§45E Small Employer Pension Plan Startup Costs

Summary

Gives a tax credit to small employers for starting a retirement plan. The credit equals 50 percent of the plan’s qualified startup costs paid or incurred in the year. The credit is only available for the first credit year and the two years after that. Each of those years the credit cannot be more than the greater of $500 or the smaller of $250 times each non–highly compensated employee who can join the plan, or $5,000. After those three years the credit is zero. Qualified startup costs are ordinary expenses to set up or run the plan or to teach employees about it, and the plan must have at least one non–highly compensated employee eligible. An “eligible employer” and “eligible employer plan” are the terms the tax code uses for the kinds of employers and plans that can get this credit. An employer cannot get the credit if, during the three-taxable-year period before the first credit year, the employer or its controlled group already ran a plan that covered essentially the same employees. The credit can be increased by a share of employer contributions (but not employee elective deferrals, and not for defined benefit plans). That extra amount cannot exceed $1,000 per employee. If the employer had more than 50 employees in the prior year, the extra is reduced by 2 percentage points for each employee over 50. Contributions for any employee who earns more than $100,000 in wages don’t count; after 2023 that $100,000 is adjusted for inflation using the cost‑of‑living rule in section 1(f)(3) with calendar year 2007 substituted for calendar year 2016. The applicable percentage for the contribution boost is 100 percent for the year the plan is established, and then follows this schedule for later years: 1st 100%, 2nd 75%, 3rd 50%, 4th 25%, and 0% after that. Companies treated as a single employer are combined, no double deductions are allowed for costs or contributions covered by the credit, and an employer may elect not to use the credit for a year. If an employer would qualify under a 50‑employee rule instead of 100, the startup cost percentage is 100 percent instead of 50 percent.