There are several tax credits available to employers who establish a retirement plan, such as a 401k, Simple or profit sharing plan, that can reduce your taxes directly on a dollar for dollar basis. As always, there are rules to who qualifies and limitations on the credit. Here are a few available:
Credit for Retirement Plan Startup Costs
Employers with less than 100 employees may claim tax credit of up to $5000 for the costs of starting a retirement plan for their employees. Eligible start-up costs include necessary costs to set up and administer the plan and costs to educate your employees about the plan. The credit can be taken annually for up to three years starting in the year you establish the plan. The credit amount is limited by the number of employees in the plan multiplied by $250. The retirement plan must cover at least one non highly compensated employee (think non owner employee).
Auto-Enrollment Credit
Employers with less than 100 employees that adds an auto-enrollment feature to their retirement plan may claim a tax credit of $500 per year for three years starting in the year the auto-enrollment feature is added. The credit is available for new or existing plans that adopt an eligible auto-enrollment feature.
Essentially an auto-enrollment feature is when new employees are automatically enrolled in the retirement plan when they become eligible to participate. Their wages are automatically reduced for contributions to the retirement plan. The employer must notify the employee of the auto-enrollment feature and the employee must be given the opportunity to elect out of enrollment in the plan. However, absent this election, the employee will be auto-enrolled in the plan and retirement plan contributions will be withheld from their compensation.
Employer Contributions Credit
This credit coincides with the Startup Credit mentioned above, but applies to employer contributions to the plan. It also only applies to employers with less than 100 employees. The credit is equal to the employer contribution made on behalf of an employee, capped at $1000 per employee. In addition, the tax credit is not available for contributions to employees earning more than $100,000. Thus, if an employee’s compensation is $100,001 or more, the employer does not get a tax credit for contributions on behalf of that particular employee.
The credit can be taken in the first five years of establishing the retirement plan. For employers with 50 or fewer employees, the tax credit available for each employee participant is:
- 1st plan year: 100% of the employer contribution, up to $1000
- 2nd plan year: 100% of the employer contribution, up to $1000
- 3rd plan year: 75% of the employer contribution, up to $1000
- 4th plan year: 50% of the employer contribution, up to $1000
- 5th plan year: 25% of the employer contribution, up to $1000
For employers with 51-100 employees, the annual credit is further reduced.
If you have been considering starting a retirement plan for your company, give us a call. We can advise you on the type of plan that best fits your needs and also claim these credits on your tax return.
