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New Tax Credits for Small Business Owners Adopting Retirement Plans

New Tax Credits for Small Business Owners Adopting Retirement Plans

April 09, 2024

For small business owners, detangling the complexities of tax regulations while striving to provide valuable benefits to employees can feel daunting. However, recent developments in tax law offer a promising solution: the introduction of tax credits for those who establish employer-sponsored retirement plans.


The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in December 2019, expanded the availability of retirement plan tax credits. This legislation introduced additional credits for small businesses that automatically enroll employees in retirement plans, as well as credits for establishing and maintaining eligible plans like SIMPLE IRAs and 401(k) plans.

The Retirement Plans Startup Costs Tax Credit

The IRS has introduced the Retirement Plans Startup Costs Tax Credit, aimed at incentivizing small businesses to initiate retirement plans for their employees. This tax credit covers up to 50% of the startup costs incurred by the employer, with a maximum credit of $5000 per year for the first three years of the plan. Eligible startup costs include expenses related to establishing and administering the retirement plan, as outlined in IRS Publication 560.

One of the key benefits of this tax credit is its accessibility to small businesses of all sizes. Whether you're a sole proprietor, a partnership, or a corporation, you may qualify for the credit if you meet certain criteria. The credit is available to businesses with 100 or fewer employees who received at least $5,000 in compensation in the preceding year. Additionally, the plan must cover at least one non-highly compensated employee.

For employers with 50 or fewer employees, the credit will cover 100% of the employer’s ordinary and necessary out-of-pocket plan costs. For those with 51 to 100 employees, the coverage is capped at 50 percent.

The Employer Contribution Credit

In addition to the credit for startup costs of a retirement plan, employers may also qualify for an employer contribution tax credit. For each employee earning less than $100,000 annually, employers can receive a tax credit against contributions made in their names to defined contribution plans, such as 401(k), SEP and SIMPLE plans.

The credit maxes out at $1,000 per employee and applies only to plans with no more than 100 employee participants.

Retirement Plans Benefit Employers and Employees

Small business owners stand to gain significant advantages by taking advantage of these tax credits. Not only do retirement plans help attract and retain top talent by offering valuable benefits, but they also provide tax advantages for both employers and employees. Contributions to retirement plans are tax-deductible for employers and can grow tax-deferred until withdrawn in retirement. Additionally, employees benefit from the opportunity to save for retirement through payroll deductions, potentially lowering their taxable income.

By adopting an employer-sponsored retirement plan, small business owners demonstrate their commitment to the financial well-being of their employees while simultaneously leveraging valuable tax incentives. With the assistance of tax credits provided by the IRS, the barriers to entry for establishing retirement plans are significantly reduced, making it more feasible for small businesses to offer these essential benefits.

By taking proactive steps to establish retirement plans, small businesses can reap the rewards of tax savings and employee satisfaction. For more information on retirement planning and tax credits, call our office to schedule an appointment. We can help you determine how to proceed so that both your business and your employees can benefit from these opportunities.