Tax advantages for start-up retirement plans

What are the tax credits?

Small employers with 50 or fewer employees may now apply 100% of their qualified start-up costs toward the start-up tax credit formula (employers with 51-100 employees may apply 50% of qualified start-up costs, as originally established in the SECURE Act of 2019) up to $5,000 per tax year for the first three years.

For start-up plans offering employer contributions, there is a tax credit equal to the applicable percentage of employer contributions, capped at a maximum of $1,000 per employee.*

• Applicable to small employers with 50 or fewer employees.
• For employers with 51-100 employees, the credit is phased out by reducing the amount of the credit each year by 2% for each employee in excess of 50.

Applicable percentage:

• 1st and 2nd year = 100%
• 3rd year = 75%, 4th year = 50%
• 5th year = 25%
• 6th year = 0%

What are the qualified start-up costs?

Qualified start-up costs generally refer to ordinary and necessary expenses an employer paid or incurred in connection with the establishment or administration of an eligible employer plan, and retirement plan-related employee education.

Employers should refer to IRS Form 8881 and consult their tax or legal professional for a more specific determination.

Other tax credits

Under SECURE Act of 2019, employers with up to 100 employees who add an Eligible Automatic Contribution Arrangement (EACA) are eligible for a $500 tax credit once every three years. The three-year period begins in the year in which the employer establishes a qualified employer plan with an EACA feature, or the year an existing plan is amended to add an EACA.