Did you know that the IRS will help pay your costs for setting up an employee retirement plan? You can get up to $1,500 as an expense reimbursement from Uncle Sam, and it’s really not that difficult.
If you are a startup business or practice, one of the first benefits you will probably want to put in place is an employee retirement plan. Even before you match any contributions, however, you’re going to incur some costs.
Costs for setting up a plan include:
- Payments to set up the plan. These payments could be made to your financial planner or CPA for research and recommendations, choosing custodians, and initial 401k setup fees paid to your Third-Party Administrator.
- Payments to administer the plan. After initial setup, you may continue to incur costs for plan administration, especially if you have a 401k or other kind of qualified plan.
- Costs to educate your employees about the plan.
- Side note: An investment in employee education will benefit all plan participants. Unfortunately, employers rarely pay a separate fee for education, relying instead on the sparse amount of information provided by the plan provider (usually a salesman), leaving employees in the dark. A CPA or financial planner who is independent of the plan can give your employees actionable information to will help them make better investment decisions.
The credit is 50% of the first $1,000 of these costs for the first 3 years of the plan; claim it on form 8881. Expenses for a SEP, SIMPLE, or qualified plan count toward the credit limit.
To be eligible, the employer must:
- Have no more than 100 employees who were paid at least $5,000 in the preceding year;
- Have at least one non-“highly compensated” employee (cannot be your spouse under the rules of attribution); and
- Not have had a similar plan with the same employees in the 3 tax years before the first year you’re eligible for the credit.
You can even begin claiming the credit in the year before the plan becomes effective. Unused credits can be carried back (no earlier than 2002) or forward.
You could also take a deduction for the above expenses, but it’s hard to beat a 50% tax credit. My recommendation: take the credit for the first $1,000 of costs for the 3 years and take the deduction for the remainder. Recommendation #2: pay for some good investment education for your employees – they’ll thank you for it!