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Overview of Benefits under IRC §45E for Small Employer Pension Plans

The Internal Revenue Code (IRC) §45E provides significant tax incentives to small employers who establish qualified retirement plans for their employees. These incentives are designed to encourage small businesses to offer retirement benefits, enhancing financial security for employees and providing valuable tax relief for employers.

Key Benefits of IRC §45E:

1. Startup Costs Credit (Up to $5,000):

• Small employers can claim a credit of 50% of eligible startup costs, up to a maximum of $5,000 per year, for the first three years of establishing a qualified plan. This us much better than claiming the costs as a tax deduction.
• Eligible costs include:
  • Plan setup and administration fees
  • Employee education and outreach programs about the new plan.

2. Credit for Employer Contributions (Up to $1,000 per Employee):

• For the first five years of the plan, employers may claim an additional credit for contributions made to employee accounts.
• The credit is calculated as 100% of the first $1,000 contributed per employee annually.
• The combined benefit can provide up to $105,000 in total credits over the five-year period ($5,000 startup credit + $100,000 employer contribution credit).

Eligibility Requirements:
To qualify for these credits, a small employer must:

• Have 100 or fewer employees who received at least $5,000 in compensation in the preceding year.
• Not have offered a qualified retirement plan for substantially the same employees in the three years prior to starting the new plan.

Steps to Take Advantage of IRC §45E Credits:

1. Consult with a retirement plan advisor to select a qualified plan type (e.g., SIMPLE IRA, SEP IRA, or 401(k)).
2. Work with a professional CPA to ensure proper documentation of startup costs and employer contributions.
3. File Form 8881 (Credit for Small Employer Pension Plan Startup Costs) with your tax return to claim the credit.

The IRC §45E credits can substantially offset the costs of establishing and maintaining a retirement plan, making it easier and more affordable for small businesses to offer these valuable benefits. If you have any questions or need assistance in claiming these credits, please contact us at info@millermusmr.cpa or call us at +1-703-437-8877.

Please be advised that, based on current IRS rules and standards, the advice contained herein is not intended or written by the practitioner to be used and cannot be used by the taxpayer for the purpose of avoiding penalties.

From: G.F. Joey Musmar, CPA, CVA, ABV  Date: January 9, 2025