Retirement Plans Startup Costs Tax Credit

As mentioned in our post, “State Retirement Plan Mandates,” America is facing a retirement savings crisis. The statistics highlighted in our previous posts illustrate the severity of the situation. One statistic worth repeating is that only 59% of employees who work for businesses with fewer than 100 employees have access to a retirement plan through their employer.

The government is well aware of this situation and has taken steps to help reduce the cost for small businesses to establish qualified retirement plans, such as 401(k) plans. In 2022, Congress enacted the SECURE 2.0 Act, which increased the tax credits that small businesses can claim for establishing and administering a plan, as well as for educating employees about the plan. The tax credits are available to businesses with fewer than 100 employees. See the official IRS website for eligibility requirements.

Unlike other retirement plan providers, Crecer has built a modern system that allows businesses to establish and manage retirement plans without paying any fees. Our sign-up process is intuitive and takes only about 10–15 minutes to complete. Once the retirement plan is established, our automated system handles most of the ongoing administrative work.

However, some business owners may prefer to have their accountant assist with the initial sign-up process and occasional administrative tasks. In these cases, the accountant may charge the business for the time spent assisting with the retirement plan. The IRS tax credit also applies to fees charged by the business’s accountant, provided that the fees are specifically related to establishing and administering the retirement plan.

Here is a hypothetical example of how the tax credit could be used.

A small business named Acme Corp decides to create a Crecer 401(k) plan. The business is owned by a couple and has 25 employees including the two owners. Three of the employees are senior managers and earned over $160,000 in the prior year. The IRS considers the owners and senior managers highly compensated employees since they either own more than 5% interest in the business or earned over $160,000 in the prior year. This means the remaining 20 employees, who we’ll assume are all eligible for the plan and earned at least $5,000 in the prior year, are non-highly compensated employees.

For a qualifying business with 50 or fewer employees, the IRS startup credit generally covers 100% of eligible costs to establish and administer a 401(k) plan, up to an annual limit. The limit is generally $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan, with a maximum of $5,000 per year. Let’s walk through a possible startup credit calculation for Acme Corp.

• Charge from Crecer and its affiliates to establish and administer the plan = $0

• Hypothetical charge from Acme corp’s accountant to assist with the plan set up = $2,500

• Calculated credit limit: $250 × 20 eligible employees = $5,000, which equals the maximum annual limit.

To summarize, if Acme corp meets all of the qualifications they can claim the $2,500 fee from the accountant for setting up their Crecer 401(k) plan as a tax credit. In fact, if the accountant’s fee exceeds $2,500, Acme Corp may claim the full amount, up to the $5,000 annual limit. Note that this is generally more valuable than a tax deduction because it reduces taxes owed on a dollar-for-dollar basis. Assuming Acme Corp can use the full $2,500 credit, it would offset the accountant’s fee, effectively making the cost of setting up the plan with the accountant’s assistance free.