401(k) Tax Benefits

Tax Breaks for Starting a 401(k)

Do you have 100 or less employees? Did you pay each of them at least $5,000 last year? Was there at least one “non-highly compensated employee”, an employee who made less than $130,000 in the preceding year? If you’ve answered yes to these questions, you are likely eligible for a 50% credit on your start-up costs up to a $5,000 max/year! In addition, you can also receive an additional tax credit of $500 per year for a max or 3 years for adding an automatic enrollment feature to your plan. Visit the IRS website regarding eligibility.

What qualifies as a start-up cost?” Start-up costs can include fees for the set-up required to administer your plan as well as the cost to educate your employees about the benefits of your new 401k.

You can claim this credit for the first three years of the plan. The IRS will also allow you to start claiming the credit for the tax year before the tax year in which the plan becomes effective. To claim your credit, you’ll need to file Form 8881, Credit for Small Employer Pension Plan Startup Costs.

Ongoing 401(k) Tax Breaks

Are you considering employer contributions? Employer matching or profit sharing contributions can help owners defer more income personally, while helping your business attract and retain the talented employee it needs. And the best part? These contributions are tax deductible!

How does it work? The deduction cannot be greater than 25% of total compensation paid during the year to participants in the plan. Total compensation includes elective deferrals, but deferrals are not counted against the limit. For 2021, the maximum compensation that can be taken into account for each employee is $290,000.