ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in Texas is representative of a common inquiry related to the IRS’s plan startup tax credits for small businesses. The advisor asked: “How does a tax-exempt entity take advantage of the plan startup tax credits?”
Highlights of Discussion
Simply put—they don’t. Unfortunately, tax-exempt entities that set-up retirement plans (e.g., 403(b) or 457(b) plans) are not eligible to take advantage of the startup tax credits. The function of a tax credit is to reduce the amount of taxes owed on a dollar-for-dollar basis. If an entity does not owe taxes—there is no need for a tax credit.
The list of plan types that are eligible for the credit is found under IRC Sec. 4972(d)(1) and includes a:
- Qualified plan under IRC Sec. 401(a) (e.g., a profit sharing or 401(k) plan);
- Qualified annuity plan under IRC Sec. 403(a);
- Simplified employee pension (SEP) plan; and
- Savings incentive match plan for employees (SIMPLE) IRA plan.
Tax-exempt entities are also prohibited from taking advantage of the new tax credit for employer contributions.
Further, an “eligible” employer must meet requirements related to the number of employees and cover at least one nonhighly compensated employee. See also Retirement Plans Startup Costs Tax Credit.
Conclusion
While it may seem unfair, the special tax credits for small businesses to set up and fund retirement plans are only available to eligible taxable entities that sponsor a qualified plan, 403(a), SEP or SIMPLE IRA plan.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2023, Retirement Learning Center, LLC. Used with permission.
