Small Employer Tax Credits for Starting a Company Retirement Plan

Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.) A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.

The credit is 50% of your eligible startup costs, up to the greater of $500; OR the lesser of:

$250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan OR $5,000.

You qualify to claim this credit if:

• You had 100 or fewer employees who received more than $5,000 in compensation from you for the preceding year.
• You had at least one plan participant who was a non-highly compensated employee (NHCE).
• In the three tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

The legislation also created a new small employer automatic enrollment credit of up to $500 per year to employers to defray startup costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment.

Q&As

How long does the credit apply?

The credit applies for up to three years.

How do not-for-profit organizations receive the 403(b)-start-up credit for offering new plan? Is the credit applicable to non-profit organizations?

The credit is not applicable to tax-exempt entities because it is not a refundable credit. Therefore, the credit is not available for the adoption of a 403(b) plan.

Does the credit include first year admin cost or specifically the start-up cost?

Eligible expenses include those incurred for establishing or administering the plan and retirement related education of employees with respect to the plan for the first three years.

I thought the auto enrollment credit was only good if put under an eligible automatic contribution arrangement (EACA) provision, any truth to that?

That is correct. The law provides that it must be an EACA to qualify for the credit. A qualified automatic contribution arrangement (QACA) feature will satisfy the definition of an EACA and will, therefore, qualify for the credit.

Does the credit include safe harbor plans, too?

Yes, the credit is for the first three years of a plan and it does not matter what features are in the plan for those three years.

Will providers/recordkeepers provide any type of tax form to aid in the claiming of the credits?

We don’t know if providers will come up with a form. But the IRS will need to update Form 8881 so that would be a worksheet.

Those credits are for each year, correct?

Correct.

So, $5,000 each year or $15,000 over three years?

Yes, per year. For taxable years that begin after Dec. 31, 2019, the credit is equal to 50% of the eligible expenses. The minimum credit is $500, and the maximum is $250 times the number of eligible non-highly compensated employees (NHCEs), with a maximum credit of $5,000.

More than two NHCEs would not be a $5,000 credit, would it? It reads, the “lesser of $250 per or $5,000.” So, 3 x $250 = $750, so that would be $750, not $5,000, right? 

Correct. It is the lesser of $250 per NHCE or $5,000.

If a startup plan has both a startup cost for example of $1,000 but there are ongoing fees of more than $5,000, does the tax credit count towards the ongoing administration fees?        

Yes. IRC 45E(d)(1)(A) states that it is expenses for the establishment or “administration” of a plan.

The topics addressed on this page are for information purposes only and should not be construed as specific tax or retirement plan advice. Individuals should consult a tax advisor or attorney for questions regarding specific tax or legal needs.