Small Business 401(k) Tax Credits – SECURE 2.0 Updates

small business tax credit for retirement plan

January 8, 2024

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Have you ever been to a wedding or club where the DJ keeps trying different songs hoping to fill up the dance floor? Similar to DJs who want full dance floors, the federal government really wants small businesses to have retirement plans. Instead of songs, the government tries tax incentives. A newer incentive strategy is to offer tax credits to small businesses for costs associated with starting a plan and providing employer contributions. These tax credits initially started through a law change in 2019 and a recent law change in 2022 enhanced the tax credits even more – conveniently labeled SECURE and SECURE 2.0 .

There are now three distinct tax credits for plan fees or contributions paid by small businesses. Below is a summary of each tax credit to assist you in determining whether your business is eligible and the potential amount of the tax credit. To estimate the amount, use our online calculator .

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Startup Tax Credit

Created in SECURE and enhanced in SECURE 2.0, an eligible employer may claim up to 100% of its qualified startup costs for adopting and maintaining a new 401(k) plan.

Who is an eligible employer?

To be eligible, you must meet 3 requirements:

  • Have 100 or fewer employees who were paid at least $5,000 in compensation by you in the preceding year;
  • Cover at least one non-HCE with your retirement plan; and
  • In the 3 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 retirement plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

A non-Highly Compensated Employee (non-HCE) is an employee who is not considered a Highly Compensated Employee (HCE). An HCE is an individual who:

  • Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
  • For the preceding year, received compensation from the business of more than $150,000 (if the preceding year is 2023 and $155,000 if the preceding year is 2024), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.

Due to the one non-HCE requirement, an owner-only business is unable to take advantage of the startup tax credit by adopting a solo 401(k) plan .

Further, due to the substantially same employees requirement, a business cannot take advantage of this tax credit by adding a 401(k) feature to an existing profit sharing plan. A business would also not be able to terminate an existing 401(k) plan and adopt a new 401(k) to receive this tax credit.

What are qualified startup costs?

Qualified startup costs include the ordinary and necessary expenses incurred by a small business to:

  • Establish or administer a qualifying retirement plan, or
  • Educate employees about the plan.

An eligible employer with 50 or fewer employees may claim a tax credit for 100% of its qualified startup costs.

An eligible employer with 51 to 100 employees may only claim a tax credit for 50% of its qualified startup costs.

Eligible startup costs with Employee Fiduciary include our one-time setup fee of $500 and our annual administration fee of $1,500 (up to 30 employees, each employee over 30 is $30 annually). If you choose to start a 401(k) plan with Employee Fiduciary, that will mean your first-year startup tax credit would equal $2,000 and $1,500 for the next two years.

Is there a maximum limit to the tax credit?

The maximum tax credit is $5,000 each year. The maximum tax credit is reduced for a business with less than 20 employees. The maximum for businesses with less than 20 employees cannot exceed $250 times the number of non-Highly Compensated Employees (non-HCEs) eligible for plan participation. An eligible employer can always claim a tax credit of at least $500 each year.

For example, a business with one owner and 15 non-HCEs may receive a tax credit up to $3,750 (250 x 15).

small business tax credit for retirement plan

A business with an owner, three managers, and 59 non-HCEs may receive a tax credit up to the $5,000 limit. Remember that a business with over 50 employees can only claim 50% of its qualified startup costs. Therefore, expenses incurred by this business to establish and administer the plan would have to exceed $10,000 a year to reach the $5,000 tax credit.

small business tax credit for retirement plan

How long can an eligible employer claim the tax credit?

The tax credit is available for the first three years starting when the plan is effective or, if elected by the business, the preceding year.

How do I apply for the tax credit?

You must file IRS Form 8881  (Credit for Small Employer Pension Plan Startup Costs) with your tax return to claim the startup tax credit. This form has not yet been amended to accommodate the SECURE 2.0 change allowing businesses with 50 or fewer employees to claim 100% of its qualified startup costs.

Employer Contribution Tax Credit

But wait, there’s more! SECURE 2.0 created a tax credit for employer contributions provided by small businesses over the first few years of the 401(k) plan. To receive this credit, a business must still meet the eligible employer requirements described under the startup tax credit section.

The maximum limit is $1,000 per eligible employee per year. An eligible employee is paid no more than $100,000 a year (adjusted for inflation). The exact tax credit depends upon the number of employees and the number of years since plan startup.

Tax Credit For Businesses with 50 or Fewer Employees

A business with 50 or fewer employees may receive a tax credit for 100% of employer contributions in the first two years (including the startup year), 75% of employer contributions in the third year, 50% in the fourth year, and 25% in the fifth year. There is no tax credit available for employer contributions after the fifth year of the plans’ startup.

small business tax credit for retirement plan

To illustrate, a business with one owner (making over $100,000) and 15 eligible employees (making no more than $100,000) starts a 401(k) plan in 2023. Both the plan year and the business’ tax year are the calendar year. The plan allows salary deferrals and provides a match of 50% of deferrals, but is capped at $1,000. Assuming all 15 eligible employees (EEs) and the owner defer enough to take advantage of the match, the business would be receiving $52,500 in tax credits over five years.

Employer contributions not eligible for the employer contributions tax credit may still be considered for tax deduction purposes.

Tax Credit For Businesses with 51 to 100 Employees

The tax credit for a business with 51 to 100 employees is based on a sliding scale. The percentage is reduced by 2 points for each employee over 50. To illustrate, the tax credit for a business with 80 employees would only be 40% (100% - (2% x 30)) of employer contributions for the first two years, 30% (75% x 40%) for the third year, 20% (50% x 40%) for the fourth year and 10% (25% x 40%) in the fifth year.

To illustrate, a business with 5 managers (each making over $100,000) and 75 eligible employees (making no more than $100,000) starts a 401(k) plan in 2023. Both the plan year and the business’ tax year are the calendar year. The plan allows salary deferrals and provides a match of 100% of deferrals capped at deferrals up to 3% of compensation. Assume total compensation for each year is $1,000,000 for managers and $5,500,000 for eligible employees and all employees defer enough to maximize the match contribution. As detailed below, the business would be receiving $105,000  in tax credits over five years.

Auto-Enrollment Tax Credit

Don’t forget SECURE created an auto-enrollment tax credit. Small businesses are eligible for a $500 tax credit by adding an automatic enrollment feature to a new or existing 401(k) plan. To be eligible for this tax credit, the auto-enrollment feature must meet Eligible Automatic Contribution Arrangement (EACA) requirements . A QACA safe harbor 401(k) plan will also meet EACA requirements. Unlike the startup tax credit, the only requirement to be an eligible employer is having 100 or fewer employees who were paid at least $5,000 in compensation in the preceding year.

Also different from the startup tax credit, the auto-enrollment tax credit is available to existing 401(k) plans and profit sharing plans adding a 401(k) feature. For example, you have sponsored a 401(k) plan over 20 years. If you are considered an eligible employer, you could add the automatic enrollment feature now and receive the tax credit. The credit is available for each of the first three years the feature is effective.

The auto-enrollment tax credit became much more relevant due to a law change in SECURE 2.0. Beginning in 2025, most 401(k) plans must have the auto-enrollment feature. Although businesses starting 401(k) plans now do not need to have the auto-enrollment feature, they will be required to adopt the feature by 2025. Small businesses may want to add the auto-enrollment feature now to minimize the potential disruption in 2025 as well as take advantage of this tax credit.

