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"Substantially same employees" SECURE 2.0 tax credit


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What do folks think "substantially same employees" works out to be in real life? 

§45E(c)(2) Such term shall not include an employer if, during the 3-taxable year period immediately preceding the 1st taxable year for which the credit under this section is otherwise allowable for a qualified employer plan of the employer, the employer or any member of any controlled group including the employer (or any predecessor of either) 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 qualified employer plan.


Example A: ER has SEP - covers only the owner because the other employees don't have enough service. Starts 401(k), due to shorter service requirements, 10 employees (including the owner) are part of the 401(k). 

Would that be different employees because the employees weren't covered by the SEP? or because they could have been covered by the SEP if they had more services, they are considered substantially the same because they could have been covered? I think they are different, they didn't actually have any benefit in the SEP so don't count. see "contributions were made, or benefits accrued" So I think for Example A, the full gamut of tax credits would apply. Do others agree?

What if the ratios were different? say the existing program covers 30% of existing employees, new plan covers 50% of employees? Anyone have thoughts on the cut off or what reasonable math test to use? Is there guidance somewhere? (probably laughable, I know, but I figured it can't hurt to ask). 


I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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17 hours ago, justanotheradmin said:

contributions were made, or benefits were accrued,

FWIW - it seems like this is the operative phrase. So I agree, for your first example, the credit should apply. When you get into the weeds where some employees were covered and some weren't, then to my way of thinking, since this is a tax credit situation, it is the CPA's call - some of them are aggressive, some conservative - so who knows. I'm not aware of any firm guidance on this question. 

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If there is no Treasury regulation, a tax return might assert the taxpayer’s interpretation of the statute, and may do so with attaching a Form 8275-R. https://www.irs.gov/forms-pubs/about-form-8275-r.

If a tax-return position is supported by substantial authority (which may be “a well-reasoned construction of the applicable statutory provision”), one need not attach Form 8275 to avoid an understatement penalty. 26 C.F.R. § 1.6662-4(d)(3)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.6662-4#p-1.6662-4(d)(3)(ii).

If a tax-return position is less confident than substantial authority (which can be less confident than more likely than not [51%]) but has at least a reasonable basis and is disclosed (using Form 8275), this too avoids an understatement penalty. https://www.irs.gov/forms-pubs/about-form-8275.

A certified public accountant who obeys AICPA professional-conduct standards does not recommend a tax-return position or prepare or sign a tax return taking a position unless the CPA “has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits if challenged.” Or, a CPA may prepare or sign a tax return that reflects a position if the CPA finds “there is a reasonable basis for the position and the position is appropriately disclosed.”

Recordkeepers, third-party administrators, and other service providers often wish for guidance to interpret recent (and sometimes not-so-recent, or even decades-ago) tax legislation about retirement plans. But an absence of guidance sometimes affords a wider range of interpretations.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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