Small Businesses must balance two important and competing objectives: attracting employees with a robust benefits package, and keeping business costs low. Fortunately, a low cost 401(k) plan can help to bridge the gap between these disparate priorities. Offering a 401(k) Plan, may qualify your business for a startup cost tax credit, which can offset some of the costs of installing a 401(k) Plan.

The Credit for Small Employer Pension Plan Startup Costs covers 50% of all the ordinary and necessary eligible startup costs companies incur to set up a qualified retirement plan, up to a maximum of $500 per year. These startup costs include any necessary plan setup and administration fees, as well as expenses associated with employee education. The result is a reduction in the amount of tax a business owes.

Employers may qualify for the credit if:

  • They had 100 or fewer employees who received at least $5,000 in compensation for the preceding year
  • They had at least one plan participant who was a non-highly compensated employee (did not own 5% or more of the company and received less than $120,000 in compensation, or was in the bottom 80% of compensation for employees)
  • No employees received benefits in another qualified retirement plan by the same employer

If your company meets these qualifications, you can claim the credit for each of the first three years of the plan (so long as you continue to qualify). It’s part of the general business credit, and if you can’t use it in the current year, you can carry it backward or forward. Be sure to bring this to the attention of your CPA when you establish a Plan.

An important caveat to note is that if you’re claiming the credit for certain plan expenses, you can’t deduct those same expenses. For example, if you’re claiming a $500 credit for a $1,000 plan set-up fee, you can’t also deduct that cost from your company’s income. You can take a tax deduction for the expenses in lieu of the credit, but taking the credit, when available, is almost always a better deal! You can, however, deduct any additional expenses in excess of the credit.

 

Example of Plan Startup Tax Credit

ABC Co. wants to start a 401(k) Plan for its small business. ABC Co. currently has 3 employees and wants to help them save for retirement.

 

 SPS 401(k) Year 1  Year 2  Year 3 
 Plan start-up fee  $425* $0  $0 
 Administration Fee  $600 $600  $600 
 Total Cost Per Year $1025  $600  $600 
 Credit $500 $300 $300
 Actual Cost $525  $300 $300

 *50% Discount on Standard Installation Fee

 

ABC Co. can take a credit of $500 for the first year of the Plan. In years two and three, if ABC Co. still qualifies, its costs would be $600 annually and would be offset by a $300 tax credit.

Steidle Pension Solutions, LLC’s low and transparent pricing in combination with the plan startup tax credit drives down employer costs of offering a 401(k) Plan.

Disclaimer: This content is provided for informational purposes only and is not intended to be construed as tax or legal advice. You should consult a tax professional to determine whether your company qualifies for the tax credit.