Cheaper Than Ever to Start a New 401(k) Plan!

Approximately 80% of our small business clients pay their 401(k) administration fees from a corporate bank account – not plan assets . This approach is usually a win-win for the business owner because they can deduct the fees as a business expense while keeping the portion that would have been paid from their personal 401(k) account earning compound interest until retirement.

The enhanced tax credits provided in both SECURE and SECURE 2.0 make this win-win scenario even more advantageous to business owners by making the out-of-pocket cost of a 401(k) plan even cheaper for up to the first five years. Is this the song to get your small business on the dance floor?

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What is Form 8881: Tax Credit for Small Employer Pension Plan Startup Costs

small business tax credit for retirement plan

The tax code typically encourages Americans to save for retirement. It also gives employers incentives to set up retirement plans for their workers. One way it does this is by offering tax credits to offset some of the costs of setting up a retirement plan. Smaller qualifying businesses can cut their taxes by up to $500 by claiming the Credit for Small Employer Pension Plan Startup Costs. A business claims this credit by filing IRS Form 8881 with their tax return.

Qualifying as a small employer

Qualifying your plan, using the tax credit.

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Key Takeaways

  • A business is eligible for the credit if they had no more than 100 employees who were paid at least $5,000 in the year before it set up the plan.
  • Most retirement plans commonly offered by employers qualify as "pension plans" under the rules for the Form 8881 tax credit.
  • A business can claim the credit for expenses it incurred to set up a qualified plan, including administrative costs and money spent to educate employees about their benefits and options under the plan.
  • Unlike a tax deduction, a tax credit reduces your income tax liability dollar for dollar.

As the name makes clear, the tax credit on Form 8881 is available only to certain “small” employers. A business is eligible for the credit if:

  • They had no more than 100 employees who were paid at least $5,000 in the year before it set up the plan. Employees who were paid less than $5,000 don’t count toward the total.
  • A business did not previously have a retirement plan in place in the prior 3 years covering substantially the same employees as the plan being set up.

Note that the definition of a small employer for this credit may differ from definitions used elsewhere in the tax code, such as with the Affordable Care Act, where the cutoff is 50 full-time employees . So a business that’s considered a “large” employer under the ACA or other provisions may still qualify for this credit.

TurboTax Tip: In some cases a company may save more money by simply deducting their pension plan startup costs as regular business expenses rather than claiming the credit.

Most retirement plans commonly offered by employers qualify as "pension plans" under the rules for the Form 8881 tax credit. These include:

  • traditional pension plans, in which employees are guaranteed a specific benefit when they retire
  • 401(k)  and 403(b)  plans
  • profit-sharing plans
  • money purchase pension plans
  • SEP IRAs and SIMPLE IRAs

A business can claim the credit for expenses it incurred to set up a qualified plan. This includes:

  • administrative costs
  • money spent to educate employees about their benefits and options under the plan

Unlike a tax deduction, a tax credit reduces your income tax liability dollar for dollar . For example, if you have a $1,000 tax deduction, that reduces the amount of income subject to tax by $1,000, producing a tax savings of, at most, a few hundred dollars. A $1,000 tax credit, on the other hand, cuts your taxes by the full $1,000.

However, in some cases a company may save more money by simply deducting their pension plan startup costs as regular business expenses rather than claiming the credit. You can’t do both for the same expenses. Run the numbers both ways and go with whichever saves the most money.

Let a local tax expert matched to your unique situation get your taxes done 100% right with TurboTax Live Full Service . Your expert will uncover industry-specific deductions for more tax breaks and file your taxes for you. Backed by our Full Service Guarantee . You can also file taxes on your own with TurboTax Premium . We’ll search over 500 deductions and credits so you don’t miss a thing.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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One More Incentive to Offer a Retirement Plan: 100% Start-Up Cost Credit

Part of a series  |  SECURE 2.0 Act Insights

Ronald Ulrich

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By Christopher Magno, SVP/General Manager, Retirement Services, ADP

The new SECURE Act 2.0 and other legislation focuses on making it easier for small businesses to offer a retirement savings plan, including a significantly higher tax credit to cover start-up costs.

[NOTE: An updated article is now available: SECURE 2.0 Act of 2022 .]

With hundreds of provisions included in the recent flurry of retirement plan-related legislation, it's easy to miss those that could have the most immediate positive effect on your small business.

But here is one that's truly a no-brainer in terms of impact — proposed changes to the current tax credit legislation for small employers. Changes to the current legislation are being proposed in both House and Senate Finance Committee bills. Both bills offer positive changes to the existing legislation, but it remains to be seen what language will make it into the final bill.

ADP SECURE Act 2.0 comparison chart

The two bills vary in the amount and structure of the tax credits, as well as the timing for rollout. We'll advise as soon as final decisions are made, so your business can be sure to take advantage all applicable new provisions.

Employees want (and need) a retirement savings plan

During the past decade, access to an employer-sponsored retirement plan has consistently ranked high on employees' lists of must-have benefits. In the current volatile labor market, it's become an even more vital component for attracting qualified employees, staying ahead of the competition and controlling expensive turnover.

Not convinced? Sixty percent of employees now identify retirement benefits as the reason they stay with their current employer, up from just 40 percent a decade ago. Further, 47% said those retirement benefits were a primary reason why they joined their employer in the first place, nearly double the employees who felt the same in 2010.

Of course, the retirement-focused legislation — including the EARN Act and Starter 401(k) Act in addition to the SECURE Act 2.0 — has many more benefits for businesses beyond tax credits, including provisions to:

  • Cut down on paperwork required of plan sponsors
  • Reduce penalties for certain reporting errors
  • Consolidate multiple plan participant notices into a single document
  • Require automatic enrollment to increase plan participation

By reducing or eliminating common barriers for small businesses and making it easier for employees to save, more Americans will hopefully be on the path to retirement readiness sooner rather than later.

What's next?

As all the legislation mentioned above is still being finalized, check back often to stay current on potential impacts to your business. And if you're among the small businesses that currently don't have a plan in place, there's no time like the present to start evaluating your options .

For information on how the legislation might impact your current retirement plan — or to start the process to offer a retirement plan — reach out to ADP today.

ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor. ADPRS-20220920-3614

Up Next In This Series

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SECURE 2.0: A Closer Look at Auto Enrollment & Catch-up Contributions

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Setting the Record Straight: SECURE 2 Act FAQ

SECURE 2.0: New Small Business Tax Incentives for Retirement Plans

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Simplifying the Retirement Plan Tax Credit for Start-Ups

Simplifying the Retirement Plan Tax Credit for Start-Ups

For start-up small businesses, establishing a retirement plan can be costly as well as resource and time prohibitive. Legislation has now made it easier. The following are answers to common questions related to a potential tax credit for start-ups.

What is the tax credit for start-ups.

The SECURE Act includes many significant changes to retirement plans including providing a tax credit to start-up businesses that establish a new retirement plan. The purpose of the tax credit is to make it more feasible for small businesses to provide a retirement plan for its employees, thus giving more workers the opportunity to save for a secure retirement.

Which start-ups are eligible for the tax credit?

