Attention Plan Sponsors:
Does It Cost Employers A Lot of Money to Start a 401(K) Plan?
As an employer, you are likely looking for cost effective ways to attract stellar employees. This economy makes every expense something to scrutinize. However, with issues such as the “Great Resignation,” “Quiet Quitting,” and the overall employee shortage plaguing all industries, you must listen to what employees say they want and then give them these benefits.
One of the benefits employees want is a retirement savings plan. While it may sound like a great expense, employers can actually benefit from offering such plans to employees – beyond attracting valuable talent to the job.
The Retirement Plan Startup Costs Tax Credit
Starting a 401(k) or qualified retirement savings plan for your employees will benefit employees as well as your business. The IRS is literally invested in business starting such plans for their employees. As a result, they will provide you with up to a $5,000 tax credit for three years for the ordinary and necessary costs of starting such a plan. In other words, the IRS will give you a credit to offset your corporate taxes for three years to help you cover the costs of starting a benefit that helps your employees save for their retirement.
Not every employer qualifies for this credit. However, many of you reading this blog will fall in the category of qualified employers. Read on to learn how to qualify for this tax credit and what it means for you and your business.
Who Qualifies for the Retirement Plan Startup Costs Tax Credit?
Your company may qualify for this tax credit if you meet the following criteria as set by the IRS. Your company must:
- Have fewer than 100 employees who received compensation totaling at least $5,000 in the prior tax year.
- Have at least one plan participant who is considered a non-highly compensated employee (NHCE).
- The employees were not substantially the same employees who received contributions or accrued benefits in another plan sponsored by your business, a member of a controlled group including you or your business, or a predecessor within the three years before the first year of being eligible for the credit.
In other words, your company must have employees of all income ranges within your company, including those legally considered non-highly compensated employees take part in the retirement savings plan, They can only receive benefits under this plan and not other plans also sponsored by you, your company, or any groups you are involved in, and you must have a workforce of under 100 people making over $5,000 a year.
What Restrictions Apply to the Retirement Plans Startup Costs Tax Credit?
There is a caveat relating to this tax credit. Many employers will look to deduct the startup costs for starting a retirement savings plan for their employees. If you wish to take advantage of this credit, you are not permitted to claim these expenses as a deduction for your business. However, claiming the credit is optional. If you find the deduction is more beneficial to your company, you are welcome to claim the deduction instead of accepting the credit.
The credit will equate to 50% of your eligible startup costs, which is up to the great of $500 or the lesser of #250 times the number of NHCEs eligible to participate in the plan of $5,000. These eligible costs include money used to set up and administer the plan and money used to educate employees about the plan.
Contact Tanker Consulting Group to Learn More About the Available Credits to Start a 401(k) Plan for Your Employees
Tanker Consulting Group helps employers provide retirement savings options for their employees. Contact them today at 609.922.0201 to learn more about the Retirement Plans Startup Costs Tax Credit and whether it is the right option for your business.