Tax advantages of startup retirement plans
Consider when setting up a retirement plan
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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.
What next?
Every business is unique – share the good tax news with clients, but suggest they talk with a tax advisor.