  • Those with no more than 100 employees who received at least $5,000 in compensation for the preceding year
  • Those with at least one plan participant who was a non-highly compensated employee (NHCE)
  • In the last three years, a different qualified retirement plan for employees was not sponsored by the business. In short, businesses can’t change to a new plan  every three years and receive a new tax  credit each time.

What is a Non-Highly Compensated Employee?

An employee is considered a NHCE if:

  • They own less than 5% of the company
  • They make less than the income threshold for that year as determined by the IRS. For 2022, a NHCE must make less than $135,000 1

How much is the credit?

  • The start-up credit is 50% of eligible start-up costs, up to the greater of:
  • The lesser of:
  • $250 for each employee that is eligible to participate in the plan and is not a Highly Compensated Employee (HCE) or
  • The start-up credit is $500 for adding an automatic enrollment feature to a new or existing 401(k) plan.    

Which costs are eligible?*

The tax credit can be claimed for common and necessary costs to:

  • Set up a new qualified plan
  • Execute plan administration
  • Educate your employees about the plan

When can the tax credit be claimed?

The credit can be claimed for each of the first three years of the plan. The first year of claiming the credit can be the tax year before the plan becomes effective.

What is the auto enrollment tax credit?

An eligible employer that adds an automatic enrollment feature to its plan can claim a tax credit of $500 per year for a three-year taxable period. With this feature, employees have to  opt-out rather than opt-in. The credit starts with the first taxable year the employer includes the auto enrollment feature.

Are there any new retirement plan types a start-up might consider?

Yes. The Pooled Employer Plan (“PEP”), a significant offering, entered the employer sponsored retirement plan (401(k) plan) arena as of January 2021. A PEP enables unaffiliated plan sponsors (employers) to put their retirement plans of any asset size into a pooled or umbrella structure as “adopting employers.”

A PEP has a Pooled Plan Provider (“PPP”) managing it, and benefits include lower cost, reduced fiduciary liability, decrease in employer workload and lower audit expense on a plan with more than 100 participants.

*No tax deduction is allowed for expenses on which the credit is claimed.

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Small Business Retirement Guide: The $16,500 Tax Credit Small Businesses Can Claim

small business tax credit for retirement plan

In the competitive world of small business, every advantage counts.

And now, thanks to the 2019 SECURE Act, there is a new, major benefit available to small businesses: a tax credit as high as $16,500, secured by offering a qualified retirement plan to employees. These include programs like a 401(k), a SIMPLE IRA, or a SEP, all of which may be easier to offer than you’d think.

In this article, we’ll review how the SECURE Act’s tax credits work, discuss how you can obtain them, and answer common questions you may have.

The SECURE Act: Tax Breaks for Small Businesses

Since 2001, businesses with 100 employees or less have had access to a retirement tax benefit: If you start offering a retirement plan to your employees, you can claim a tax credit equivalent to 50% of the total cost of establishing and communicating that plan, up to $500 per year. This credit has been a major boost to employers interested in recruiting and retaining top talent, opening the door for small businesses everywhere to help their employees save for retirement.

However, in 2020, this credit was significantly improved by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Among many other changes,​ the act increased the tax credit that eligible employers can use to claim a benefit of up to $5,000, for three years, for the “ordinary and necessary costs” of starting a qualified retirement plan and also provides an additional credit for certain automatic contribution arrangements.

For taxable years beginning prior to January 1, 2020, the credit was equal to 50% of the qualified start-up costs with a $500 maximum credit for the first plan year and $500 for the next two years.  And now, for plan years beginning after December 31, 2019, the dollar limit of the credit is increased to the greater of (1) $500, or (2) the lesser of $5,000, or $250 for each non-highly compensated employee (NHCE) who is eligible to participate in the plan.

What Are The Requirements For Claiming This Tax Credit?

The requirements for claiming these tax credits are fairly straightforward. You qualify 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 (NHCE) .
  • In the three tax years before you became eligible for the credit, your employees weren’t enrolled in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

Are The SECURE Act Tax Credits A Flat $5,000 Benefit?

No, they are not. The credit is still capped at 50% of the startup costs, but is equal to $250 times the number of NHCEs eligible to participate in the plan, up to $5,000 annually. In practice, your startup credit is the greater of:

  • $250 multiplied by the number of NHCEs who are eligible to participate in the plan; or

While that may sound complicated at first, there is a simple step-by-step process for calculating your potential tax credit.

How to Calculate Your Tax Credit

The tax credit is calculated in five steps:

  • Determine how many NHCEs are eligible for the plan
  • Multiply that number by $250
  • The result from step #2 is the maximum tax credit for the year, subject to an overall cap of $5,000
  • Determine your eligible plan expenses for the year—only those paid by the business, not those paid by or deducted from plan assets
  • Multiply that number by 50%

The result from step #5 is your maximum permissible tax credit for the year. Other plan expenses can be taken as tax deductions, just not tax credits.

Example :  The ABC Company sponsors a new 401(k) plan on January 1, 2022, which covers the owner and five NHCEs, and costs $5,000 for the year.  In this case, the ABC Company’s start-up tax credit for 2022 would be $1,250: The greater of $500 or $250 times the number of NHCEs (5), but in no event more than 50% of the start-up costs.

Lastly, if you add an auto-enrollment feature to your plan, known as an eligible automatic enrollment arrangement (EACA), you can claim a tax credit of $500 per year for a three-year taxable period, beginning with the first taxable year after December 31, 2019. However, it’s important to know that this comes with a duty to notify employees of this feature, and that you must withhold wages from automatically enrolled participants at the plan’s default deferral rate.

What Counts As A “Qualified Startup Cost?”

Just as important as the number of NHCEs eligible to participate, you also need to understand what counts as a qualified startup cost for the plan. These are any ordinary and necessary expenses of an eligible employer which are incurred in connection with the establishment or administration of an eligible plan, or education of employees with respect to that plan. This includes:

  • Recordkeeping fees
  • Plan administration fees
  • Support services from your retirement vendor
  • Costs of educating your employees about the plan

Common Questions With Answers

You may have further questions about your business’s unique circumstances and your maximum deduction. Consulting with a financial advisor can give you the specific information you’re looking for, and some common questions include:

If my business already has a plan and starts a second one, can I claim the tax credits?

If the second plan is offered to substantially the same group of employees as the new retirement plan would be, then you would not be eligible for the startup credit. Also, if you would have a defined benefit plan and a defined contribution plan, then the plans are aggregated and treated as one plan.

If I had a solo 401(k) in prior years, then created a 401(k) plan for my company, would my business be eligible for the startup credit?

A solo 401(k) is a 401(k) plan covering one person, so the business’s 401(k) plan would not be a new plan. If you terminate the solo 401(k), then the new 401(k) plan could cover a substantially different group of employees and be eligible, but the sponsor would need to wait 12 months before starting the new plan.

Can I take the auto-enrollment credit if my business joins a multiple employer plan (MEP) or pooled employer plan (PEP)?

Yes, an employer participating in a MEP whose participants are subject to an EACA are eligible for the $500 automatic enrollment tax credit for taxable years beginning after December 31, 2019.  An automatic enrollment arrangement that does not meet the requirements of an EACA would not qualify for this credit.

Can an existing plan add auto-enrollment to get the new $500 credit?

