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. 

Eligible Employer:

  • 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. 

Eligible Expenses:

  • 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.  

Tax Credit:

  • 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.

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