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Small Business Retirement Plan Startup Credit: A Tax-Saving Opportunity for Employers

 

If you're a small business owner, offering a retirement plan can be a game-changer—for both your employees and your bottom line. To make it easier and more affordable for small businesses to set up retirement plans, the IRS provides the Small Business Retirement Plan Startup Credit.

 

This tax credit helps cover the costs of establishing and maintaining a 401(k), SIMPLE IRA, SEP IRA, or another qualified retirement plan. Thanks to recent changes under the SECURE Act and SECURE 2.0 Act, this credit is now more generous than ever.

 

In this post, we'll explain how the Small Business Retirement Plan Startup Credit works, who qualifies, how much you can save, and how to claim it.

 

What Is the Small Business Retirement Plan Startup Credit?

 

The Small Business Retirement Plan Startup Cost Tax Credit is a federal tax incentive that helps small businesses offset the expenses of starting a new retirement plan for employees.

 

This credit applies to businesses with 100 or fewer employees and covers a portion of the administrative and setup costs for the first three years of the plan.

 

Under the SECURE 2.0 Act, which became law in 2022, the credit has been expanded, making it even more attractive for small businesses to take advantage of.

 

Who Qualifies for the Credit?

 

Your business is eligible for the Retirement Plan Startup Credit if:

 

• You have 100 or fewer employees who earned at least $5,000 in the previous year.
• You did not have a retirement plan for the same employees in the past three years.
• You establish a qualified retirement plan, such as 401(k) (Traditional or Roth), SIMPLE IRA, SEP IRA, or other eligible retirement plans

 

If your business meets these qualifications, you can claim the credit for three years after setting up the plan.

 

How Much Can You Save?

 

The SECURE 2.0 Act has significantly increased the tax benefits for small businesses that start a retirement plan. Here’s how the credit works:

 

1. Retirement Plan Startup Cost Credit

• Covers 100% of eligible plan setup and administration costs for businesses with 50 or fewer employees (previously, it covered only 50%).

• Maximum credit: $5,000 per year for three years.

• The credit is calculated as the greater of:

$500, OR

$250 per eligible non-highly compensated employee (NHCE) (employees earning less than $150,000 in 2024), up to $5,000 per year.

 

2. Employer Contribution Credit (New Under SECURE 2.0)

• If your business makes employer contributions to employees’ retirement accounts, you may qualify for an additional credit.

• Covers up to $1,000 per employee for employer contributions.

• Available for businesses with 50 or fewer employees and phases out for businesses with 51-100 employees.

• Credit starts at 100% of employer contributions in years 1 and 2, then phases down over five years.

 

Example of Potential Savings

 

Imagine you run a 20-employee business and start a 401(k) plan:

• You qualify for a $5,000 annual startup cost credit for three years.

• You contribute $1,000 per employee, and you qualify for the employer contribution credit, covering part of your contributions.

• Over three years, you could save $15,000 or more in tax credits!

 

How to Claim the Small Business Retirement Plan Startup Credit

 

To take advantage of this credit, follow these steps:

 

• Step 1: Choose a Retirement Plan
Work with a financial advisor or retirement plan provider to set up a 401(k), SIMPLE IRA, SEP IRA, or another qualified plan.

 

• Step 2: Keep Records of Startup Costs
Eligible expenses include administrative fees, setup costs, and employee education costs related to the retirement plan.

 

• Step 3: Complete IRS Form 8881
Use IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs, when filing your business tax return.

 

• Step 4: Apply the Credit to Your Taxes
The credit directly reduces the amount of taxes your business owes. If your credit is larger than your tax bill, you may be able to carry it forward to future tax years.

 

Why Should Small Businesses Take Advantage of This Credit?

 

• Reduce Taxes – Save up to $5,000 per year in tax credits.
• Attract and Retain Employees – Retirement benefits make your business more competitive.
• Boost Your Own Retirement Savings – Business owners can also participate in the plan.
• Take Advantage of SECURE 2.0 Benefits – Expanded credits and additional savings opportunities.

 

By offering a retirement plan, you’re not just providing a benefit to your employees—you’re also making a smart financial decision for your business.

 

Final Thoughts

 

The Small Business Retirement Plan Startup Credit is a fantastic opportunity for small businesses to save on taxes while helping employees secure their financial future. With up to $5,000 per year for three years (plus potential employer contribution credits), there’s never been a better time to start a retirement plan.