Unlocking Tax Benefits: A Guide for Small Employers on Pension Plans

At HR Ledger, we are always working to provide you with the most relevant and beneficial information. Today, we’d like to highlight a potential tax advantage for small employers who are considering the establishment of pension plans.

Eligible employers could claim a tax credit of up to $5,000 when initiating a Simplified Employee Pension (SEP), a Savings Incentive Match Plan for Employees (SIMPLE IRA), or a qualified plan like a 401(k). This credit is accessible to businesses that meet the following criteria:

  • You had 100 or fewer employees in the previous year who each received at least $5,000 in compensation.
  • At least one of your plan participants was not a highly compensated employee.
  • Your employees did not receive contributions or benefits from another plan sponsored by you in the three tax years prior to the first year you are eligible for the credit.

The credit covers 50% of the eligible startup costs and is calculated based on the greater of the following two amounts:

  • $500
  • The lesser of $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan or $5,000.

These startup costs include costs to set up and administer the plan and educate your employees about it. The credit can be claimed for each of the first three years of the plan and may even be claimed in the tax year before the plan becomes effective.

In addition to this, if you choose to add an auto-enrollment feature to your pension plan, you can claim an additional tax credit of $500 per year for a three-year taxable period. But bear in mind that this feature comes with added administrative responsibilities.

To claim the tax credit, you will need to file IRS Form 8881 with your tax return. Most retirement plans commonly offered by employers qualify for this credit.

We hope this information proves useful as you consider ways to enhance your employee benefits while also managing costs. As always, the HR Ledger team is here to support you with any questions or concerns you may have.

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Written by:

Scott Evers

Scott Evers

Vice President Sales and Marketing