Tax Credit for Plan Startup Costs

The SECURE Act Provides Tax Credits for New Plans Established After 2019:

Small employers could receive a tax credit of 50% of the cost of establishing and communicating a retirement plan to employees for the year in which it was established and the two tax years following for plan years after 2019.

A small business is eligible if:

  • The business has 100 or fewer employees who received at least $5,000 in compensation for the preceding year.

  • The plan must cover at least one non-highly compensated employee.

  • The plan must cover employees who did not benefit from a prior plan offered by the employer in the three tax years before the first year of eligiblity for the credit.

The tax credit available is the greater of $500 OR the lesser of $250 for each NHCE who is eligible to participate in the Plan, or $5,000.

The tax credit is only available when an employer is establishing a new retirement plan. If the employer offered a retirement plan at any time during the previous three years, which covered substantially the same employees as the new plan, the tax credit is not available.

The tax credit is not a deduction. The tax credit reduces the employer's tax liability dollar-for-dollar. If this tax credit calculated is equal to $2,000, then the employer's tax liability is reduced by $2,000.

The SECURE Act provides an additional $500 annual credit for 3 years for the implementation of an Automatic Enrollment feature 2020 or later.

A new Plan that implements Automatic Enrollment would be eligible for both credits.

Tax Credit In Action

ABC Construction Company has 20 employees and one owner in the first plan year. Document implementation is $1,500, record keeping set up is $750 and annual administration is $2,500. Tax credit would be $4,750 * 50% = $2,375!

Broker compensation (if paid outside the plan) as well as third party fiduciary services also qualify.

In order to qualify for the $5,000 annual maximum you would need annual combined costs to be $10,000 or more. That means any employer with 40 or more non-highly compensated employees would qualify for the maximum credit!