Tax Credits for Retirement Plan Start-up Costs

Posted on Feb 15, 2022

Retirement plans can help employers attract and retain workers and improve morale. If you’re a small business owner considering a qualified retirement plan for employees, you have an incentive from the government to proceed. The SECURE Act passed in 2019 allows a tax credit of up to $5,000 for three years for plan start-up costs, which can significantly lower your out-of-pocket expenses.

 Employers eligible to claim this credit must meet the following criteria:

• You employ 100 or fewer workers who received at least $5,000 in compensation from you for the preceding year;
• You have at least one plan participant who is a non-highly compensated employee (NHCE); and
• In the three tax years before the first year that you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.[1]

Eligible start-up costs include “ordinary and necessary” costs to set up and administer the plan, as well as to educate employees about the plan. The amount of the tax credit is half of your eligible start-up costs, up to the greater of $500 or the lesser of $250 multiplied by the number of non-highly compensated employees (NHCEs) eligible for plan participation, or $5,000. Even better, small employers can earn an additional $500 tax credit in each of the three years by adding an automatic enrollment feature to their plan. The tax credit can be claimed in the first taxable year that the auto-enrollment starts.

When combined, employers can reap up to $5,500 per year in tax credits, totaling $16,500 for three years. There’s no better time than now to take advantage of these tax credits and offer a retirement plan to your employees. It’s a win-win: you’ll have an advantage in recruiting and retaining quality employees while saving on plan start-up costs, and employees benefit by preparing for their eventual retirement.

This material is provided for informational purposes only, and is not intended as authoritative guidance, legal advice, or assurance of compliance with state and federal regulations.