Understanding the 401(k) plan tax credits
Offering a 401(k) plan is a great way to bolster your organization’s employee benefits – and now, it’s more affordable than ever. The SECURE Act and SECURE Act 2.0 offer substantial tax credits for launching and maintaining a retirement plan. You can find an overview of the available 401(k) plan tax credits below, but we always recommend discussing any determinations with a tax professional.
Plan Startup Cost Credit
Objective: To offset the setup and administrative costs of a new 401(k) plan.
Eligibility Criteria: 100 or fewer employees and have not offered a plan covering substantially the same employees in the previous three years.
Credit Amount: $500 up to $5,000 per year
- 50 or fewer employees – up to 100% of costs
- 51 – 100 employees – up to 50% of costs
Term: Available for the first three years of a new plan.
Sample Credit Calculations:
Automatic Enrollment Credit
Objective: To encourage the adoption of automatic enrollment on new and existing 401(k) plans.
Eligibility Criteria: 100 or fewer employees, add automatic enrollment to new or existing 401(k) plan.
Credit Amount: $500 per year
Term: Three years
Employer Contribution Credit
Objective: Encourage employer contributions to employee accounts in new 401(k) plans.
Eligibility Criteria: 100 or fewer employees, made qualifying employer contributions to the accounts of eligible employees.
Credit Amount: Up to $1,000 per eligible employee per year, $50,000 employer maximum with a 2% credit reduction for each employee over 50.
Term: Five-year phaseout (100% in years 1 & 2; 75% in year 3, 50% in year 4; 25% in year 5)
Additional Notes:
- Qualifying employer contributions: made to employees who earned $100,000 or less in wages for the tax year, $1,000 maximum per eligible employee
- 51-100 employees: 2% reduction for each employee over 50 (ex: 75 employees would mean a 50% reduction in the available tax credit – 75-50 = 25 x 2% = 50%)
- 5-year credit phase-out: Yrs 1-2 – 100%; Yr 3 – 75%; Yr 4 – 50%; Yr 5 – 25%
Sample Credit Calculations:
Additional Resources:
- No double-dipping – remember, you can’t use an expense for both a credit and a deduction. You should evaluate both options and choose the one that is most beneficial for your business.
- Here’s a tax credit overview that includes more sample credit calculations.
- When you’re ready to file, use IRS Form 8881 – Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment
- Instructions for IRS Form 8881
- IRS guidance regarding provisions of the SECURE Act
