Startup 401K Tax Credits

The Secure Act which was passed in September 2020 greatly expanded the tax credits available to small business that start a new 401k plan. A tax credit is a dollar for dollar offset for taxes owed. For example, if your total federal tax liability is $15,000 and you have a $5,000 tax credit, your tax bill would be reduced to $10,000.

To qualify for the tax credit, you must:

  1. Have 100 or fewer employees earning at least $5,000 per year.
  2. Cover at least 1 Non-Highly Compensated Employee (NHCE).
  3. Not have had a company sponsored retirement plan during the previous 3 taxable years.

If you do qualify, you will receive tax credits in the following amounts:

The greater of $500
Or
The lesser of the number of Non-Highly Compensated Employees (NHCE) x $250 or $5,000

Example 1:

You have 12 employees. 10 of them are NHCE’s

10 NHCE’s x $250 tax credit = $2,500 total tax credit

Example 2:

You have 50 employees. 45 who are NHCE’s

45 NHCE’s x $250 tax credit = $11,250 $5,000 is less than $11,250, so your tax credits
are limited to $5,000

Example 3:

You have 1 NHCE

1 NHCE x $250 = $500 which is greater than $250, so your tax credit is $500

The tax credit is available for the first 3 years of the plan operation. So, this can be an extremely
generous benefit. It is possible, in some cases, that tax credits will pay the plan’s entire administrative
costs for the first 3 years.

So, if you are thinking about starting a 401k plan, now is the time to do it.

We can help you estimate your tax credits. Just complete the following and submit