Under the SECURE and SECURE 2.0 Acts, eligible employers can claim a tax credit for up to 100% of qualified startup costs when adopting and maintaining a new 401(k) plan.
Who qualifies as an eligible employer?
To be considered eligible, employers must meet the following three criteria:
1. Size of workforce: You have 100 or fewer employees who earned at least $5,000 in the previous year.
2. Non-Highly Compensated Employees (non-HCE): Your retirement plan must cover at least one non-HCE.
3. Retirement plan history: During the three years before you qualify for this tax credit, your employees must have yet to receive contributions or accrued benefits in another retirement plan sponsored by you, a related controlled group, or a predecessor.
A non-HCE is any employee who doesn’t meet the definition of a Highly Compensated Employee (HCE). An HCE is someone who:
Owns more than 5% of the business at any time during the current or previous year, regardless of compensation or
Earned over $150,000 in the previous year (for 2023; this threshold is $155,000 for 2024) and, if the employer opts, was among the top 20% of employees by compensation.
What counts as qualified startup costs?
Qualified startup costs are ordinary and necessary expenses incurred by small businesses to:
Set up or administer a qualifying retirement plan or
Educate employees about the retirement plan.
How big is the tax credit?
Employers with 50 or fewer employees may claim a tax credit for 100% of their qualified startup costs.
Employers with 51 to 100 employees can claim a tax credit for 50% of their qualified startup costs.
Does a Solo 401k qualify for this tax credit?
Owner-only businesses cannot use the startup tax credit with a solo 401(k) plan because they do not meet the non-HCE requirement. There are no non-owner employees (spouses are not considered non-owner employees, even if they are not named members/shareholders of the business), so the sponsoring business of the Solo 401k plan does not apply here.
How can I offset the Solo 401k setup and ongoing fees?
Around 90% of Nabers Group Solo 401k customers choose to pay their 401(k) administration fees from their business bank accounts.
This strategy often benefits you as a business owner, as it allows you to deduct these fees as a business expense while preserving more of your personal 401(k) balance to grow through compound interest until retirement.
Are there any other tax credits available?
Yes! Beginning in 2024, Nabers Group customers can claim the Eligible Automatic Contribution Arrangement (EACA) or auto-enrollment credit. By incorporating the EACA features into your Solo 401k plan documents, you can receive a $1,500 tax credit ($500 annually for three years), starting with your 2024 tax return.