Yes. The automatic enrollment credit is in addition to the start-up credit.  Please note that the credit is only available for taxable years starting in 2020 and would only apply for the first three years the feature is effective. An existing plan may add an EACA mid-year as long as it only applies to new participants. If it will apply to all participants, then the feature may only be added at the beginning of the next plan year.

Example :  ABC Company establishes a new 401(k) Plan covering 5 NHCEs with an EACA feature, effective January 1, 2022. Both the fiscal year and plan year are the same.  The start-up costs are $3,000.  ABC Company is eligible for the start-up credit totalling  $1,250 (the lesser of $1,250 ($250 x 5) or $1,500 (50% of the total start-up costs)).  The automatic enrollment credit for 2022 is $500.  ABC Company is entitled to a credit in 2022 totalling $1,750 ($1,250 start-up credit and $500 EACA credit) for 2022. The credit would be available in 2023 and 2024 based on the number of NHCEs eligible to defer to the plan with an EACA provision.

Conclusion: Should You Start a New 401(k) Plan?

The SECURE Act has made offering a retirement plan easier than ever before. As a small business owner, you have the opportunity to help close the savings gap , fight America’s growing retirement crisis , and lend a helping hand to your employees.

If you are interested in setting up a 401(k) account for your business to claim the SECURE Act tax credits, you can contact Vestwell to determine your benefit amount and start a no-hassle plan, all from the comfort of your home. Interested? Learn more here .

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Small Business Startup Plan Tax Advantages

Small businesses care about their employees and want to help them retire, but cost can be an issue. The good news is that there may be tax benefits for some of the costs of starting a SEP, SIMPLE IRA, or qualified plan (like a 401(k) or a 403(b)). As always, have your client consult a tax advisor, but tax deductions and credits (which reduce the amount you pay in taxes) are available. Here are some things to consider when setting up a new small business retirement plan:

Tax credit: who’s eligible?

As a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, effective Jan. 1, 2020, the tax credit for small employers starting a new retirement plan increased from $500 annually up to a maximum of $5,000 annually for each of the first three years. 1

Employers can claim the credit if:

  • They have no more than 100 employees who were paid at least $5,000 in the prior year.
  • At least one, non-highly compensated employee is eligible to participate in the plan.
  • The plan is truly a startup—not a replacement for another plan. Employees can’t have received a benefit from a qualified plan from the company in the last three years.

What’s the tax credit?

The tax credit cannot exceed 50% of the qualified startup costs paid or incurred by the small employer.

What’s a qualified startup cost?

Qualified startup costs are defined by the IRS as ordinary and necessary costs to set up, administer, and educate employees about a new retirement plan.

When are clients eligible?

Your clients can claim the credit for three years—starting the year before the plan is effective.

Other tax benefits

What’s more, certain other expenses can be claimed as a tax deduction (but no double-dipping—they can’t claim the same expense as a tax credit and a tax deduction):

  • Administrative fees are a tax-deductible business expense.
  • Contributions from the employer are exempt from federal, state, and payroll taxes if they fall under 25% of the total compensation paid (or accrued) during the year to participating employees.

A new startup retirement plan option

For small business clients concerned about cost, there’s a new digital startup retirement plan option. Simply Retirement by Principal ® is an online 401(k) offering for businesses with fewer than 100 employees.

With Simply Retirement by Principal ® , you can create 401(k) proposals in minutes and share them with your clients by email, no in-person meetings required. Simple plan design, streamlined investment options, and flat recordkeeping fees make this an easy solution for small businesses that are ready to start a retirement plan. And SECURE 2.0 Act tax credits may help offset their plan startup costs. Visit SimplyRetirement.com to learn more.

1 Greater of $500 or the lesser of $250 x NHCEs eligible or $5,000.

Simply Retirement by Principal ® 401(k) plan recordkeeping, and administrative services are provided through Decimal, Inc. dba Ubiquity Retirement + Savings (“Ubiquity”). Ubiquity is not affiliated with any plan and investment administrative services provided through Principal Life Insurance Co. or affiliated with any company of the Principal Financial Group ® . Principal makes available the investment options for customers to select through Simply Retirement by Principal. All other services are provided by service providers not affiliated with any company of the Principal Financial Group. Refer to related documents and agreements for more details on plan services available.

The subject matter in this communication is educational only and provided with the understanding that neither Principal ® or Ubiquity Retirement + Savings are rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other financial professionals on all matters pertaining to legal, tax, investment or accounting obligations and requirements.


Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group ® , Des Moines, Iowa 50392.


©2020 Principal Financial Services, Inc.

1344533-09/2020 | 09/2020

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How to Claim a Tax Credit for Your Small Business Retirement Plan

Looking for another perk to attract and retain employees, now is a good time to add a retirement plan to your business’s benefits package. As part of the SECURE Act (Setting Every Community Up for Retirement Enhancement Act), enhancements were made to retirement plan start-up tax credits benefitting small business owners. 

The new tax credit is designed to offset up to 50% of the cost of starting a retirement plan for the first three years of the plan. It includes enhanced tax credits for small businesses that start a new 401(k) plan and/or add an automatic enrollment feature to any 401(k) plan.

The purpose of the enhanced tax credit is to make it easier and more affordable for small businesses to offer retirement plans to their employees to invest in their future.

What Businesses are Eligible for the Retirement Plan Tax Credit?

To claim the enhanced tax credits, employers must:

  • Have 100 or fewer employees who received at least $5,000 in compensation from for the preceding year;
  • Have at least one plan participant who was a non-highly compensated employee (NHCE) ; and
  • In the three tax years before the first year of eligibility for the credit, the business’s employees weren’t substantially the same employees who received contributions or accrued benefits in another business-sponsored plan, a member of a controlled group that includes the business, or a predecessor of either.

How Much is the Retirement Plan Tax Credit?

The tax credit can be as high as $16,500 ($5,500 per year). The retirement plan tax credit is calculated by multiplying the number of non-highly compensated employees by $250. 

Additional provisions include:

  • The annual tax credit will be the greater of $500, or $250 for every eligible NHCE.
  • The annual tax credit is 50% of the total qualified start-up cost up to $5,000.
  • Plans that add automatic enrollment get a bonus tax credit of an additional $500 per year.

While tax deductions and exemptions are helpful to business owners, they only reduce a business’s taxable income. Tax credits, on the other hand, reduce the actual amount of tax owed by a business dollar for dollar. 

How Does the Addition of Automatic Enrollment Result in Retirement Plan Tax Credits?

If your small business already has an existing retirement plan, you may be eligible for a tax credit for adding automatic contribution arrangements where employees make regular contributions by default unless they opt-out. The credit is $500 for the year the automatic enrollment is incorporated into the plan and for each of the following two years for a total of $1,500.

What Retirement Plan Expenses are Considered Qualified Startup Costs?

Qualified startup costs include the routine and necessary costs that a small business incurs when establishing a retirement plan such as:

  • Setting up and administering the plan, and
  • Educating employees about the plan

What Retirement Plans Qualify for the Tax Credits?

401(k) plans, Simplified Employee Pensions (SEPs) , and Savings Incentive Match Plan for Employees (SIMPLE IRAs) qualify for the retirement plan tax credits. Solo(k) and 403(b) plans are not eligible.

How Does a Small Business Claim the Retirement Plan Tax Credits?

Small businesses may claim the qualified retirement plan startup costs tax credit using IRS Form 8881 for the first three years of the plan. The credit may be claimed in the tax year before the plan becomes effective to offset the retirement plan start-up costs. 

