Tax Credit for Pension Plan Startup Costs...

If you are an eligible employer who begins a new pension plan for your employees, you may be eligible to receive a tax credit of 50% of the first $1,000 of qualified startup costs of the plan. The credit is available for each of the first three years of the plan.


Eligible Employer

  • You are an eligible employer if, during the preceding year, you had 100 or fewer employees who received at least $5,000 of compensation
  • The plan must cover at least on non-highly compensated employee.
  • The employer must not have established or maintained any employer plan during the three tax-year period immediately preceding the first tax year in which the new plan is effective.

Qualified Startup Costs

  • Any ordinary and necessary expenses that are paid to 1) begin or administer an eligible employer plan and/or 2) educate employees about the plan

Eligible Employer Plan

  • A plan that meets the requirements of a defined benefit or defined contribution plan including a 401(k) plan, SIMPLE plan or simplified employee pension.


Planning Note:

To avoid a double tax benefit, qualified costs are not deductible to the extent they are effectively offset by the tax credit (Code Sec. 45E(e)(2) - 50% of the costs up to $1,000), as added by the 2001 Act. However, taxpayers should remember to claim deductions for the remaining qualified costs that are ordinary and necessary business expenses (Senate Finance Committee Report).


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