Retirement Plan Startup Tax Credit

The need for talented and qualified professionals is a priority for every growing and established company.

Management is always on the lookout for professionals that can help take them to the next level. However, to attract talent, the company must offer a benefits and compensation package on par with others in the industry and marketplace. For small businesses, this can be a challenging task because of the high costs sometimes associated with plan establishment and management. The good news is that the IRS offers qualifying small business a tax credit, the Retirement Plan Startup Tax Credit, designed to help offset the cost of establishing a qualifying retirement plan. This includes many of the ordinary and necessary startup costs. To help clients, prospects and others take advantage of the credit, Hanson & Co has provided a summary of key points below.

Eligible Employers

Small businesses that recently established or are planning to establish a retirement plan may be eligible to receive a tax credit for expenses incurred to implement the plan in addition to any tax deduction received for plan contributions.

To qualify for the credit, employers must satisfy all three conditions below:

  • Have 100 or fewer employees who received at least $5,000 in compensation in the preceding year

  • Have at least one plan participant who is a non-highly compensated employee as defined by the plan

  • In the three tax years before the first year of startup tax credit eligibility, the majority of eligible employees must not have received contributions or accrued benefits in another plan sponsored by the same employer, a member of a controlled group that includes the employer or a predecessor of either

Eligible Expenses andLimitations

Expenses eligible for the tax credit include those that are ordinary or necessary for the startup of the plan, including:

  • Expenses incurred to establish the plan

  • Administrative fees

  • Costs incurred to educate employees about the plan

The tax credit is limited to 50% of the first $1,000 in expenses – or a maximum of $500 – but reduces the amount of taxes owed on a dollar-for-dollar basis. The credit may be claimed for a maximum of three years (beginning in the tax year prior to the plan becoming effective if elected) and is nonrefundable, meaning that the credit cannot generate an income tax refund. However, the credit can be carried back or forward to other tax years if it exceeds the current tax year liability.

For employers who don’t owe taxes, they may benefit from choosing to treat the pension plan startup costs as regular deductible business expenses. However, you cannot deduct and claim the tax credit for the same expenses.

Contact Us

Offering a retirement plan to employees is practically the standard in today’s business environment. If a company doesn’t offer a plan then it’s possible they may lose the opportunity to attract new and talented employees. If your small business is interested in creating a retirement plan and would like to see if you qualify for the credit, Hanson & Co is here to help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.