How Does SECURE 2.0’s Start-Up Tax Credit Apply to Recently Started Plan?

Q: I read your Ask the Experts column regarding the limits when contributions are made by a physician to his/her own private practice, as well as to an unrelated hospital plan. I am a physician in the same situation as the article, with a for-profit private practice and employment at an unrelated hospital. Assuming that this limit remains in place, is the deductibility of employer contribution to my private practice plan affected by this rule as well? Is my ability for my private practice plan to take the start-up tax credit similarly affected? I started my private practice plan in 2021, so I believe I am still within my three-year window to take a start-up credit, if I am reading the Secure Act 2.0 guidance correctly.

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: The good news is that the contribution limits described in our column, which are indeed still effective under current law, have nothing to do with your private practice retirement plan deductions and tax credits, other than the fact that what is contributed to your hospital’s 403(b) plan may impact the amount of your contributions to your private practice plan. You should also note that the tax credits were recently enhanced by the SECURE 2.0 Act of 2022; assuming that for the three-year period prior to 2021, your private practice did not maintain a retirement plan for its employees (and the practice did not benefit from another plan of an entity that owned/controlled it), then in 2023 you would be eligible for a tax credit for 100% of retirement plan start-up costs up to $5,000, assuming your private practice has less than 50 employees.

SECURE 2.0 also added another credit—available for the first five years of a new plan—of an applicable percentage of employer contributions to a defined contribution plan up to $1,000 per employee earning wages of $100,000 or less. In your case, since you are in Year 3 of your new plan, the applicable percentage of employer contributions is 75%; it will drop to 50% in 2024 and 25% in 2025. You should also note that you cannot take a deduction and a tax credit for the same amounts.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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