Many small businesses that desire to start a 401(k) plan generally face a major hurdle – startup costs. In order to make it easier for them, The Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) has a provision that implements a credit which aids in offsetting employer’s startup costs and the cost of educating their employees about the new 401(k) plan.
The following is a brief look at the rules that govern how one can claim the tax credit.
The EGTRRA provisioned credit can be accessed by employers who have 100 or less employees. Those employees must have earned at least $5,500 in the previous year. For example, let us assume that for the year 2014 an employer established a retirement plan. The only way in which the employer would be eligible for credit is if the business had 100 or less employees who received at least $5,500 in compensation in 2013.
Plans that are eligible include SEP IRAs, SIMPLE IRAs, and qualified plans such as profit sharing plans, defined benefit plans, and 401(k) plans. At least one employee who has not been classified as a highly compensated employee (HCE) must be covered by the plan.
Expenses that are considered to be eligible for tax credit include the qualified startup costs of the plan. These costs are necessary to get the plan established. The qualified startup costs include administrative fees, employee education costs as it relates to the plan, and expenses that are incurred to establish the actual plan.
During the tax year, credit is limited to half of the qualified startup costs that are paid or incurred. A ceiling of $500 per annum for the first year and the subsequent two tax years has been set as the credit limit.
You can take a look here at the IRS Form 8881 which is needed to claim the credit.
Keep in mind that 401(k) plan providers differ in one way or another. The providers that have better plans are quite adept at designing their plans to favor business owners whose income tax deductions are bigger. Please let us help you.
Over the next 30 days, there are a number of important deadlines that you need to keep in mind. They are:
March 31st – Electronic filing of IRS Forms 1099-R for all distributions made in the year 2014.
April 1st – Required Minimum Distribution (RMD) for participants reaching age 70½ during the year 2014.
April 15th – File tax returns, request an extension of tax returns, and process corrective distributions.
April 15th is only a few weeks away. As such, it is becoming ever more urgent for you to calculate your 2014 retirement plan contributions. If you need assistance meeting the April 15th deadline, please contact us now. Our qualified team is ready to assist you with your calculations or to answer any questions you may have.