§45E Small Employer Pension Plan Startup Costs

Summary

Small employers can get a tax credit to help pay for starting a retirement plan. The credit pays 50% of the plan startup costs the employer pays or incurs in a year. For the first year the plan is effective and the next two years, the credit cannot be more than the greater of $500 or $250 for each non‑highly‑paid employee who can join the plan (but no more than $5,000). After those three years, no credit is allowed. If an employer would qualify under a smaller-employee rule (50 instead of 100 employees), the credit rate is 100% instead of 50%. Key terms in one line each: eligible employer — the kind of employer the tax rules point to; qualified startup costs — ordinary costs to set up or run the plan or teach employees about it (only counts if the plan has at least one eligible non‑highly‑paid participant); eligible employer plan — a qualified retirement plan; first credit year — the year the plan starts (or the year before, if the employer chooses). Related businesses are treated as one employer for counting and limits. The employer must reduce any tax deduction by the amount of costs covered by the credit, can choose not to claim the credit, and may get an extra credit for employer contributions (not employee deferrals or defined benefit plans). That extra credit is limited to $1,000 per employee, is phased down if the employer had more than 50 employees (2 percentage points lost for each employee over 50), ignores wages above $100,000 (indexed after 2023), and is available at 100% when the plan starts and the following year, then 75%, 50%, 25%, and 0% in later years.