Start-up companies and other small employers take note—the recently enacted SECURE 2.0 Act of 2022 included a significant expansion of the small employer pension plan startup cost tax credit, including a new credit for employer contributions during the plan’s early years.

Existing law includes a tax credit equal to 50% of the costs an eligible employer incurs to establish a qualified retirement plan.  The amount of the credit ranges from $500 to $5,000, depending on the number of the employer’s employees, and can apply for up to three years.  Generally, any employer that had 100 or fewer employees for the preceding year and that did not sponsor a qualified retirement plan within the last three years will qualify.  The credit may be claimed for costs incurred to set up and administer a qualified retirement plan or to educate employees about the plan.  No deduction is permitted for costs for which a credit is claimed.

Starting in 2023, for employers with 50 or fewer employees this credit is now equal to 100% of such plan start-up costs, subject to the same dollar limits described above.  For many small employers, the credit will likely cover most, if not all, of the costs of setting up and administering a plan for the first three years.

Also starting in 2023, small employers may also claim an additional credit equal to a percentage of the employer matching or nonelective contributions made to a defined contribution plan like a 401(k) plan.  The percentage is 100% for the year the plan is established and the following year, and then decreases by 25% each year thereafter (that is, 75% the third year, 50% the fourth, 25% the fifth, 0% the sixth and thereafter).  The following limits also apply:

• The credit is subject to a per-employee cap of $1,000;
• No credit is allowed on contributions for employees who receive FICA wages for the year in excess of $100,000 (indexed for inflation); and
• The credit phases out for employers with between 51 and 100 employees (aggregation rules apply to determine the employee count of related employers).

This could be a significant boon to start-up companies and other employers who qualify and could be a nice, taxpayer-subsidized benefit to offer employees.