This credit is considered a general business credit that may be carried back or forward to other tax years if it can’t be used in the current year. We are happy to discuss how the retirement plan tax credit may impact your Accounting , Bookkeeping , and/or Business Tax Planning .

To set up a free consultation, please click on the button below to schedule a time that works best for you.

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Small Business Tax Incentives for Retirement Plans

Studies show that employees are far more likely to save for retirement when they can participate in a retirement plan at work. But for small companies, the cost and resources required to start and maintain a retirement plan can be prohibitive.

In fact, only 53 percent of small business employees have access to workplace retirement plans. And with nearly half of all private sector workers employed by small companies, that means almost 30 million Americans are without retirement plan access. 1

Fortunately, Congress has taken notice. Recent legislation expanded tax incentives designed to make it more affordable for small businesses to establish retirement plans—and easier for Americans to save.

Startup Costs Tax Credit

Establishing a retirement plan can be costly, especially for small employers. The small-employer retirement plan startup credit helps reimburse some of the expenses required to create a new plan.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 increased these tax incentives. Now, small businesses can take advantage of a $250 credit per non-highly compensated (NHCE) employee. This includes a minimum credit of $500 and a maximum credit of $5,000 per year.

Small businesses can apply this credit to 50 percent of the costs related to plan administration and participant education. Businesses can claim this tax deduction for up to three years.

Automatic Enrollment Credit

Automatic enrollment is a plan feature that allows employers to enroll eligible employees in a retirement plan at a set contribution amount without direct permission. Participants can change the deferral amount or opt out at any time but do not need to take action to start saving.

Employee inertia is one of the major roadblocks to retirement savings. Thus, automatic enrollment has proven to enhance retirement plan participation—and retirement outcomes.

The SECURE Act incentivizes employers to add automatic enrollment to their plans by offering a tax credit of $500 per year, for up to three years. The credit is available to all new and existing small-employer plans that add an automatic enrollment feature. For new plans, it is in addition to the startup credit.

It is also important to note that the automatic enrollment tax credit is not limited to individual plans. Small employers that participate in a multiple employer plan (MEP) can also take advantage of the credit by adding automatic enrollment.

Who Is Eligible?

The small-employer credits are available to businesses with 100 or fewer employees. These employees need to have earned at least $5,000 in compensation in the prior year. Among them, there must also be at least one plan participant who is an NHCE. An NHCE must own less than 5 percent of the business or earn less than $125,000 annually.

Additionally, the employees cannot have received contributions or accrued benefits in another retirement plan sponsored by the same employer, a member of a controlled group that includes the employer, or a predecessor of either for the three tax years before the first year of eligibility.

On the Horizon

Concerns about Americans’ ability to successfully retire are widespread. But retirement plan access may help mitigate a potential crisis. Thus, expanding retirement plan coverage continues to be a legislative priority.

Some states have taken matters into their own hands. State-sponsored automatic individual retirement accounts (auto-IRAs) provide a retirement savings vehicle for workers without an employer-sponsored plan.

Proposed legislation like the Build Back Better Act—approved by the House Ways and Means Committee in September—seeks to mimic this on a national level. It would require employers that do not sponsor a retirement plan to automatically enroll their employees in an IRA or a 401(k)-like plan, starting in January 2023. Should this become law, it may motivate private employers to establish plans to avoid a government-run option.

Another piece of legislation, the Securing a Strong Retirement Act of 2021—known as the SECURE Act 2.0, seeks to further encourage small businesses to establish retirement plans. The SECURE Act 2.0 proposes an additional increase to the small-employer startup plan credit. It would also allow small employers that join an established MEP to take the startup credit for the first three years in the plan.

With retirement plan access center stage, employers are likely to face continued pressure to provide employees with an option to save. Small businesses are wise to be proactive. 

Along with the current tax incentives—which combined can total up to $5,500 per year, or $16,500 for three years—employer-sponsored plans have business advantages. Retirement plans support employee wellness and retirement readiness. They also serve as a recruitment and retention tool. These benefits may be the competitive edge a small business needs to thrive.

1 “ 2020 Small Business Profile,” U.S. Small Business Administration Office of Advocacy

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Secure Act 2.0 Retirement Plan Tax Credits: A Home Run for Small Business

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Paul Sundin, CPA

August 20, 2023

The IRS has given small business owners many reasons to set up a retirement plan for their employees. The SECURE 2.0 amended an existing tax credit provision for administrative expenses for startup plans by doubling the credit for companies with 50 or fewer employees.

Added to this enhancement is a new tax credit for plan contributions for newly established plans for small companies. The combined tax credits can make many new plans almost free for the first two years. After year two, the company can receive partial credits for contributions for another two years.

This article discusses the tax credit for administrative fees. When a “small” employer incurs administrative expenses for establishing and operating a plan, there are tax credits for those payments for the first three years of the plan.

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This article discusses these two new provisions and shows you how to maximize the credits. Let’s dive in!

Small Business Startup Credit

Thanks to the Secure Act 2.0, the IRS changed the startup tax credit by increasing the credit from 50% to 100% for businesses that have up to 50 employees. The credit percentage is 100% for the first and second years. Then it is reduced to 75% in year three, 50% in year four, and 25% in the fifth year. No credit is available after year five. This is effective for tax years beginning subsequent to December 31, 2022.

This credit is for small employers. A small employer is defined as one that has up to 100 qualified employees. For companies that have 1 to 50 eligible employees, the IRS tax credit is 100% of the setup and administrative fees. It is capped at $5,000. 

For companies with 51 to 100 participating employees, the tax credit percentage is lowered to 50%. All employees who earned at least $5,000 of compensation from the company in the prior year are considered.

small business tax credit for retirement plan

To be eligible for the administrative credit, the company must have at least one non-highly compensated eligible participant. Finally, a business is not eligible if it substantially covers the same employees in a qualified retirement plan, SIMPLE IRA, or SEP IRA in the three prior tax years.

The $5,000 limit is not as straightforward as it may appear. Specifically, the limit is calculated as follows:

  • The business receives a $250 credit for each eligible employee who is not considered highly compensated. As a result, for up to 20 employees, the tax credit would be below $5,000. But companies with 20 employees or more would be capped at $5,000.
  • The minimum is $500, and the maximum is $5,000

The credit only applies to covered expenses (“qualified startup costs”) the employer pays. Qualified startup costs are defined as:

  • any ordinary and necessary expenses of an eligible company that are paid (or incurred) in association with:
  • (i) the setup or administration of an eligible company plan, or (ii) the retirement-related education of employees concerning the plan.

Considering the above definition, the eligible costs include payment for plan administration, recordkeeping, and employee education services. 

Contribution Tax Credits

The Act created a new credit for company contributions to startup plans. The additional tax credit generally will be a percentage of the employer’s contribution for employees. This extra credit is only available for companies with 50 or fewer employees and is phased out for employers between 51 and 100 qualifying employees. The tax credits are based on plan contributions other than contributions to defined benefit plans.

For companies with 50 or less employees in the prior year, the credit is 100% of the plan contributions made for eligible employees for the first two years but caps at $1,000 per employee. The method used for counting the number of employees is the same as for the startup cost credit. It includes any employee who made at least $5,000 from the company. 

