On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. 

If you are considering establishing a qualified pension plan for your business, you may be entitled to the Credit for Small Employer Pension Startup Costs. Eligible small employers that adopt a new plan, such as a 401(k), a SIMPLE plan, or a simplified employee pension plan (SEP), may claim a nonrefundable credit.

The first credit year is the tax year that includes the date when the plan becomes effective or, electively, the preceding tax year. Examples of qualifying expenses include the costs related to changing the employer’s payroll system, consulting fees, and set-up fees for investment vehicles.

There are some qualification rules, the most predominant being:

  • The business did not employ, in the preceding year, more than 100 employees with compensation of at least $5,000.
  • The plan must cover at least one non–highly compensated employee.
  • The plan must be a new plan; during the three prior years, the employer must not have had a qualified employer plan for which contributions were made or in which benefits accrued for substantially the same employees who are in the plan for which the credit is being claimed.
  • If the credit is for the cost of a payroll-deduction IRA plan, the plan must be made available to all employees who have worked with the employer for at least three months.

Prior to 2020, this non-refundable credit was limited to the lesser of $500 or 50% of administrative and retirement-education expenses for the plan, for each of the plan’s first three years.

The Appropriations Act of 2020 increased the maximum credit for years beginning after 2019 to the greater of $500 or the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000.

The term “highly compensated employee” generally means any employee who (a) was a 5% owner at any time during the year or the preceding year, or (b) had compensation from the employer in excess of $130,000 (2020 amount, which is inflation adjusted for future years) during the year.

If you have questions related to starting a company pension plan or qualifying for this credit, please give this office a call.