Tax Tip #322

Eligible employers may be able 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, such as a 401(k). 

To qualify for the credit, an employer must have: 

• 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year 
• At least one plan participant who was a non-highly compensated employee (NHCE) (earning more than $100,000) 
  
  

If employer has 50 or fewer employees who received at least $5,000, the credit is 100% (50% if 51-100 employees) 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

Eligible startup costs include:

• Setting up and administering the plan
• Educating employees about the plan. 

An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a 3-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature. This tax credit is available for new or existing plans that adopt an eligible auto-enrollment plan.