Tax advantages of startup retirement plans

Consider when setting up a retirement plan

Small organizations care about their employees and want to help them retire, but cost is an issue. The good news is that there may be tax benefits for some of the costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) or a 403(b)). As always, have your client consult a tax advisor, but tax deductions and credits (which reduce the amount you pay in taxes) are available.
Tax advantages of startup retirement plans

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Tax credit: who's eligible?

As a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, effective Jan 1, 2020 the tax credit for small employers starting a new retirement plan increased from $500 annually up to a maximum of $5,000 annually for each of the first three years1

Employers can claim the credit if:

  • They have no more than 100 employees who were paid at least $5,000 in the prior year.
  • At least one, non-highly compensated employee is eligible to participate in the plan.
  • The plan is truly a startup – not a replacement for another plan. Employees can’t have received a benefit from a qualified plan from the company in the last three years.

What’s the tax credit?

The tax credit cannot exceed 50% of the qualified startup costs paid or incurred by the small employer.

What’s a qualified startup cost?

Qualified startup costs are defined by the IRS as ordinary and necessary costs to setup, administer and educate employees about a new retirement plan.

When are clients eligible?

Your clients can claim the credit for three years – starting the year before the plan is effective.

Other tax benefits

What’s more, certain other expenses can be claimed as a tax deduction (but no double-dipping – they can’t claim the same expense as a tax credit and a tax deduction):

  • Administrative fees are a tax-deductible business expense.
  • Contributions from the employer are exempt from federal, state and payroll taxes if they fall under 25% of the total compensation paid (or accrued) during the year to participating employees.

Small business retirement plans

Start-up 401(k) plans

Simply Retirement
by Principal®

Pooled employer plans

Principal® EASE

Flexible retirement plans

Principal® Flex with TPA

Principal® Flex
with TPA


Principal® Flex without TPA

Principal® Flex
without TPA
Customized retirement plans

Principal® IMPACT


What next?

Every business is unique –  share the good tax news with clients, but suggest they talk with a tax advisor.

Greater of $500 or the lesser of $250 x NHCEs eligible or $5000.
Simply Retirement by Principal® 401(k) plan recordkeeping, and administrative services are provided through Decimal, Inc. dba Ubiquity Retirement + Savings (“Ubiquity”). Ubiquity is not affiliated with any plan and investment administrative services provided through Principal Life Insurance Co. or affiliated with any company of the Principal Financial Group®.  Principal makes available the investment options for customers to select through Simply Retirement by Principal.  All other services are provided by service providers not affiliated with any company of the Principal Financial Group.  Refer to related documents and agreements for more details on plan services available.