Investing through a company sponsored retirement plan is a great way for employees to save for retirement, and is a valuable benefit provided by employers. There are two updated tax credits that are making this easier—and more profitable—for both the employee (participant) and the company sponsoring the plan.
The IRS offers tax-advantaged savings programs to encourage employers and employees to participate in the retirement savings process. Retirement savings plans, such as defined benefit plans and defined contribution plans, along with the Social Security program,
constitute a significant part of an individual’s retirement income sources. Specific tax credit programs, described below, offer a leg up to those who are shrewd enough to utilize them.
Participant Tax Credit
The Saver’s Credit (the “retirement savings contribution credit”) is a rarely used, but highly beneficial tax credit that is offered by the IRS to encourage low and moderate income workers to make retirement contributions to any
IRS recognized retirement account. In fact, only about 12% of eligible tax payers claim this tax credit. It is easy to take the credit by simply completing IRS Form 8880.
The credit amount ranges from 10% to 50% of your retirement account contribution depending on your adjusted gross income (AGI). The maximum credit is capped at $2,000 ($4,000 if married filing jointly).
|Credit Rate||Married Filing Jointly||Head of Household||All Other Filers*|
|50% of your contribution||AGI not more than $39,000||AGI not more than $29,250||AGI not more than $19,500|
|20% of your contribution||$39,001 - $42,500||$29,251 - $31,875||$19,501 - $21,750|
|10% of your contribution||$42,501 - $65,000||$31,876 - $48,750||$21,251 - $32,500|
|0% of your contribution||more than $65,000||more than $48,751||more than $32,500|
Company Tax Credit
Start-up costs associated with establishing a retirement plan can be a challenge for small businesses who want to offer this benefit to their employees. The “Credit for Small Employer Pension Plan Startup Costs” (IRS Form 8881) has been
augmented thanks to the new SECURE (Setting Every Community Up for Retirement Enhancement) Act.
A small employer is eligible to claim the credit if they meet several criteria, including:
- 100 or fewer employees who received at least $5,000 in compensation for the preceding year.
- At least one plan participant who is considered a non-highly compensated employee.
- Offer new plans (it is not available if the employer offered a prior plan, including a SIMPLE plan, in the three tax years before the first year of eligibility for the credit).
The tax credit provides the following benefits:
- Covers up to 50% of qualified plan costs.
- Amount of the annual credit equals the greater of $500 or $250 per non-highly compensated employee covered by the plan.
- Maximum annual credit is $5,000.
- Credit can be claimed in each of the first three years of the plan and can be carried back or forward to other tax year ($15,000 maximum total for those doing the math).
- Additional $500 credit can be claimed if the plan selects an automatic contribution arrangement (like auto-enroll) in the plan document. This can be claimed over the first three years of the plan, and also applies to existing plan adopting this feature in 2020 or later.
|1||NHCEs Eligible for the Plan||35||37||37|
|2||NHCE's x $250 each||$8,750||$9,250||$9,250|
|3||Maximum credit (lesser of $5,000 or step 2)||$5,000||$5,000||$5,000|
|4||Actual plan expenses (includes plan doc fee year 1)||$4,750||$3,950||$3,950|
|5||Half of actual expenses||$2,375||$1,975||$1,975|
|6||Available credit (subject to minimum of $500 and max of step 3)||$2,375||$1,975||$1,975|
Note that a tax credit is more favorable than a tax deduction. A deduction lowers taxable income, while a credit is actually deducted from the taxes owed. As always, please consult your tax professional to see if you can take advantage of this tax benefit.
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