However, for plan contribution purposes, it counts eligible employees in the year for which the contributions are made. This is in contrast to the startup credit, where the count is for the year prior to the year the credit is claimed. Of course, the tax credit is only applicable for contributions made for eligible employees and allocated to their plan accounts.

In addition, the credit is only for contributions made for qualifying employees who make less than $100,000 in the tax year that the tax credit is claimed. The IRS will adjust the amount in future years for cost-of-living increases. Wages are defined the same as for Social Security (FICA).

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Any credits are reduced after year two. The credit reduces 75% for the third year, 50% for the fourth year, and 25% for the fifth year. There are no contribution tax credits after that.

For example, if an eligible company structures a plan to contribute $1,000 for each of its 20 participants who make less than $100,000, the company will contribute $20,000 and receive a tax credit of $20,000 for the first two years. This effectively offsets the cost of the contributions for the first years and partially offsetting them for the three years after.

If the company has 51 to 100 employees, the contribution tax credit reduces pro-ratably at 2% for employees over 50. As with the tax credit for startup costs, the contribution credit is not allowed if the company has covered substantially the same employees in a qualified plan, SIMPLE IRA, or SEP IRA in the three preceding taxable years. 

However, unlike the credit for startup costs, this limitation on the contribution tax credit will apply only to the first-year credit amount. Said differently, the company will be entitled to the 2nd, 3rd, 4th, and 5th-year credits for contributions. In addition to the qualified tax credits for administrative fees and contribution costs, there is another $500 tax credit for setting up a plan with automatic enrollment.

Final Thoughts

In conclusion, SECURE 2.0 amended the existing tax credit for administrative costs by doubling the value for companies with 50 or fewer employees. The intent is to encourage the establishment of new plans by small companies. That is because the most significant need for retirement plan coverage is with small employers. 

This enhancement and the new credit for contributions for newly established plans will hopefully accomplish this goal. The combined tax credits will often make a new plan almost free for the first three years. After that, a company will receive partial credits for contributions for another two years.

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Start-up costs have always been a major hurdle to small businesses that want to start a 401(k) plan, but a provision of The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) helps scale this barrier to employee saving opportunities. EGTRRA implemented a credit for employers to offset the start-up cost and the cost of educating employees about the new plan.

For costs paid or incurred in tax years beginning after December 31, 2001, for retirement plans that first became effective after that date, you may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE or qualified plan (including a 401(k)).The credit equals 50 percent of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first three years of the plan. For plans that become effective after 2002, you may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

Eligibility requirements:

  • 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.
  • 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.
  • The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year; however, it cannot be carried back to a tax year beginning before January 1, 2002.

To claim the credit, use Form 8881, Credit for Small Employer Pension Plan Startup Costs, and the accompanying instructions.

Each person’s tax situation is different, so this is not to be construed as financial, tax or legal advice. If you believe that it may apply to your company or that of your client, be sure to further discuss this with a qualified accountant or tax professional.

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What Is a SIMPLE 401(k) Plan?

  • How It Works
  • Rules and Regulations
  • Advantages and Disadvantages

The Bottom Line

  • Retirement Planning

SIMPLE 401(k) Plan: What It Is, How It Works, FAQ

Small business owners should know about this retirement-plan option

small business tax credit for retirement plan

A SIMPLE 401(k) is a retirement savings account offered by small business employers with 100 or fewer employees. The SIMPLE 401(k) works just like a regular 401(k) plan , combining it with the simplicity of a SIMPLE IRA with a few minor changes. Employees can defer some of their wages to the plan and employers must either make a matching or non-elective contribution of a certain amount of each employee's wages.

Employers who are eligible to set up these plans must meet certain eligibility requirements and the Internal Revenue Service (IRS) sets limits on how much can be contributed each year.

Key Takeaways

  • SIMPLE 401(k) plans are retirement savings plans offered by small business employers or companies with 100 or fewer employees.
  • This kind of plan combines the features of traditional 401(k)s with the simplicity of SIMPLE IRAs.
  • Participants must be at least 21 and have one year of service before they can participate.
  • Contributions to the plan are fully vested immediately and employees are allowed to borrow against their account balances.
  • Employees who provide SIMPLE 401(k)s can't offer their employees any other options and contribution limits are lower than traditional 401(k) plans.

How SIMPLE 401(k) Plans Works

As the name implies, the SIMPLE 401(k) is a simplified, stripped-down version of a regular 401(k) plan that is geared toward self-employed individuals and small business owners. And just like SIMPLE IRA accounts, only employers with a staff of 100 or fewer can establish SIMPLE 401(k) plans. Establishing businesses can be structured in any form, including sole proprietors, corporations, and partnerships.

SIMPLE 401(k)s work just like regular 401(k)s. Employees contribute with pre-tax dollars out of their paychecks, investing the funds in options provided by the plan administrator . The IRS limits annual contribution amounts, which are about two-thirds of those allowed for regular 401(k)s. Employees can contribute a maximum of $15,500 in 2023 and $16,000 in 2024. People 50 and over are allowed to deposit an additional catch-up contribution of $3,500 in 2023 and 2024.

All employer contributions to a SIMPLE 401(k) are subject to an employee compensation cap, which is $330,000 for 2023 and $345,000 for 2024. This is one way the  SIMPLE 401(k) differs from a SIMPLE IRA . Unlike traditional 401(k)s, employers are required to make either a matching contribution to their employees' accounts—up to 3% of each employee's pay or a  nonelective contribution of 2% of each eligible employee's pay.

Companies that offer their employees a SIMPLE 401(k) plan must file Form 5500 every year.

SIMPLE 401(k) Rules and Regulations

Employees who are at least 21 years old and completed at least one year of service must be allowed to participate in their employers' SIMPLE 401(k) plans. They must also receive at least $5,000 in SIMPLE compensation from their employers for the preceding year in order to take part.

Funds in a SIMPLE 401(k) must be held in the account until the employee reaches age 59½. Withdrawals made before that point are subject to an early withdrawal penalty of 10%.

The employer must provide a deferral notice to each eligible employee for the year the plan is established and for each year the employer continues to maintain the plan. This notification must be provided at least 60 days before the employee becomes eligible to participate. It must include a statement of the employee's right to make salary deferral contributions and to terminate their participation in the plan.

The "SIMPLE" in a SIMPLE 401(k) plan is short for Savings Incentive Match Plan for Employees of Small Employers.

Advantages and Disadvantages of SIMPLE 401(k)s

There are a number of different benefits to participating in a SIMPLE 401(k) plan. But there are also several drawbacks. We've noted some of the major ones below.

Contributions to a SIMPLE 401(k) are immediately 100% vested . An employee who meets the requirements to receive distributions from the plan may withdraw their entire account balance whenever they like and won't lose it if they switch jobs after the money is in their account.

One of the simplified features is that SIMPLE 401(k) plans do not require nondiscrimination and top-heavy testing to ensure that the plan operates in compliance with IRS rules. Such testing must generally be done by professionals and can be quite costly.

Although withdrawals before the age of 59½ are subject to a penalty, employees can take out loans against their SIMPLE 401(k) balances. They also have the option of making hardship withdrawals from their plans if they need to do so.

Disadvantages

Unlike other retirement options, employer contributions are mandatory for those who offer SIMPLE 401(k) plans to their employees. As noted above, employers have one of two options available. They can contribute either 3% of each employee's pay or they can make nonelective contributions of 2% of each eligible worker's salary.

