This Tax Benefit Can Get Your Client Over the Fence About Starting a Retirement Plan

It’s time to discuss whether your small business owner should start offering a retirement plan.*

You might be able to garner more interest on the topic by showing what tax benefits are included.

The tax credit, a dollar-for-dollar reduction of the company’s income taxes, might just be enough to get your client over the fence.

Credit for Small Employer Pension Plan Startup Costs

If certain conditions are met, your client can claim a deduction for the start-up costs of a new retirement plan, of up to $500 per year for the first three years of the plan, for a maximum of $1,500.

The plan must be a qualified retirement plan, SEP-IRA, or SIMPLE.

Is Your Employer Eligible?

According to IRS rules, eligible employers must:

  • Have fewer than 100 employees who received at least $5,000 in compensation for the past year
  • Have at least one non-highly compensated employee in the plan
  • Not have contributions or accrued benefits from another qualified retirement plan from the same company or as part of a control group, for this same group of employees, for the prior three years before this plan was put in place

The Tax Credit

The amount of the credit is 50% of the normal start-up costs for the plan each year, up to a limit of $500.

Eligible start-up costs include:

  • Costs to establish the plan
  • Cost to educate your employees about the plan

The credit may be claimed for each of the first three years of the plan, and businesses may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

It is also part of the general business credit and may be carried backwards or forward if it can’t be used in the current tax year.

There is no “double dipping,” i.e., the same costs used for the credit cannot then be deducted as a business expense.

Retirement plans offer a number of benefits for business owner and their employees.

Mention the $1,500 tax credit benefit to your small business clients, and you might be able to get them over the fence about offering a retirement plan to their employees.


The opinions expressed in this article are those of the author, and do not constitute any service or obligation of Vestwell Holdings, Inc or its affiliates.

*Vestwell and its affiliates do not offer tax advice