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Small Business Tax Credit for Plan Startup Costs - June 2, 2003

The Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) provides a tax credit for employers to offset the ordinary and necessary costs associated with the plan establishment, annual compliance services and education of employees for retirement plans (SEP, SIMPLE, or qualified plans) that are first effective in tax years beginning after December 31, 2001.  To qualify:

  • The plan must cover at least one non-highly compensated employee, and
  • The employer must have had 100 or fewer employees who received at least $5,000 in compensation from the employer in the preceding year.

In addition, the plan must not cover the same employees who received contributions or accrued benefits under a plan in a three tax year period immediately before the first year that the tax credit applies of:

  • The employer;
  • A member of a controlled group of the employer; or
  • A predecessor of the employer (or a member of a controlled group of the employer).

The credit is 50% of the start up costs up to a maximum of $500 per year for each of the first three years of the plan.  The credit is part of the general business credit, which can be carried back (but not before the tax year beginning January 1, 2002) or forward to other tax years if it cannot be used in the current year.

Credit for Small Employer Pension Plan Startup Costs Form 8881 and Instructions

2003 Milberg Consulting LLC  All Rights Reserved

We intend the information in this publication as a general resource, not as legal or plan compliance advice or counsel. If you consider any actions discussed in this update, we suggest that you consult a tax or ERISA professional. Milberg Consulting LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this update.