§45E Small employer pension plan startup costs

Summary

You can get a tax credit equal to 50 percent of the money a qualifying small employer spends to start or run a workplace retirement plan and to teach employees about it. The credit only applies for the first credit year and the next two years. Each of those years the credit can’t be more than the larger of $500 or $250 for each non‑highly‑paid employee eligible for the plan (but never more than $5,000). The first credit year is the year the plan starts, or the employer can choose the year before. Definitions: “eligible employer” is the term used in section 408(p)(2)(C)(i). “Qualified startup costs” are ordinary expenses to set up or run the plan or to educate employees, and the plan must have at least one eligible employee who is not highly compensated. “Eligible employer plan” means a qualified employer plan as described in section 4972(d). “First credit year” is the year the plan takes effect (or the prior year if chosen). The credit can be increased by a percentage of employer contributions to the plan (not employee deferrals and not for defined benefit plans). That increase is limited to $1,000 per employee. If the employer had more than 50 employees in the previous year, the increase is reduced by 2 percentage points for each employee over 50. Employer contributions for employees paid over $100,000 are ignored (the $100,000 limit is adjusted for inflation for years after 2023 under the rule in section 1(f)(3) with calendar year 2007 substituted for 2016). The contribution percentage is 100% in the year the plan is set up, 75% the next year, 50% the next, 25% the fourth year, and 0% after that. Employers in a controlled group are treated as one employer. You cannot deduct the part of costs or contributions that the credit covers. If an employer had a plan covering the same employees in the three years before the first credit year, the employer is not eligible. An employer can also choose not to take this credit for a year. Finally, certain very small employers treated as eligible under a 50‑employee test get 100% instead of 50%.