Small Business Retirement Plan Credits

By Dan Ashburn

The SECURE Act brought many new tax breaks to help small businesses. The Small Employer Pension Plan Tax Credit provides businesses a credit for the start-up costs of implementing a new retirement plan for their employees. The Small Employer Retirement Savings Auto Enrollment Credit is a new credit for businesses who include and maintain an automatic enrollment feature in their plans. As always, there are certain requirements you will need to meet to receive these credits.

Am I eligible to receive the credits?

For both credits, you must be considered an “eligible employer”. An eligible employer is one that had 100 or fewer employees who received at least $5,000 in compensation for the preceding year, had at least one employee participating in their plan, and in the three prior tax years the same employees were not participating in another plan sponsored by the employer. The plan must also be an eligible plan, which include a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.

How much can I receive from the credits?

For the 2020 tax year and onwards, you can take the Small Employer Pension Plan Tax Credit for the first three years of the plan’s existence. The amount of the credit depends on several factors. To start, the amount of the credit cannot exceed 50% of all qualifying costs to set up the plan. These qualifying costs include any expenses for setting up and administering the plan and any costs incurred to educate your employees on the plan.

Beginning in 2020 the minimum credit is $500 and for every eligible employee you will receive a $250 credit, up to $5,000. Eligible employees must also be “non-highly compensated employees.” These are employees who received less than $125,000 in salary and owned less than 5% of the company. For example, if you have 15 employees you will be eligible for a $3,750 credit (15*$250=$3,750). If you have more than 20 employees you will max out the credit at $5,000, if 50% of your qualifying start-up costs are greater than the credit.

For the Small Employer Retirement Savings Auto-Enrollment Credit you must be an “eligible employer” and have an “eligible plan” as explained above. The business will receive a $500 credit for three years if they maintain an automatic enrollment feature in the employer-sponsored plan.

If you were thinking of adding a retirement plan benefit to your business, these credits will help you with the costs of setting up and implementing this employee benefit.  If you implemented a plan during 2021, be sure to discuss how these credits apply to your business with your CPA.  Please reach out to Snyder Cohn if you have any questions.