Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in December 2019, a number of tax credits were enacted to encourage small businesses to begin offering retirement plans. One of those credits was designed to help small businesses offset the first three years of retirement plan startup costs (with a ceiling of the lesser of: (a) $250 per non-highly compensated employee or (b) $5,000 in startup costs eligible for the credit) in an amount equal to 50% of qualified startup costs paid or incurred, In general, “qualified startup costs” are ordinary and necessary expenses of an eligible employer that are paid or incurred in connection with the establishment or administration of an eligible employer plan, or the retirement-related education of employees with respect to a plan if the plan has at least one participant who is not a highly compensated employee.
Another tax credit SECURE created was a $500 annual credit for three years if the employer included an auto-enrollment feature in the plan. This credit is only available for employers that have fewer than 100 employees with at least $5,000 in compensation in the previous year and the plan must cover at least one non-highly compensated employee.
SECURE 2.0, which was contained in Consolidated Appropriations Act, 2023, P.L. 117-328, enacted December 29, 2022, extended the startup costs tax credit for the first three years to 100% of plan administrative expenses for businesses with 50 or fewer employees (still limited to the lesser of: (a) $250 per non-highly compensated employee or (b) $5,000). See 26 U.S.C. 45E (a) through (e). See also https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-creditOpens overlay.
Employers should be advised to consult their tax advisors concerning eligibility for the credit.
