Common misconception exists regarding the plan start-up credit which is only available to small employers. A small employer is defined as an employer that had 100 or fewer employees and who each received at least $5,000 of compensation from the employer for the preceding year. Therefore, since a Solo 401k | Individual 401k plan is for the self employed with no employees, it cannot claim the credit.
The rest of this blog posting explains the plan start-up credit but remember that it doesn’t apply to Solo 401k or Individual 401k.
Resulting from the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, a qualified employer may take the tax credit for establishing a new qualified retirement plan.
Qualified start-up costs
Include any ordinary or necessary expenses incurred in connection with:
- establishment of plan;
- administration; or
- educating employees about the plan
Determining the Credit and Form 8881
- The credit equals 50% of start-up costs detailed above up to $500 per year for maximum of plan’s first 3 years.
- Employer has option of applying 1st year credit to year of plan establishment or to year before.
- To claim credit, qualified employer completes and attaches Form 8881, Credit for Small Employer Pension Plan Startup Costs, to its business tax return.
- The credit is permitted as part of employer’s general business credit.
- Employer may not claim a deduction for the start-up costs in addition to claiming the credit.
- However, employer has option to elect not to claim the start-up credit at all.