Payroll, Here Are Your Articles for Wednesday, July 07, 2021
Is this email not displaying correctly?
View it in your browser
Friend Me on Facebook Follow Me on Twitter Connect with me on LinkedIn
Website Services Resources Contact Us About Us Blog
Share Save

Retirement Plan Startup Costs Tax Credit

 

A tax credit for small-employer pension plan startup costs may be awaiting you. You may be able to claim a tax credit of up to $5,000 when you set up an SEP or a SIMPLE IRA or a qualified plan such as a 401(k). You qualify to claim this credit if you meet all these conditions:

  • 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 not a highly compensated employee.
  • In the three tax years before the first year you're eligible for the credit, your employees didn't receive contributions or accrue benefits in another plan you sponsored.

The credit is 50% of your eligible startup costs, up to the greater of these two amounts:

  • $500.
  • The lesser of these two amounts:
    • $250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan.
    • $5,000.

You may claim the credit for ordinary and necessary costs to set up and administer the plan and to educate your employees about the program.

You can claim the credit for each of the plan's first three years and may choose to start claiming the credit in the tax year before the plan becomes effective. You can't deduct startup costs and claim the credit for the same expenses. However, you aren't required to claim the allowable credit.

If you add an auto-enrollment feature to your pension program, you can claim a tax credit of $500 per year for a three-year taxable period, beginning with the first taxable year. However, you should know that adding that feature adds two major administrative responsibilities to a plan:

  1. Distributing an annual notice to eligible employees that explains the feature, including the employees' right to make their own deferral election.
  2. Withholding wages from automatically enrolled participants at the plan's default deferral rate.

Claim the tax credit by filing IRS Form 8881 with your tax return. Most retirement plans commonly offered by employers qualify, including:

  • Traditional pension plans.
  • 403(b) plans.
  • Profit-sharing plans.
  • Money purchase pension plans.
  • SEP IRAs and SIMPLE IRAs.

If you recently acquired or started a new business and are ready to put more money into employee benefit plans, you can look into this credit to help with the costs of administering pension programs.

 
Share Save

Your Comments

Saved Articles
Comments and Feedback
Refer A Friend
Your Privacy
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
Powered by
Copyright © All rights reserved.

This email was sent to: robert@payrollpartners.com

Mailing address: 3001 Medlin Dr. Ste 125, Arlington, TX 76015