Employer Contribution Tax Credit
Overview
Updated for SECURE 2.0 Act
Credit amount
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1 – 50 Employees - 100% of the first $1,000 for each qualified employee first 2 years, then 75%, 50% and 25% for the subsequent 3 years.
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50-100 Employees -
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Eligible Employer – Employs 100 or fewer employees who received more than $5,000 in compensation in prior year.
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Credit Amount is Reduced by 2% for each for each employee in excess of 50 employees during the preceding tax year
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General Business Credit – Credit is part of the General Business Credit.
Effective for 2023 and later years
Related IRC and IRS Publications and Forms
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Form 3800 – General Business Credit
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Form 8881 - Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment
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IRC Sec 45E
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SECURE 2.0 Act Sec 102
Secure 2.0 also established a new tax credit for small businesses that make employer contributions to a new retirement plan. This credit is available for five years for those employers with 100 or few employees who make employer contributions up to $1,000 per employee.
Effective Date
This credit like the start-up tax credit, is effective for tax years beginning after December 31, 2022 (i.e., 2023).
Credit and Phase Out
For an eligible employer, the credit is an applicable percentage of qualifying employer contributions, up to $1,000 per employee, made by an eligible employer for the first tax year during which the plan becomes effective with respect to the eligible employer and the succeeding 4 tax years.
1-50 Employees - The applicable percentage is:
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100% for the first and second years,
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75% for the third year,
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50% for the fourth year,
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and25% for the fifth year.
51-100 Employees –
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100% for the first and second years, minus 2% for each employee exceeding 50 limit.
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75% for the third year, minus 2% for each employee exceeding 50 limit.
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50% for the fourth year, minus 2% for each employee exceeding 50 limit.
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25% for the fifth year. minus 2% for each employee exceeding 50 limit.
Eligible Employer
An eligible employer must have had no more than 100 employees who received at least $5,000 of compensation during the tax year preceding the tax year during which the eligible employer plan becomes effective. However, an employer is not an eligible employer if during the 3 tax years preceding the tax year during which the plan becomes effective, the employer established or maintained a qualified employer plan with respect to which contributions were made, or benefits were accrued, for substantially the same employees as are in the new eligible employer plan.
Credit is Part of the General Business Credit
In the case of an eligible employer (as defined above), the small employer pension plan start-up costs credit will be part of and subject to the general business credit rules, including a one-year carryback and 20-year carryforward of unused credit when tax liability is less than the credit amount.
Claim Credit on Form 8881
Part I of Form 8881, Line 6b Employer Contributions.
Qualifying Employer Contributions
Qualifying employer contributions include any contributions (not including an elective deferral (as defined in section 402(g) (3)) by the eligible employer to an eligible employer plan, but do not include any such contribution on behalf of an employee who received wages (as defined in section 3121(a)) from the eligible employer for the tax year in excess of $100,000.
Member of Controlled Group or Business Under Common Control
For purposes of figuring the credit all members of the following are treated as a single employer:
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A controlled group of corporations (as defined in section 52(a)),
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A group of businesses under common control (as defined in section 52(b)), and
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An affiliated service group (as defined in section 414(m))
Members, compute their credit based on their proportionate share of qualifying employer contributions giving rise to the group’s credit for plan startup costs. Enter the employer’s share of the credit on lines 6a–6g. Attach a statement showing how the share of the credit was figured, and write “See Attached” next to the entry space for line 6g.