Increased small employer plan start-up credit
Eligible small employers may claim a general business credit of up to $5,000 for the cost of establishing a pension plan, such as a SEP or SIMPLE plan, for eligible employees. An eligible employer is one with 100 or fewer employees who received at least $5,000 in compensation the previous year. The credit is allowed for the year the plan is established and each of the two subsequent years.
For plan years starting after Dec. 31, 2022:
- The credit is increased from 50% to 100% of start-up costs for employers with 50 or fewer employees. There is no change to the maximum credit amount.
- A new credit of up to $1,000 per employee is allowed for employer contributions to the plan for the first five tax years of the plan. The credit is reduced for employers with 51-100 employees.
You claim this credit on Form 8881, Credit for Small Employer Pension Plan Startup Costs, Auto-Enrollment, and Military Spouse Participation.
Military spouse retirement plan participation credit
Starting in tax years after Dec. 29, 2022, eligible small employers may claim a general business credit up to $500 for each eligible military spouse employee. Generally, an eligible employer is one with 100 or fewer employees who received at least $5,000 in compensation the previous year. An eligible military spouse is one who was married to an active member of the uniformed services on or before the first date of employment. The credit is available for the first three years of the employee’s participation in the plan.
You claim this credit on Form 8881, Credit for Small Employer Pension Plan Startup Costs, Auto-Enrollment, and Military Spouse Participation.
SIMPLE plan contribution increases
The Act increases contribution limits for SIMPLE IRAs and SIMPLE 401(k)s starting in 2023.
- The annual salary reduction or elective contribution limit increases from $14,000 to $15,500.
- The annual catch-up contribution for participants age 50 and older increases from $3,000 to $3,500.
These amounts are inflation adjusted after 2023. The increased limits apply automatically to employers with 25 or fewer employees who received at least $5,000 in compensation for the previous year. Otherwise, the employer must make an election for the increased limits to apply.
New exception to the 10% additional tax on early distributions for terminally ill individuals
Starting with distributions made after Dec. 29, 2022, the Act provides an exception to the 10% additional tax for distributions made to a terminally ill individual. The exception applies to both IRAs and employer plans. A terminally ill individual is one who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of the certification. The certification must be made on or before the date the employee receives the distribution.
(You should use exception code 20 on line 2 of Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.)
SIMPLE IRA and SEP contributions to Roth IRAs
Starting after Dec. 31, 2022 employees who participate in SIMPLE IRA or SEP arrangements may elect to have a Roth IRA as the IRA to which plan contributions are made.
Roth IRA contributions whether made by the employee or employer are not excludable from the participant’s gross income, as they are considered paid into with after-tax money.
- Employee salary reduction contributions are included on Form W-2. They are subject to income tax withholding, FICA, and FUTA.
- Employer nonelective or matching contributions are reported on Form 1099-R using code 2 or 7 in box 7 (as if the contributions were made to a traditional IRA and immediately converted to a Roth IRA).
Employers may make nonelective or matching contributions only for employees who affirmatively elect the Roth IRA option.
Election to treat employer matching contributions as Roth contributions
Employees who participate in employer retirement plans may elect to have employer nonelective or matching contributions treated as designated Roth contributions. The change applies to contributions made after Dec. 29, 2023, and plans must be amended to allow for the election. Employer designated Roth contributions are not excludable from employees’ gross income. They are reported on Form 1099-R with code “G” in box 7. That is, they are treated as if a contribution had been made to a non-Roth account and immediately rolled over to a designated Roth account as an in-plan rollover.