Did you recently acquire or start a new business? Are you ready to put more money into employee benefit plans? 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. Here’s how.

What is the credit?

The credit for small employer pension plan startup is a dollar-for-dollar reduction of the company’s tax bill.

Who is eligible?

You qualify for 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 – generally someone who makes $120,000 or less per year and who is not an owner of the company; and
• In the three 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.

What costs are eligible?

You may claim the credit for ordinary and necessary costs to:

• Set up and administer the plan
• Educate your employees about the plan

What is the amount of the credit?

The credit used to be 50% of your ordinary and necessary eligible startup costs up to a maximum of $500 per year.

As of January 1, 2020, the amount of the credit is 50% of your eligible startup costs limited to $250 per employee per year, but the minimum credit amount is $500(even if you have only 1 qualifying employee) and the maximum credit amount is $5,000 (even if you have more than 20 qualifying employees).

When can you claim the credit?

You are able to claim the credit for each of the first 3 years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

If you can’t use the credit in the current year, it is part of the general business credit so you can carry it back or forward to other tax years.

Can you deduct the startup costs and claim the credit for the same expenses?

No, you cannot.

Where is the credit claimed?

You claim the credit on Form 8881, Credit for Small Employer Pension Plan Startup Costs.

Questions? Contact us.