With the availability of retirement plan tax credits in the SECURE 2.0 Act, now may be an ideal time for small business owners to consider starting a retirement plan to take advantage of these tax incentives. Retirement plan startup cost tax credits have previously been available for certain employers with less than 100 employees. Starting in January 2023, business owners with 50 or fewer employees can now receive increased tax credits for the establishment and administrative costs of a new qualified plan, such as a 401(k), a simplified employee pension (SEP) individual retirement account (IRA) plan, or savings incentive match plan for employees (SIMPLE) IRA plan.
Types of Retirement Plan Tax Credits for Small Business Owners
There are a few different retirement plan tax credits available. Per the IRS, the first is for ordinary and necessary costs to set up and administer the plan, and to educate employees about the plan. The startup costs credit amount for an employer of 50 or fewer employees is determined by taking the greater of either $500 or $250 for each non-highly compensated employee (NHCE), up to a maximum of $5,000. The credit amount is reduced if the actual startup is less than the otherwise available credit.
Retirement Plan Startup Costs Tax Credit
| The lesser of: | ||||||
|---|---|---|---|---|---|---|
| 100% of the qualified startup cost for 1–50 employees (50% of qualified startup costs for 51–100 employees) | OR | Number of NHCEs | Credit Amount | Number of NHCEs | Credit Amount | |
| 1 | $500 | 11 | $2,750 | |||
| 2 | $500 | 12 | $3,000 | |||
| 3 | $750 | 13 | $3,250 | |||
| 4 | $1,000 | 14 | $3,500 | |||
| 5 | $1,250 | 15 | $3,750 | |||
| 6 | $1,500 | 16 | $4,000 | |||
| 7 | $1,750 | 17 | $4,250 | |||
| 8 | $2,000 | 18 | $4,500 | |||
| 9 | $2,250 | 19 | $4,750 | |||
| 10 | $2,500 | 20 or more | $5,000 | |||
Qualified costs include costs paid by the employer for:
- Setting up and administering the plan (third-party administrator fees)
- Record-keeping fees
- Investment advisory fees
The startup cost tax credit can be claimed for the first three years of the plan.
Also, the SECURE 2.0 Act provides for an additional credit for the amount contributed by the employer for the benefit of employees, up to $1,000 per employee. This has never been offered before. Now, small business employers may receive credit for contributions given to their employees.
The credit will phase out 2% per employee for businesses with between 50 and 100 employees, and phases out completely over 100 employees. No credit will be given to any employees making over $100,000 (indexed) per year.
Employer (ER) Contribution Tax Credit
Calculated on a per-employee basis, the lesser of:
- Actual employer contribution amount; or
- $1,000 for each employee making $100,000 or less in FICA wages
The employer contribution tax credit can be claimed for the first five years of the plan.
| Year 1 | 100% Credit |
| Year 2 | 100% Credit |
| Year 3 | 75% Credit |
| Year 4 | 50% Credit |
| Year 5 | 25% Credit |
EACA Tax Credit
Lastly, a $500 per-year credit is available for making your plan an eligible automatic contribution arrangement (EACA). This credit is available for the first three years and is available for new and existing plans that become an EACA.
$500 per-year credit for the first three years for making your retirement plan an EACA
All credits are non-refundable and must be filed using Form 8881, Credit for Small Employer Pension Plan Startup Costs, Auto-Enrollment, and Military Spouse Participation, and attached to the plan sponsor’s income tax return.
This means a small business employer with 50 eligible employees may be eligible to receive up to $5,000 in tax credits for starting a new retirement plan, plus additional credits of up to $50,000 for contributions they make to their employees. The highest possible tax credit for each year is shown in the table below.
| Credit Type | Year 1 Credit | Year 2 Credit | Year 3 Credit | Year 4 Credit | Year 5 Credit |
|---|---|---|---|---|---|
| Startup Costs | $5000 | $5000 | $5000 | ||
| ER Contribution | $50,000 | $50,000 | $37,500 | $25,000 | $12,500 |
| EACA | $500 | $500 | $500 |
If you have any questions or need assistance, please contact the Retirement Plan Consulting team from Forvis Mazars Private Client for more information.
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