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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

Tax credit: who’s eligible?

It’s officially called the “Credit for Small Employer Pension Plan Startup Costs” and employers can claim the credit if:

  • They have fewer than 100 employees who were paid at least $5,000 in the prior year.
  • All participants aren't highly compensated – at least one must be considered non-highly compensated. “Highly compensated” means owning 5 percent or more of the business or earned more than $120,000 in the last year.
  • 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 credit is 50 percent of necessary eligible startup costs; with a max of $500 per year.


What’s an eligible startup cost?

Eligible 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 percent 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.