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2023 Tax Planning Guide

Employee Benefit Plans

Employee Benefit Plans

It is important for employers to review their employee benefit plans to ensure they continue to receive the maximum tax benefits while providing benefits that attract and retain qualified employees.

Small business retirement plan tax credits are doubled starting in 2023, thanks to the SECURE 2.0 Act, and can be as much as $15,000 for three years. Businesses with up to 50 employees are eligible. The tax credit is up to 100% of plan start-up costs (up from 50%), capped at $5,000 annually, per employer (which remains unchanged) for each of the first three years. Employers with 51 to 100 employees still qualify for the original SECURE Act tax credits equal to 50% of costs.

The maximum auto-enrollment contribution for employees during the first year of employment is 10% of compensation. Employees must have the choice to opt out of auto-enrollment. After the first year, safe harbor plans may automatically increase employee contributions up to a maximum of 15% of compensation. Again, employees must have the option of opting out. Additionally, you now have until the due date for your company’s tax return filing to establish a plan and claim the credit for the previous year.

Employers of all sizes can collaborate to open “pooled plans,” or Multiple Employer Plans (MEPs) for plan years starting after December 31, 2020. Employers need not show a common interest to do so.

Until now, employers were discouraged from entering MEP arrangements because of the “One Bad Apple” rule, which disqualified the entire plan if one-member employer had problems complying with ERISA requirements. The SECURE Act, passed in late 2019, reduces employer risk by allowing for the non-compliant plan to be separated from the MEP, leaving the remaining plans under the MEP intact.

Now, through 2025, employers can make payments of up to $5,250 a year in student loan payments for each employee and receive a tax deduction for the payment. This amount is excluded from employees’ income, so it is tax-free to the employee.

Previously, employees with a defaulted plan loan who were no longer with their qualified plan’s company, or had a terminated plan, had 60 days to roll over the loan and pay withholding taxes before penalties and interest accrued. Now, they have until the tax filing deadline (plus extensions) of the following year to make a rollover.

The annual compensation limit for retirement accounts under Sections 401(a) (17), 404(l), 408(k)(3)(C) and 408(k)(6)(D)(ii) was $305,000 in 2022. In 2023, the limit jumps to $330,000. Incidentally, The SECURE 2.0 Act newly allows SEP and SIMPLE plans to allow Roth contributions starting in 2023.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period is $1,230,000 in 2022 and $1,330,000 in 2023. The dollar amount used to determine the lengthening of the five-year distribution period is $245,000 in 2022 and $265,000 in 2023.

Employers who provide some paid family or medical leave can get a credit, thanks to the Employer Family Medical Leave Act. The credit is equal to 12.5% to 25% of eligible wages paid to low-and moderate-income employees on family or medical leave.

Fines and penalties for non-compliance with ERISA requirements have increased annually and can range from a few hundred dollars to a six-figure fine. So, work with a compliance professional.


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