Download The Companion Document

When we talk about new retirement plans, we usually focus on the savings advantages they grant to business owners or the big-picture advantages of helping employees achieve ongoing financial wellness. Tax credits granted to plan sponsors are another important, but sometimes opaque, piece of this puzzle.

When your client starts a new qualified retirement plan, SEP, or SIMPLE IRA, they may be eligible to claim tax credits for the first three years of the plan.

A plan sponsor is eligible to claim this tax credit if three conditions are met: 

  • In the previous year, they had 100 or fewer employees who received $5,000 or more in compensation,
  • they had at least one plan participant who was a “non-highly compensated employee,”
  • and, in the last three years, they were not already sponsoring a DIFFERENT qualified retirement plan that was benefiting the same group of plan participants. In other words, a Sponsor can’t change to a new plan every three years and get a new tax credit every time.

The tax credit a new plan sponsor can claim is equal to half of their “eligible” startup costs, but it caps at $500 each tax year.

An “eligible” startup cost includes any typical expense that’s necessary to set up a new plan, perform ongoing administration for that plan, or educate employees about their new options.

A quick note: a plan sponsor can claim this tax credit for those eligible startup costs OR deduct them as business expenses on their tax return, but NOT both. Work with your client to determine which strategy is most effective for their situation.

So, when can an employer claim these tax credits?

A plan sponsor may begin claiming the credit in the tax year BEFORE the plan becomes effective. For example, if your client’s business decides to enact a qualified retirement plan that begins to take effect in 2021, your client may claim the credit when completing their tax return for 2020. Your client is also allowed to carry it forward to future tax years if, for example, they can’t use it in the current tax year.

These tax credits can be an important tool in helping employers offset the costs of setting up a new retirement plan for their business. As with many of our previous topics, it’s important to understand your client’s unique needs and circumstances so that you can guide them toward the financial decisions most prudent to their specific situation. 

If you have any questions about new plan tax credits, don’t hesitate to reach out to chat.  We’re here to help.