Small Employer Credit for Retirement Plan Start-Up Costs
For small employer retirement plans, a tax credit of up to 50% of the first $1,000 in “eligible start up costs” may be available to offset establishment and administration costs. This credit is available for each of the first three years of the plan.
- Employs 100 or fewer employees who received at least $5,000 in prior year compensation (prior year is defined as the year preceding the first credit year).
- Has not established or maintained a retirement plan (qualified plan, SIMPLE, or Simplified Employee Pension plan) in the preceding three years. (Example: For a credit available in 2018, the three year period is 2015, 2016, and 2017.)
Eligible New Plans:
- Qualified defined contribution plans, qualified defined benefit plans, SEPs, and SIMPLEs. This would also include 401(k) plans and ESOPs.
- Must cover at least one non-highly compensated employee.
- Include any ordinary and necessary expenses paid or incurred in connection with the establishment and administration of an eligible employer plan, or the retirement-related education of employees with respect to the eligible employer plan.
- Eligible expenses may be incurred and credited in the year preceding the actual effective date of the plan.
- Maximum credit is $500 for the first credit year and each of the two tax years immediately following the first credit year.
- No deduction is allowed for the portion of startup costs taken as a credit. (Example: If an employer’s eligible costs are $1,750 and the maximum credit of $500 is used, $1,250 remains as a deductible expense.)
- This credit is subject to the general business credit rules. Those rules allow a carryback of unused credits.