Form 8881 - Credit for Small Employer Pension Plan Startup Costs
The Setting Every Community Up for Retirement Act (SECURE Act) was passed by congress in December 2019. In the act, small businesses are provided with an incentive for establishment of a retirement plan for its employees through refundable tax credit.
The credit limit for small employer plan start-up costs was increased by The Consolidated Appropriations Act (CAA) of 2020. New credit was also provided for by this act, for employers having an auto-enrollment option into their employee’s retirement plan. The act defines employers as people with a maximum of 100 employees who are not highly compensated.
In May 2021, SECURE Act 2.0 was signed into law. It increased the pension plan start-up credit to cover the entire administrative costs for the initial three years of 401(k) plan implementation for employers having a maximum of 50 employees. This also applies to employees not highly compensated.
Take note:
- You may deduct the administrative costs as business expense. However, you cannot use the amount of credit to reduce the expense.
- On S Corp and Partnership returns, Schedule K-1 is used to pass credit to the shareholder or partner.
Employers with a maximum of 50 employees:
- Are able to deduct the entire start-up credit for administrative costs for the initial 3 years of a 401(k) plan implementation.
- Permits employers a stimulus to contribute to the plans of an employee via an offsetting credit of up to $1,000 for contributions for every employee participating.
- Enlarge opportunities for plans to self correct operational errors.
- Eases the testing requirements for compliance.
- Grants flexibility to existing plans to evaluate ways in which they can make their 401(k) plans more giving to employees at the end of the year.
- Eases the criteria that permits part-time employees to make employee contributions to the defined contribution retirement plan of their employer.
The Form 8881 menu in Taxx Savage Pro varies based on the tax return:
Individual Tax Return
- Go to the Main Menu of the individual tax return (Form 1040)
- From the menu, select Credits
- Proceed to General Business Credit (3800)
- Then to Current Year General Business Credits
- Select Form 8881
Corporation Tax Return (Form 1120)
- Go to the Main Menu of the Corporation tax return (Form 1120)
- From the menu, select Tax and Payments
- Proceed to Total Tax (Schedule J, Part I)
- Then to Total Credits
- Select General Business Credits (Form 3800)
- Then Current Year General Business Credits
- And finally, Form 8881
S Corporation Tax Return (Form 1120-S)
- Go to the Main Menu of the S Corporation tax return (Form 1120-S)
- From the menu, select Schedule K - Distributive Share Items
- Proceed to Credits & Credit Recapture
- Then to Other Credits
- Finally, select Credit for Small Employer Pension Plan Startup Costs
Note: This is not tax advice. It is a guide on how to enter Small Employer Pension Startup Costs Credit into the Taxx Savage Pro program.
Additional Information: