In the final days of 2022, President Biden signed the Consolidated Appropriations Act of 2023. A part of this omnibus bill included the second group of provisions that fell into the Securing a Strong Retirement Act legislative agenda, more popularly known as the SECURE 2.0 Act. From the 90 new modifications this law created, I will highlight the most important changes to retirement planning for clinicians and practice owners. In this article I will focus on the legislation’s impact to 401K and qualified plans and in my second article I will explore non-qualified plan provisions.
Of all the conditions in SECURE 2.0, adjustments and tax credits to 401(k) and other qualified plans may impact practice owners the most. However, these expansive changes are not universally applicable at the start of this legislation. The rolling introduction of these changes has created some powerful planning options for informed practice owners. Here is a quick breakdown of what you can expect over the next several years:
Starting in 2023
- You can receive a tax credit for 100% of administrative costs (up to $5,000) related to starting a 401(k) plan.
- You can receive a tax credit for up to $1,000 per employee of employer contributions. The credit is allowable for employees making less than $100,000 per year and phases out over four years.
Introducing a 401K plan can create a tax efficient way for a practice owner to accelerate their wealth creation and mitigate their taxes. While a properly designed top-heavy plan is often the most advantageous plan design, some practice owners delay moving forward, worried about plan costs and the expense of employee contributions. The two tax credits above will dramatically decrease the expense of starting a plan and employer contributions for the first several years of the plan.
New opportunities in 2024
- You can include employee student loan payments when calculating employer contributions.
- Top-heavy testing will be eased to allow excludable and non-excludable employees to be tested separately. A move to encourage employers to provide plan access to help young employees save for retirement will begin.
For many young clinicians, their student loan balance can feel prohibitive to building a retirement nest egg. One of our greatest wealth creation opportunities is time; years of compounding interest can greatly and positively impact retirement readiness. The ability for an employer to consider qualified student loan payments for employer retirement matching creates a competitive tool for clinician owners looking to attract and retain talent.
The second tool is intended to provide business owners an opportunity to offer retirement accounts to younger employees. Traditionally, when designing a top-heavy plan to favor clinician owners and their families, employees under 21 years old, part-time workers or other defined employee classes are excluded. As the talent wars continue to persist, this type of benefit can be an additional competitive advantage to building and retaining the right team.
What’s on the horizon for 2025
- If your practice is older than three years, has more than 10 employees and is offering a new 401(k) plan, you must include both auto enrollment and auto escalation provisions.
In the following year, things become a bit more complicated.
SECURE 2.0 introduces two mandatory provisions to start-up qualified plans: auto enrollment and auto escalation. From a broad perspective on retirement readiness in our country, I am a fan of these provisions. However, these provisions will introduce administrative time and possibly plan-related expenses for practice owners.
Currently, most defined contribution plans, such as 401(k)s, require a participant to proactively enroll in the plan once they are eligible. Auto enrollment changes this from an opt-in to an opt-out provision. The plan sponsor must enroll participants with a uniform percentage of compensation for the employee, ranging from 3% to 10%.
The above auto enrollment provision will be tied to an auto escalation provision. This will require plan sponsors to automatically escalate employee deferrals on their behalf. This escalation needs to be 1% on the first day of the plan year (usually January 1) and will continue until the participant reaches at least 10% of compensation, but not more than 15%.
With these above requirements, introducing a 401(k) plan in 2023 or 2024 will allow practice owners to secure tax benefits and expand tools for retaining associate clinicians. They may benefit from a more efficient allocation of employer contributions while avoiding the administrative costs introduced in 2025.
As you can see, a properly designed qualified plan is an efficient and effective wealth acceleration tool for high-income clinical owners. SECURE 2.0 introduced cost savings in the form of tax credits, which will further the success of these plans. In addition, certain provisions can help you stand out in a competitive employee market without harming the efficacy of a qualified plan. Opening a defined contribution plan over the next several years will allow you to capture new tax credits and expand employee benefits before certain administrative responsibilities and expenses are mandatory.
About the author
As a practice integration advisor, Thomas provides comprehensive financial advisory services to dental and medical offices, including tax, pension and retirement planning. He is motivated by a passion to help medical professionals connect the hard work they put into their practices with their most deeply held values and goals, all through Buckingham’s evidence-driven approach to true wealth management.
Source:
Section 102, modification of credit for small employer pension plan startup costs. The three-year small business startup credit is currently 50% of administrative costs, up to an annual cap of $5,000. Section 102 makes changes to the credit by increasing the startup credit from 50% to 100% for employers with up to 50 employees. Except in the case of defined benefit plans, an additional credit is provided. The amount of the additional credit generally will be a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000. This full additional credit is limited to employers with 50 or fewer employees and phased out for employers with 51 and 100 employees. The applicable percentage is 100% in the first and second years, 75% in the third year, 50% in the fourth year, 25% in the fifth year and no credit for tax years thereafter. Section 102 is effective for taxable years beginning after December 31, 2022.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article.
R-23-6104