Small Business Startup Plan Tax Advantages

Small businesses care about their employees and want to help them retire, but cost can be an issue. The good news is that there may be tax benefits for some of the costs of starting a SEP, SIMPLE IRA, or qualified plan (like a 401(k) or a 403(b)). As always, have your client consult a tax advisor, but tax deductions and credits (which reduce the amount you pay in taxes) are available. Here are some things to consider when setting up a new small business retirement plan:

Tax credit: who’s eligible?

As a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, effective Jan. 1, 2020, the tax credit for small employers starting a new retirement plan increased from $500 annually up to a maximum of $5,000 annually for each of the first three years.1

Employers can claim the credit if:

  • They have no more than 100 employees who were paid at least $5,000 in the prior year.
  • At least one, non-highly compensated employee is eligible to participate in the plan.
  • The plan is truly a startup—not a replacement for another plan. Employees can’t have received a benefit from a qualified plan from the company in the last three years.

What’s the tax credit?

The tax credit cannot exceed 50% of the qualified startup costs paid or incurred by the small employer.

What’s a qualified startup cost?

Qualified startup costs are defined by the IRS as ordinary and necessary costs to set up, administer, and educate employees about a new retirement plan.

When are clients eligible?

Your clients can claim the credit for three years—starting the year before the plan is effective.

Other tax benefits

What’s more, certain other expenses can be claimed as a tax deduction (but no double-dipping—they can’t claim the same expense as a tax credit and a tax deduction):

  • Administrative fees are a tax-deductible business expense.
  • Contributions from the employer are exempt from federal, state, and payroll taxes if they fall under 25% of the total compensation paid (or accrued) during the year to participating employees.

A new startup retirement plan option

For small business clients concerned about cost, there’s a new digital startup retirement plan option. Simply Retirement by Principal® is an online 401(k) offering for businesses with fewer than 100 employees.

With Simply Retirement by Principal®, you can create 401(k) proposals in minutes and share them with your clients by email, no in-person meetings required. Simple plan design, streamlined investment options, and flat recordkeeping fees make this an easy solution for small businesses that are ready to start a retirement plan. And SECURE Act tax credits may help offset their plan startup costs. Visit SimplyRetirement.com to learn more.

1 Greater of $500 or the lesser of $250 x NHCEs eligible or $5,000.

Simply Retirement by Principal® 401(k) plan recordkeeping, and administrative services are provided through Decimal, Inc. dba Ubiquity Retirement + Savings (“Ubiquity”). Ubiquity is not affiliated with any plan and investment administrative services provided through Principal Life Insurance Co. or affiliated with any company of the Principal Financial Group®. Principal makes available the investment options for customers to select through Simply Retirement by Principal. All other services are provided by service providers not affiliated with any company of the Principal Financial Group. Refer to related documents and agreements for more details on plan services available.

The subject matter in this communication is educational only and provided with the understanding that neither Principal® or Ubiquity Retirement + Savings are rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other financial professionals on all matters pertaining to legal, tax, investment or accounting obligations and requirements.


Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, Iowa 50392.


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