Normally when we mention startups we’re talking about early-stage companies, but in this instance we’re talking about tax credits for small businesses that start up retirement plans for their employees. These tax credits were enhanced by the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019, and the changes took effect Jan. 1, 2020. So let’s look at some questions and answers about the program.
Not if you’re not earning income yet. Tax credits, like the 401(k)/retirement plan startup one created by the SECURE Act, are dollar-for-dollar reductions in the income tax your startup owes. If you don’t have income, you can’t use the credits. This means that most VC-backed startups are NOT going to have any use for this particular government incentive. If you are a startup looking for tax credits, check out our tax credit page – there are in fact programs that can help startups save money, specifically the R&D tax credit, which can provide up to $250,000 a year to unprofitable startups.
If you’re earning income, there are three specific eligibility requirements. Your startup must:
An eligible small business can claim the credit to offset the costs of adopting a new retirement plan and/or a new automatic enrollment program for up to three years. Retirement plans include a Simple Employee Pension (SEP) plan, a SIMPLE IRA, and other qualified plans like 401(k)s.
The SECURE Act revised the amounts of the tax credits that can be claimed. The credit is for qualified retirement plan startup costs, is available for up to three years, and the limits are now the greater of:
Small businesses also can get an additional $500 tax credit by adding an automatic enrollment feature to a new or existing retirement plan, and that’s available for the first three years the automatic enrollment program is effective.
All total, a qualified small business could get $16,500 in tax credits ($5,500 per year for three years).
These are costs that your business incurred to set up and administer a qualified retirement plan, or educate employees about the plan.
The IRS defines an HCE as:
Setting up a 401k for your startup employees is a commendable step, showcasing growth and a forward-thinking approach to hiring and retaining your team. And even though most traditional VC-backed startups can’t get a tax credit for setting up a 401(k), there are some great reasons to offer retirement plans for employees.
For any startup founder, key considerations when choosing a 401k provider include ensuring minimal administrative overhead, user-friendly digital interfaces, solid compliance support, promotion of employee participation, and transparent cost structures with reasonable fees. Additionally, the plan should feature diverse investment options and clearly defined fiduciary responsibilities. Within the realm of startup 401k providers, options range from automated to manual. While automated providers, like Guideline and Human Interest, integrate seamlessly with payroll and provide a good user experience, manual providers, like Vanguard, might be cheaper but require more hands-on involvement. Tax credits for 401k setups are available, but primarily benefit profit-making companies. As startups navigate this journey, it’s essential to avoid pitfalls such as non-compliance with non-discrimination testing and to delegate fiduciary duties effectively. For a comprehensive guide on the subject, follow the link provided.