April 10, 2017

Retirement Plan Startup Tax Credit

Offering a retirement plan to employees can sometimes make the difference between getting that great hire on board and losing them to a competitor. This can be especially potent motivation for small employers. Unfortunately, starting a retirement plan – such as a 401(k), profit sharing plan, 403(b), SEP IRA or SIMPLE IRA – has associated costs involved. The IRS offers help in the form of a small business retirement plan startup cost tax credit. To help our clients, prospects and others understand how to qualify for this tax credit and the associated benefits and limitations, the key details are summarized below.

Eligible Employers

Small businesses that recently established or are planning to establish a retirement plan may be eligible to receive a tax credit for expenses incurred to implement the plan in addition to any tax deduction received for plan contributions.

To qualify for the credit, employers must satisfy all three conditions below:

• Have 100 or fewer employees who received at least $5,000 in compensation in the preceding year
• Have at least one plan participant who is a non-highly compensated employee as defined by the plan
• In the three tax years before the first year of startup tax credit eligibility, the majority of eligible employees must not have received contributions or accrued benefits in another plan sponsored by the same employer, a member of a controlled group that includes the employer or a predecessor of either

Eligible Expenses and Limitations

Expenses eligible for the tax credit include those that are ordinary or necessary for the startup of the plan, including

• Expenses incurred to establish the plan
• Administrative fees
• Costs incurred to educate employees about the plan

The tax credit is limited to 50% of the first $1,000 in expenses – or a maximum of $500 – but reduces the amount of taxes owed on a dollar-for-dollar basis. The credit may be claimed for a maximum of three years (beginning in the tax year prior to the plan becoming effective if elected) and is nonrefundable, meaning that the credit cannot generate an income tax refund. However, the credit can be carried back or forward to other tax years if it exceeds the current tax year liability.

For employers who don’t owe taxes, they may benefit from choosing to treat the pension plan startup costs as regular deductible business expenses. However, you cannot deduct and claim the tax credit for the same expenses.

Contact Us

The retirement plan startup cost tax credit can help small business owners afford to establish a retirement plan when they might not otherwise chose to do so, which in turn is good for employee morale, recruiting and retention as well as all participants’ future finances. If you have questions about this or other tax credits and incentives or if you need help with other tax or retirement plan matters, Wilson Lewis can help. For additional information, please call us at 770-476-1104 or click here to contact us. We look forward to speaking with you soon.