Tax advantages for start-up retirement plans

Enhancements to retirement plan tax credits for small business owners

The SECURE 2.0 Act of 2022 introduced important enhancements to the SECURE Act of 2019 tax credits to help small businesses make it more affordable to start a retirement plan.
Tax advantages of startup retirement plans

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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.

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What's next?

Share this detailed information with your clients and suggest they talk to their tax professional.


*No contributions may be counted for employees with wages in excess of $100,000 (inflation adjusted). If taking advantage of this tax credit, employer contributions may not also be counted toward “start-up costs” in the start-up tax credit calculation.
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 Company® or affiliated with any company of the Principal Financial Group®. Principal makes available the Separate Accounts and collective investment trusts for customers to select them through Simply Retirement by Principal. All other services and mutual funds 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.