An overview

The SECURE Act, which was signed into law on December 20, 2019, made many significant retirement plan changes. Included in these changes are enhanced tax credits for small businesses that start a new 401(k) plan and/or add an automatic enrollment feature to any 401(k) plan.

Effective January 1, 2020, most small business employers may be eligible to claim a tax credit of up to $5,000 for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.) Taxpayers who qualify may claim the credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs.

The credit can be claimed for each of the first three years of the plan although the taxpayer may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective. This is a nonrefundable tax credit.

Any expense offset by this tax credit is not eligible for an additional tax deduction. However, the expenses not offset by the tax credit (such as the other 50% of expenses) would be eligible as a tax deduction.

Who is eligible to claim the credit?

To qualify to claim this credit, a taxpayer must have:

  • 100 or fewer employees who received at least $5,000 in compensation for the preceding year;
  • At least one plan participant who was a non-highly compensated employee (NHCE); and
  • In the three tax years before the first year of being eligible for the credit, taxpayer’s employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by taxpayer, a member of a controlled group that includes taxpayer, or a predecessor of either.

How much is the credit?

The credit is 50% of eligible startup costs, up to the greater of:

  • $500; or
  • The lesser of:
    • $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or
    • $5,000.

What are the start-up costs that can be claimed?

A taxpayer may claim the credit for ordinary and necessary costs to:

  • Set up and administer the plan, and
  • Educate the employees about the plan.

Auto-enrollment tax credit

An eligible employer who adds an auto-enrollment feature to their company’s plan can claim a tax credit of $500 per year for a three-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature.

Mariana Moghadam is a Member of the Firm with a distinctive leadership role in SobelCo’s Tax and Real Estate Practices. With more than 20 years of professional experience in public accounting and private industry, her extensive background covers a full range of domestic tax entities (corporations, partnerships, limited liability companies, and REITs) and jurisdictions (federal, state, local, and multi-state taxes) as well as international matters.