bandwidth to take on the administrative burden that comes with managing a retirement plan. To avoid these additional complexities, 74% of small businesses do not offer a 401(k) plan to their employees. Recordkeepers can leverage this gap and win more deals by offering the easiest user experience.
2. Simplify compliance with auto-enrollment and eligibility checks — Retirement plans established after 2022 are subject to new regulations, some of which are already in place and some that will go into effect in January 2025. Sponsors will seek out providers that are best suited to keep them compliant and reduce their risk of incurring fines.
3. Offer world-class security — Retirement plans hold tons of sensitive data, so recordkeepers need to be prepared to demonstrate how they’re keeping sponsor and employee data safe.

Invest in the sponsor experience 

As a first-time sponsor, many employers are wary about the hassle of plan administration and the degree of resource involvement. To deliver a high-quality customer experience, recordkeepers need to ensure fast sponsor onboarding, ease of using the plan administrator’s service, and reduced administrative work for the plan sponsor. 

Traditional methods of pulling employee data and setting up data-sharing processes are highly time and resource-intensive tasks—leading to lengthy onboarding processes for sponsors. Employers need to spend hours on HR administrative work each pay period to keep the 401(k) running smoothly, which can negatively impact customer satisfaction.

Recordkeepers that want to take advantage of the new business spurred by the SECURE Act 2.0 tax credits will need to offer an alternative that minimizes the sponsor’s responsibility. Payroll integrations offer a solution—when the recordkeeper can pull data directly from the sponsor’s payroll and send changes in contributions and deductions back, much of the manual work is eliminated, which reduces the burden on both the sponsor and the recordkeeper.

These 401(k) payroll integrations, powered by APIs, are game changers—but they’re also expensive and time-consuming to build and require ongoing maintenance. Rather than trying to build integrations to multiple payroll systems in-house, recordkeepers can leverage unified APIs to gain access to a multitude of payroll providers in the time it takes to build just one integration.

Simplify compliance with automatic enrollment and eligibility checks

SECURE Act 2.0 set forth new requirements, including the auto-enrollment of employees and new eligibility criteria for part-time employees and catch-up contributions. Recordkeepers must be prepared to quickly and accurately check employee eligibility and enroll them in their sponsors’ plans to maintain compliance. 

All new retirement plans established after 2022 are required to have automatic enrollment enabled by 2025, meaning employees have to opt out of participation, rather than opting in. 401(k) recordkeepers that make it easier for employers to conduct eligibility checks and simplify the process of automatically enrolling employees in specific plans will win against the competition.

Also read: SECURE Act 2.0 Timeline for Retirement Plan Providers.

However, there are two issues that can make auto-enrollment problematic for plan administrators:

1. Data validation: Many recordkeepers and plan sponsors rely on manual data entry for enrolling employees in retirement plans, which is prone to error and leads to data inconsistency across platforms—making it difficult to conduct eligibility checks.
2. Timeliness: Manual methods of enrolling employees can also lead to missed deadlines and inaccurate contribution details, risking penalties for non-compliance.

Both of these problems can be solved by removing the element of manual data entry. Payroll and HRIS integrations give retirement plan providers real-time access to employee census and payroll data, allowing them to perform eligibility checks and automate plan enrollment based on information from the employer’s source of truth. When the payroll integration offers both read and write capabilities, the recordkeeper can also automatically update changes to employee deductions and employer contributions directly within the sponsor’s payroll systems—no manual intervention required.

Offer world-class data security

Retirement is a heavily regulated industry due to the sensitive nature of employment data, such as personally identifiable information (PII), bank details, and so on. Many small businesses starting 401(k) plans for the first time are concerned about ensuring compliance and safeguarding data. 

Although plan sponsors tend to delegate data cybersecurity duties to recordkeepers, they have a fiduciary duty to ensure that their recordkeepers follow maximum security practices. As a result, to win customer confidence, all 401(k) plan administrators need to ensure total transparency and comply with industry standards like SOC2 and HIPAA when dealing with employment data.

Once again, integrations can play a pivotal role here: because integrations eliminate the need for manual data-sharing through CSV uploads or SFTP, they incur less risk that sensitive data could be exposed. Unified API providers typically come with industry-standard security for data in transit and data at rest, offering peace of mind for both the recordkeepers that use them and the employers whose data travels through them.

Create best-in-class customer experiences with Finch’s Unified Employment API

SECURE Act 2.0 tax credits stand to drive many more small businesses to offer retirement plans for the first time. As a 401(k) recordkeeper, you have an opportunity to capitalize on this movement and win new business; but doing so will require a user experience that reduces the burden on sponsors and ensures compliance. 

Finch’s Unified Employment API can help by unlocking integrations to 200+ HR and payroll providers, covering 88% of US employers. That affords your team to focus your efforts and resources on providing innovative solutions for your sponsors. 

Talk to our sales team today to explore the ways you can use Finch to help small businesses start a 401(k) plan and take advantage of the tax credits afforded by SECURE Act 2.0.

Frequently asked questions

Which employers are eligible for a SECURE Act 2.0 tax credit?

Employers must meet the following criteria for employer contribution and plan startup tax credits:

• Have fewer than 100 employees who earned at least $5,000 in compensation in the previous year
• Include at least one Non-Highly Compensated Employee (NHCE) in the plan
• Have not provided retirement plans covering the same employees in the last three years

All new and existing 401(k) plans that add the automatic enrollment feature under EACA before the January 2025 deadline are eligible for a $500 automatic enrollment credit for up to three years.

Are businesses in MEP or PEP eligible for a SECURE Act 2.0 tax credit?

Yes, all eligible employers, including those in a multiple employer plan (MEP) or pooled employer plan (PEP), can avail the small business tax credits under SECURE 2.0.

Which plans are eligible for tax credit?

The following plans are eligible for small business tax credit under SECURE 2.0:

• SEP, or simplified employee pension 
• SIMPLE IRA, or savings incentives match plan for employees
• 401(k)
• 403(b)

What are the qualified costs for the startup cost tax credit?

Qualified startup costs refer to the essential expenses a small business incurs for:

• Setting up and managing a qualified retirement plan, including recordkeeper fees and third-party administrator charges
• Educating employees about the plan

The credit doesn't cover costs paid through plan assets or investment expenses. 

What is the best way to auto-enroll employees in retirement plans?

The most effective method for 401(k) plan sponsors and recordkeepers to automatically enroll participants into retirement plans is through integrations with the sponsor’s HRIS and payroll systems. Finch’s Unified Employment API offers access to over 200  HRIS and payroll providers, allowing automatic eligibility checking and enrollment based on employment data directly from the employer's source of truth. Contact us to learn more.