Congress passed "The Setting Every Community Up for Retirement Act (SECURE Act)" in December 2019. While the SECURE Act addresses multiple types of savings, this bill provides a small business an incentive for instituting a retirement plan for its employees through a refundable tax credit.
The Consolidated Appropriations Act (CAA) of 2020 increased the credit limit for small employer plan start-up costs and provided a new credit for employers with an auto-enrollment option into their retirement plan for employees. It defines small employers as those with 100 or fewer employees who are not highly compensated.
"SECURE Act 2.0" was signed into law May, 2021 and increases the pension plan start-up credit to cover 100% of administrative costs for the first three years of 401(k) plan implementation for an employer with 50 or fewer employees. Once again, this applies to employees not highly compensated.
Two points to note:
- These administrative costs may be deducted as a business expense, but the expense must be reduced by the amount of the credit.
- On S corp and partnership returns, the credit passes through to the shareholder or partner on their Schedule K-1.
Employers with 50 or fewer employees:
- Can deduct 100% start-up credit for administrative costs for the first 3 years of a 401(k) plan implementation.
- Allows employers an incentive to make contributions to employee's plans through an off-setting credit of up to $1,000 for contributions made for each participating employee.
- Expands opportunities for plans to self-correct operational errors.
- Eases compliance testing requirements.
- Gives existing plans flexibility to evaluate ways to make their 401(k) plans more generous to employees at year end.
- Relaxes the criteria which allows part-time workers to make employee contributions to their employer's defined contribution retirement plan.
The menu to complete Form 8881 in TaxSlayer Pro will vary depending on the tax return.
From the Main Menu of the individual tax return (Form 1040) select:
- Credits
- General Business Credit (3800)
- Current Year General Business Credits
- Form 8881 - Credit for Small Employer Pension Plan Startup Costs
From the Main Menu of the Corporation tax return (Form 1120) select:
- Tax and Payments
- Total Tax (Schedule J, Part I)
- Total Credits
- General Business Credits (Form 3800)
- Current Year General Business Credits
- Form 8881 - Credit for Small Employer Pension Plan Startup Costs
From the Main Menu of the S corporation tax return (Form 1120-S) select:
- Schedule K - Distributive Share Items
- Credits
- Current Year General Business Credits
- Form 8881 - Credit for Small Employer Pension Plan Startup Costs
From the Main Menu of the Partnership tax return (Form 1065) select:
- Schedule K - Distributive Share Items
- Credits & Credit Recapture
- Current Year General Business Credits
- Form 8881 - Credit for Small Employer Pension Plan Startup Costs
Note: This is a guide on entering Small Employer Pension Startup Costs Credit into the TaxSlayer Pro program. This is not intended as tax advice. The Form 8881 instructions are an invaluable and authoritative resource for specific questions not covered above.
Additional Information: