New Tax Credits for New 401(K) Company Plans

If your company is starting a new 401k plan in (2023 or later), there are some new and not so well known tax credits you should be aware of.

These credits are great as they can offset the costs of setting up and maintaining your plan, making it more affordable to offer retirement benefits to your employees.

1. Startup Tax Credit

The Startup Tax Credit is designed for small businesses with up to 100 employees. 

• Who qualifies? Companies with 100 or fewer employees who earned at least $5,000 in the past year and have not offered a retirement plan in the last three years.
• What qualifies? Examples of eligible costs include setting up the plan, administer the plan (TPA fees), recordkeeping fees, investment advisory fees, and employee education fees.
• How much can you save? This credit is up to $5,000 annually for the first three years. It covers 100% of the startup costs for companies with 50 or fewer employees and 50% of the costs for companies with 51 to 100 employees.
• Additional restrictions:
  
  • Additionally, the plan must cover at least one Non-Highly Compensated Employee (Non-HCE), who is defined as someone who does not own more than 5% of the company, earned less than $135,000 in the preceding year, and is not the spouse of a highly compensated employee. 
  • ⚠️ If the company has more expenses than the credit, they cannot be carried forward.

2. Employer Contribution Tax Credit

This credit is for companies that contribute to their employees’ 401k plans.

• Who qualifies? Companies with 100 or fewer employees who earned at least $5,000 in the past year and have not offered a retirement plan in the last three years.
• How much can you save? This credit is up to $1,000 per employee annually for the first two years. The credit amount decreases over five years (100% in years 1 and 2, 75% in year 3, 50% in year 4, and 25% in year 5).
• Additional restrictions:
  • You will need to make an employer contribution for at least one employee whose annual compensation is not above $100,000
  • The contribution credit becomes more complex for companies with 51 to 100 employees.
• 💡S-Corp owners are included in the contribution credit! If the owner's payroll is less than $100,000, you can get a credit for this as well.

3. Auto-Enrollment Tax Credit

This credit is for companies that implement automatic enrollment for their 401k plans.

• Who qualifies? Companies with 100 or fewer employees who earned at least $5,000 in the past year. The auto-enrollment credit is available for existing plans as well.
• How much can you save? This credit is $500 per year for the first three years.

How to Claim These Credits

To claim these credits, you will need to complete Form 8881. The credit then flows through to the personal return as an available credit against your tax balance.

Final Note

These tax credits can significantly reduce the cost of starting and maintaining a 401k plan, making it easier for small businesses to offer retirement benefits to their employees. Make sure to consult with a tax professional to maximize your benefits.

By taking advantage of these credits, you can support your employees’ financial future while benefiting from valuable tax savings!