Credit for Setting Up a Retirement Plan

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Written by Jeff Dvorachek

September 27, 2019

Over the last couple weeks, we’ve talked about different credits that are available to businesses for doing things they might do every day and may not think they have a tax credit for. Credit for setting up a retirement plan is a similar one.

If you are a small business looking to retain employees, the benefits you offer can be the difference between keeping a good employee and losing them. If you do not offer a retirement plan for your employee, now may be a good time to start one, and you can get a tax credit to cover some of your costs.

When it comes to retirement plans, there’s actually a tax credit that you can get for the cost of setting up a retirement plan. Click the link below to listen to this 5-minute podcast.

What type of plans can be set up?

You can set up the normal business retirement plans such as the SEP (Simplified Employee Pension) which we talked about on prior shows, SIMPLE IRAs, 401(k)s, or other qualified plans.

What is the amount of the credit? Will it actually make a difference for a business owner?

It will. It’s 50% of expenses and a maximum credit of up to $500 per year. If that can offset some of your costs, it may make it worthwhile for you to set up that employee retirement plan.

What expenses qualify?

The costs to set up or administer the plan or costs to educate your employees about the benefits of the plan. Unfortunately, any company match or contribution expense does not qualify for the credit. It’s mostly setting it up and making sure your employees are aware of it.

Are there any limitations?

There is. This is really intended, like many other credits, for small businesses. These small businesses are defined as having 100 or fewer employees. They also have at least one non-highly compensated employee. In other words, you can’t set it up for just an owner. You have to set it up for an owner and another one or two employees. Also, the company could not have had a retirement plan for at least the last three years.

What if that employee is a family member? Does that count?

A lot of times the attribution rules will pull you in, so it almost has to be someone who is not related in order to qualify.

How long can they take the credit?

We talked about earlier how the credit is up to $500 per year and it can be taken for up to three years – so it could be a $1,500 maximum credit.

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Jeff Dvorachek
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.

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