IRS rules prohibit a company from offering other types of retirement plans to employees already covered by a SIMPLE 401(k). That said, these companies may choose to maintain a separate retirement plan for other employees not covered by the SIMPLE 401(k).

Contribution caps to SIMPLE 401(k)s are smaller than those for traditional 401(k) plans. As noted earlier, employees can only contribute $15,500 in 2023 to a SIMPLE 401(k) plan with catch-up contributions of $3,500 per year for those 50 and older. Though these amounts increased to $16,000 of contributions with the same catch-up of $3,500 in 2024, these amounts are still lower than other retirement plans. For example, taxpayers can set aside $22,500 to their 401(k)s in 2023 and $23,000 in 2024. Catch-up contributions for these plans are $7,500 in both 2023 and 2024.

Immediate 100% vesting for employees

No discrimination testing for employer

Loans and hardship withdrawals allowed

Mandatory contributions (for employer)

No other plans allowed

Smaller employee contributions than regular 401(k)

Lower employee contribution limits

Who Is Eligible for a SIMPLE 401(k)?

A SIMPLE 401(k) is available for small businesses that have 100 or fewer employees who earn more than $5,000 per year.

What Is the Difference Between a SIMPLE 401(k) and a SIMPLE IRA?

Both SIMPLE IRA and SIMPLE 401(k) plans are options for small business owners to provide retirement benefits to themselves and their employees. The key differences are that SIMPLE 401(k)s allow for loans while SIMPLE IRAs do not, and a SIMPLE 401(k) requires employees to be 21 years or older while SIMPLE IRAs have no age restrictions.

How Much Can You Contribute to a SIMPLE 401(k)?

A SIMPLE 401(k) limits employees to $15,500 in contributions for 2023 and $16,000 in 2024. This is in contrast to a traditional 401(k), which has a $22,500 limit in 2023 and a $23,000 limit in 2024. Individuals may also qualify to make catch-up contributions for both plans.

Can I Have a SIMPLE 401k and a Traditional IRA?

Yes, you can maintain and contribute to an individual retirement account (IRA) while also having and contributing to an employer-sponsored SIMPLE 401(k) plan.

Helping your employees save for retirement is a great way to keep turnover rates down and retention up. It doesn't hurt in attracting talent, either—keeping a small firm competitive with the perks offered by larger corporations.

While SIMPLE 401(k) plans have a lot of benefits, such as easy-to-manage rules, they do have some disadvantages when compared with other savings plans. The mandatory contributions and the paperwork, simplified though it is, can be a burden.

As a result, they're not for every company but then, few options are. Consult with 401(k) plan providers and your team of tax professionals to see if this retirement vehicle is the best suited for you and your staff .

Internal Revenue Service. " Choosing a Retirement Plan: SIMPLE 401(k) Plan ."

Internal Revenue Service. " 401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000 ."

Internal Revenue Service. " 2024 Limitations Adjusted as Provided in Section 415(d), etc.; Notice 2023-75 ." Page 1.

Internal Revenue Service. " 401(k) Plans for Small Businesses ." Page 4.

Internal Revenue Service. " 401(k) Plan Overview ."

Internal Revenue Service. " Publication 560, Retirement Plans for Small Business ." Pages 14, 17.

Internal Revenue Service. " SIMPLE IRA Plan ."

Internal Revenue Service. " Choosing a Retirement Solution for Your Small Business ." Page 4.

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SE 401(k) : Self-employed individual or business owner with no employees other than a spouse.

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How do contributions work?

SE 401(k) : Employers may contribute up to 25% of compensation, up to a maximum of $69,000 in 2024 ($76,500 if age 50 or older).⁵ Employees may contribute up to $23,000 for 2024 ($30,500 if age 50 or older).⁵

SEP IRA : Employers may contribute between 0% and 25% of compensation up to a maximum of $69,000 for 2024.⁵ Each eligible employee must receive the same percentage.

Fidelity Advantage 401(k) : Employers make matching contributions, up to 4% of the annual gross compensation of all employees.⁴ Employees may contribute up to $23,000 for 2024 (catch up contributions available).⁵

SIMPLE IRA : Employers contribute either a matching contribution of 1, 2, or 3% or a non-elective contribution of 2%. 7 Participants may contribute up to 100% of compensation with a maximum of $16,000 for 2024 ($19,500 if age 50 or older). 8

Who can contribute?

SE 401(k) : As someone who's self-employed, you can contribute as both employer and employee.

SEP IRA : Only the employer can contribute.

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SIMPLE IRA : Both employees and employers can contribute.

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SIMPLE IRA : There are no account fees and no minimum to open an account, $0 commission for online US stocks and ETF trades.⁶

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SE 401(k) : You can take a withdrawal once you’ve had a triggering event, such as disability, plan termination, turning age 59 ½ or older, and a few others. However, some withdrawals may incur a 10% penalty. 4

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SIMPLE IRA : You can withdraw at any time, but a 10% (or 25% if within the first two years of participation) penalty may apply if you're not yet age 59½. 4

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small business tax credit for retirement plan

IMAGES

  1. Tax-Favored Retirement Plan Options for Small Businesses

    small business tax credit for retirement plan

  2. Your Complete Guide to 2020 U.S. Small Business Tax Credits

    small business tax credit for retirement plan

  3. Form 1040 page 1 retirement plans

    small business tax credit for retirement plan

  4. Small Business Tax Credit from SECURE Act 2.0

    small business tax credit for retirement plan

  5. Choose Best Retirement Pension Plans for Small Business Owners

    small business tax credit for retirement plan

  6. 7 Small Business Tax Credits You Should Know About for 2021

    small business tax credit for retirement plan

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  2. Another Reason to Set Up a Tax Free Retirement

  3. Tax saving strategies for high net worth individuals in retirement 📈

  4. Retirement Report: Tax & Financial Questions P.1

COMMENTS

  1. Retirement Plans Startup Costs Tax Credit

    Retirement Plans Startup Costs Tax Credit Retirement Plans Startup Costs Tax Credit Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401 (k) plan.)

  2. SECURE 2.0: New Small Business Tax Incentives for Retirement Plans

    Increased tax credits to small businesses to encourage plan sponsorship. Expanded credit for retirement administrative costs Previously, employers with less than 100 employees were eligible for a three-year, start-up tax credit of up to 50% of administrative costs, with an annual limit of $5,000.

  3. Publication 560 (2022), Retirement Plans for Small Business

    Increase in credit limitation for small employer plan startup costs. The Further Consolidated Appropriations Act, 2020, P.L. 116-94, amended section 45E. For tax years beginning after December 31, 2019, eligible employers can claim a tax credit for the first credit year and each of the 2 tax years immediately following.

  4. A closer look at SECURE 2.0 startup tax credits

    SECURE 2.0 Act of 2022 created a substantial new startup tax credit to help small businesses establish retirement plans. This credit is based on contributions the employer makes on behalf of participants. SECURE 2.0 also expands the existing startup tax credit on employer plan costs.

  5. 3 New Startup 401(k) Tax Credits

    For companies with 51 to 100 employees: The credit covers 50% of the company's plan costs up to an annual limit of the GREATER of $500 or $250 multiplied by the number of plan-eligible NHCE, up to a maximum credit of $5,000. This is a federal tax credit that is available to eligible employers for the first 3 years that the new plan is in existence.

