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Federal Tax Credits for Start-Up Retirement Plans Are Better Than Expected

By January 8, 2024No Comments

Last year, we explained the Federal Tax Credits available to a small employer that starts a retirement plan (Small Employer Tax Credits for Retirement Plans) and shared two case studies where example small employers’ Federal Tax Credits totaled $76k and $155k over the first five years of the Plan (Detailing the Significant Tax Credits Available to Small Employers).  ACSI is available to help clients and our clients’ advisors learn more about this topic.

Recent IRS guidance emphasized that some of the Federal Tax Credits are available to businesses with only owners as employees.  The guidance also clarified that credits are available for the “employer contributions” made for certain high-income owners with self-employment income.  Originally, many believed the credits were not applicable in these situations.

For One-Person 401k Plans, sometimes known as Solo-K Plans, which only cover the owner of the business or the owner plus spouse, the tax credit for start-up and operational costs is not available.  However, if the business is a sole proprietorship or an LLC taxed as a sole proprietorship, regardless of the amount of Schedule C self-employment income, or if the business is taxed as a S Corporation or a C Corporation and the owner’s FICA wages are $100,000 or less, the tax credit for employer contributions (up to $1,000 per person for Tax Year 2023) is available for the employer contributions that are made to the Plan for the owner.  Similarly, if the FICA wages of the owner’s spouse are $100,000 or less, the tax credit for employer contributions to the Plan for the spouse is available.  Lastly, despite the Plan covering only the owner or owner plus spouse, if an automatic enrollment provision is added to the Plan, the $500 per year auto-enrollment tax credit applies.

ACSI is available to help clients and our clients’ advisors learn more about this topic and answer any questions.

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