Starting Up a Pension Plan - You May Get a Tax Credit!

If you are considering establishing a qualified pension plan for your business, you may be entitled to the “small employer pension start-up credit.” Eligible small employers that adopt a new plan, such as a 401(k), SIMPLE plan, or simplified employee pension plan (SEP), may claim a nonrefundable credit. The credit is equal to 50% of administrative and retirement-related education expenses for the plan for each of the first three plan years, with a maximum credit of $500 for each year.

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

There are some qualification rules; the most predominate being:

o The business did not employ, in the preceding year, more than 100 employees with compensation of at least $5,000.

o The plan must cover at least one non-highly compensated employee.

o The plan must be a new one – during the three prior years, the employer may not have had a qualified employer plan for which contributions were made or benefits accrued for substantially the same employees who are in the plan for which the credit is being claimed.

o 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.

No deduction is allowed for that portion of the qualified start-up costs paid or incurred for the tax year which is equal to the credit. However, an eligible employer may elect not to have the credit apply for any tax year.

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