3 Tax Credits Available for New Small Business Retirement Plans
Setting up your business’ first retirement plan can be daunting. On top of that, it can look expensive too.
The good news is that there are various types of retirement plans (they’re not all 401(k)’s) available, and the federal government will reimburse you for some startup costs.
Below are 3 types of tax credits available for small business retirement plans.
Source: https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit
Key Details & Eligibility Requirements
1. Startup Costs Tax Credit
How it works: This credit helps offset the administrative and out-of-pocket costs of establishing a new SEP, SIMPLE IRA, or qualified plan (like a 401(k)).
The Benefit: Thanks to SECURE 2.0 expansions, businesses with 50 or fewer employees can claim 100% of qualified startup costs for the first three years, up to an annual cap of $5,000. Businesses with 51 to 100 employees can claim 50% of their startup costs, subject to the same $5,000 cap.
2. Employer Contribution Tax Credit
How it works: This credit incentivizes employers to contribute directly to their employees' retirement accounts. It applies to contributions made to employees earning $100,000 or less annually.
The Benefit: For businesses with up to 50 employees, the credit covers 100% of employer contributions in the first and second years, up to $1,000 per employee. The credit then phases down over the next three years (75% in year three, 50% in year four, and 25% in year five). Businesses with 51 to 100 employees are subject to a reduced phase-in schedule.
3. Automatic Enrollment Tax Credit
How it works: To encourage higher employee participation, businesses that add an eligible automatic contribution arrangement (EACA) to a new or existing 401(k) or SIMPLE IRA plan can claim a specific credit for this feature.
The Benefit: Employers can claim a flat tax credit of $500 per year for three consecutive years (totaling $1,500). This can be stacked on top of the Startup Costs Tax Credit.
|
Credit Type |
Eligible Employers |
Benefit Amount |
Duration |
|
Startup Costs Credit |
100 or fewer employees
(at least 1 Non-Highly Compensated Employee*) |
1–50 employees: 100% of costs
51–100 employees: 50% of costs
(Max $5,000/year) |
3 Years |
|
Employer Contribution Credit |
100 or fewer employees |
1–50 employees: Up to $1,000 per employee
51–100 employees: Subject to a phase-out reduction** |
5 Years |
|
Auto-Enrollment Credit |
100 or fewer employees |
$500 flat credit per year |
3 Years |
This info is designed to be a first step, and this is not tax advice. Talk with your accountant!
With CalSavers now a requirement for every CA business with employees, talk with us about other options you might have
Joe is a founding partner at Sweeney & Michel, LLC and has been with the team since 2010. He graduated from the Azusa Pacific University