According to U.S. Department of Labor statistics, 64 % of all employees in medium- and large-sized firms are covered by an employment-based retirement plan, compared with only 34 % at small firms. One reason cited by small businesses for not offering retirement plans is the high costs associated with set-up and administration of a retirement plan.
Start-up costs have always been a major hurdle to small businesses who want to start a 401(k) plan, but a provision of The Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) helps scale this barrier to employee saving opportunities. EGTRRA implemented a credit for employers to offset the start-up cost and the cost of educating employees about the new plan.
For costs paid or incurred in tax years beginning after December 31, 2001, for retirement plans that first become effective after that date, you may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or qualified plan (including a 401(k)).The credit equals 50% of the cost to set-up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first three years of the plan. For plans that become effective after 2002, you can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.
You qualify to claim this credit if:
The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year. However, the part of the general business credit attributable to the small employer pension plan start-up cost credit cannot be carried back to a tax year beginning before January 1, 2002.
To take the credit, get Form 8881, Credit for Small Employer Pension Plan Start-up Costs, and the instructions.
Obviously, everyone’s tax situation is different so, as much as we hope this helped you to better understand this topic, it is not to be construed as financial, tax or legal advice. Therefore, if you believe that it may apply to your (or your client’s) company, be sure to further discuss it with a qualified accountant or tax professional.
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