Some business owners hesitate to begin a 401(k) Plan for their employees because of the cost associated with Startup Plans. The IRS has a tax credit in place to offset up to 50% of these cost for most plans.
Below is an introduction to the credit from the IRS.
You may be able to claim a tax credit for some of the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan. A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.
If you qualify, you may claim the credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs.
You qualify to claim this credit if:
- You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
- You had at least one plan participant who was a non-highly compensated employee; and
- In the 3 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.
Amount of the credit
The credit is 50% of your ordinary and necessary eligible startup costs up to a maximum of $500 per year.
(For more from the IRS, please go to the government website here.)
In a recent article from 401khelpcenter.com, only 34% of small businesses offer a SEP, SIMPLE IRA, or qualified plans, whereas 64% of medium to large-sized businesses have an employment based retirement offering.
Additionally, the IRS slightly modified Form 8881 in September 2017 and an article from ASPPA, a division of the American Retirement Association in Washington, D.C., includes these important parts:
Qualified startup costs are expenses paid or incurred in connection with:
- establishing or administering an eligible employer plan; or
- the retirement-related education of employees about the plan.
ASPPA, and its three sister organizations — ACOPA, NTSA and NAPA — comprise the American Retirement Association, the premier national organization for retirement plan professionals in the industry. Based in the Washington, D.C. area, ASPPA is a non-profit professional organization with two major goals: to educate retirement plan professionals, and to create a framework of public policy that gives every working American the ability to have a comfortable retirement.