Employee Benefit Plans

It’s important to review employee benefit offerings to ensure you’re receiving maximum tax benefits while providing plans that will attract and retain qualified employees.

TAX CREDITS FOR SMALL BUSINESS RETIREMENT PLANS

Small business retirement plan tax credits can be up to $5,000. This credit is designed to provide small business owners with an incentive to provide access to a retirement plan for their employees. Another $500 in tax credits each year for up to three years is available for businesses that enroll new hires automatically. The maximum auto-enrollment contribution for the first year of employment is 10% of compensation. After the worker’s first year, the SECURE Act allows safe harbor plans to automatically increase employee contributions up to a maximum of 15% of compensation. Employees must have the choice to opt out of auto-enrollment.

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.

“CADILLAC” EMPLOYEE HEALTH CARE PLAN TAX REPEALED

The Affordable Care Act imposed a 40% tax on certain high-end employee health
plans, which was slated to become effective in January 2022. Congress has repealed it entirely.

MULTIPLE EMPLOYER PLANS

The SECURE Act allows employers of all sizes to collaborate and 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 into MEP arrangements because of the “One Bad Apple” rule. Under this rule, if one-member employer had problems
complying with ERISA requirements, the entire plan could be disqualified. This change, reduces employer risk by allowing for the non-compliant plan to be separated from the MEP, leaving the remaining plans under the MEP intact.

TUITION DEDUCTION

Employers that pay qualified tuition expenses or student loan payments for employees can continue to deduct those expenses until December 31, 2025.

COMPLIANCE PENALTIES INCREASED

Fines and penalties for non-compliance with ERISA requirements are generally $250 per day with a maximum penalty of $150,000 depending on the type of non-compliance.

QUALIFIED RETIREMENT PLAN OFFSET

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 plus 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

QUALIFIED PLAN LIMITS

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 $285,000 in 2020. In 2021, the limit increases to $290,000.

ESOPs

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 $1,150,000 in 2020, and $1,165,000 in 2021. The dollar amount used to determine the lengthening of the five-year distribution period is $230,000 in 2021.

TRANSPORTATION BENEFITS

The corporate tax break for employer-paid transportation benefits was repealed. However, it is still tax-free to employees.

EMPLOYER FMLA TAX CREDIT EXTENDED

The Employer Family Medical Leave Act credit, originally set to expire at the end of 2019, has been extended through 2025. This credit is equal to 12.5% to 25% of eligible wages paid to low-and moderate-income employees while they
are on family or medical leave. If your employees have taken medical leave due to COVID-19, talk with your tax professional about COVID-19 sick leave tax credits.