What is the Small Business Retirement Plan Start-up Tax Credit?

By Anthony L. Scialabba IV, Esq., QKA

 

What is the tax credit?

 

For the first three tax years of a plan sponsor or employer of a small business in connection with a new plan, the tax credit lowers the amount of federal taxes that a plan sponsor or employer may owe. The maximum tax credit is $500 or, if greater, $250 multiplied by the number of non-highly compensated employees eligible for plan participation, up to $5,000. The tax credit covers 50% of a plan sponsor or employer’s ordinary and necessary out-of-pocket plan expenses (100% for employers with up to 50 employees).

 

Examples of these expenses are recordkeeping fees, employee education expenses, and advisor and third-party administrator compensation. The tax credit does not apply to expenses paid from plan assets or expenses paid by participants through investment expenses.

 

There is also an “additional” tax credit applicable to defined contribution plans. The amount of this tax credit is generally a percentage of the amount contributed by the plan sponsor or employer for employees, up to a per-employee cap of $1,000. This tax credit is limited to employers with 50 or less employees and phased out for employers with 51-100 employees. The applicable percentage is 100% in the first and second years, 75% in the third year, 50% in the fourth year, 25% in the fifth year, and no tax credit for tax years thereafter.

 

What requirements have to be met for a small business to qualify for the tax credit?

 

• In the preceding year, no greater than 100 employees who received compensation of $5,000 or more;

 

• At least one non-highly compensated employee must be covered by the plan; and

 

• In the prior three tax years, the employer did not offer a plan covering substantially the same employees.

 

If you have any questions or comments with regard to the tax credit or additional tax credit, please call 856-396-0499 or email clientservices@retirewelltpa.com.