  6. Instructions for Form 8881 (01/2024)

    The title of Form 8881 is changed to Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment. In addition, the form now has two parts. Part I is used to claim the credit for small employer pension plan startup costs. Part II is used to claim the credit for small employer auto-enrollment in retirement savings. General Instructions

  7. Small Business 401 (k) Tax Credits

    An eligible employer with 51 to 100 employees may only claim a tax credit for 50% of its qualified startup costs. Eligible startup costs with Employee Fiduciary include our one-time setup fee of $500 and our annual administration fee of $1,500 (up to 30 employees, each employee over 30 is $30 annually).

  8. What is Form 8881: Tax Credit for Small Employer Pension Plan Startup

    Smaller qualifying businesses can cut their taxes by up to $500 by claiming the Credit for Small Employer Pension Plan Startup Costs. A business claims this credit by filing IRS Form 8881 with their tax return. TABLE OF CONTENTS Qualifying as a small employer Qualifying your plan Using the tax credit Qualifying as a small employer

  9. One More Incentive to Offer a Retirement Plan: Start-up Cost ...

    By Christopher Magno, SVP/General Manager, Retirement Services, ADP. The new SECURE Act 2.0 and other legislation focuses on making it easier for small businesses to offer a retirement savings plan, including a significantly higher tax credit to cover start-up costs. [NOTE: An updated article is now available: SECURE 2.0 Act of 2022.] With hundreds of provisions included in the recent flurry ...

  10. How the SECURE Act 2.0 Affects Small Businesses

    The SECURE Act 2.0 provides a tax credit for eligible small businesses that do the following for military spouses who are non-highly compensated employees: Make them immediately eligible for plan participation within two months of their start date. Upon plan eligibility, make them eligible for any matching or nonelective contribution that they ...

  11. Simplifying the Retirement Plan Tax Credit for Start-Ups

    $500: or The lesser of: $250 for each employee that is eligible to participate in the plan and is not a Highly Compensated Employee (HCE) or $5,000 The start-up credit is $500 for adding an automatic enrollment feature to a new or existing 401 (k) plan. Which costs are eligible?* The tax credit can be claimed for common and necessary costs to:

  12. Small Business Retirement Guide: The $16,500 Tax Credit Small

    Since 2001, businesses with 100 employees or less have had access to a retirement tax benefit: If you start offering a retirement plan to your employees, you can claim a tax credit equivalent to 50% of the total cost of establishing and communicating that plan, up to $500 per year.

  13. Retirement small business tax credits, retirement changes coming in

    One big benefit is a tax incentive for businesses offering 401 (k) plans of their own, Reid said. For businesses with less than 50 employees, there is a startup credit of 100% of administrative ...

  14. Setting up 401k for small business

    As a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, effective Jan. 1, 2020, the tax credit for small employers starting a new retirement plan increased from $500 annually up to a maximum of $5,000 annually for each of the first three years. 1 Employers can claim the credit if:

  15. How to Claim a Tax Credit for Your Small Business Retirement Plan

    The tax credit can be as high as $16,500 ($5,500 per year). The retirement plan tax credit is calculated by multiplying the number of non-highly compensated employees by $250. The annual tax credit will be the greater of $500, or $250 for every eligible NHCE. The annual tax credit is 50% of the total qualified start-up cost up to $5,000.

  16. Small Business Tax Incentives for Retirement Plans

    The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 increased these tax incentives. Now, small businesses can take advantage of a $250 credit per non-highly compensated (NHCE) employee. This includes a minimum credit of $500 and a maximum credit of $5,000 per year. Small businesses can apply this credit to 50 percent ...

  17. The SECURE ACT Increases 401(k) Tax Credits For Businesses

    In year one, you will have paid $1,635 in 401(k) plan business costs. You can qualify for $2,000 (8 * $250 = $2,000), but since only 50% of business costs can apply for the small business tax credit, you earned a tax credit for $817.50. The net of this is the tax credit cut your 401(k) plan costs in half. Yet, your costs can go lower!

  18. Secure Act 2.0 Retirement Plan Tax Credits: A Home Run for Small Business

    Small Business Startup Credit. Thanks to the Secure Act 2.0, the IRS changed the startup tax credit by increasing the credit from 50% to 100% for businesses that have up to 50 employees. The credit percentage is 100% for the first and second years. Then it is reduced to 75% in year three, 50% in year four, and 25% in the fifth year.

  19. PDF CHOOSING A RETIREMENT SOLUTION

    Choosing a Retirement Solution for Your Small Business is a joint project of the U.S. Department of Labor's Employee Benefits Security Administration (EBSA) and the Internal Revenue Service. ... year for each of the first 3 years of the plan; A tax credit for certain low- and moderate-income individuals (including self-employed) who make ...

  20. Small Business Tax Credit for 401(k)

    Newsletter. Small Business Tax Credit for 401 (k) State Retirement Plan Mandate. Why TPA for Plan Sponsor. Year-end Data Checklist. FINANCIAL ADVISORS. Services. 3 (16) Fiduciary Services. 3 (16) Data Collection.

  21. Small Business Retirement Plan Tax Credits

    And it's a straightforward process: By establishing a retirement plan such as a 401 (k) or SIMPLE IRA plan, a business owner receives a tax credit of up to $5,000 a year for up to three years. To qualify for the credit, the business must have fewer than 100 employees and have not previously sponsored a plan.

  22. SIMPLE 401(k) Plan: What It Is, How It Works, FAQ

    SIMPLE 401(k) plans are retirement savings plans offered by small business employers or companies with 100 or fewer employees. This kind of plan combines the features of traditional 401(k)s with ...

  23. Small-business retirement plans

    SE 401(k): Self-employed individual or business owner with no employees other than a spouse. SEP IRA: Self-employed individual or small business owner, primarily those with only a few employees. 1. Fidelity Advantage 401(k): Small and medium- sized businesses looking to offer a 401(k) for the first time. SIMPLE IRA: Self-employed individuals or businesses with 100 or fewer employees.

  24. 16 small business tax deductions worth knowing

    Retirement contributions. As a small business owner, you can deduct your contributions to a retirement plan, as long as the plan is tax-qualified. ... and tax credits from operating the partnership.

  25. 2024 Tax Optimization Strategies for Small Businesses

    Small business health care tax credit; These credits often require specific activities to qualify, so ensure that your business's operations align with any credit that you intend to claim. ... Take the time to explore the various retirement plan options and contribute regularly as a part of your tax optimization strategy. Take Advantage of ...

  26. Retirement Plans for Small Entities and Self-Employed

    Information on retirement plans for small businesses and the self-employed. ... Advance Child Tax Credit; Standard Deduction; Health Coverage; Retirement Plans; Forms & Instructions. ... Choosing a Retirement Solution for Your Small Business PDF; Choose a Retirement Plan PDF; Choose a Plan - Articles for Small Employers;

  27. Common Tax Breaks for Retirees

    Typically, premature withdrawal from retirement accounts such as 401(k) or IRA before the age of 59 1/2 could attract penalties, but these end once you reach that age. This gives early retirees in particular more financial flexibility. Putting this in perspective, a retiree could make a $20,000 withdrawal from their retirement account without the usual 10% early withdrawal penalty, effectively ...