Retirement Plan Start-up tax credits - Qualifying start-up costs - New Small Employer

[Kris G]

Can a new small employer claim the tax credit for qualified start-up costs in the first year of the company's existence?

Assume - Employer begins operation in 2023 (No employees prior to 1/1/2023)

Employer starts their new plan during 2023 and pays start-up costs for plan design, documents and plan installation during 2023

Can this employer take a start-up plan tax credit for 2023 for qualifying start-up costs?

Concern is that one of the requirements to take the credit for qualified start-up costs is that you have to use the number of employees of the employer who received at least $5,000 of compensation from the employer during the tax year preceding the first credit year.  A new employer has no preceding tax year to make this determination.

Would seem to be two options:

1. There is no credit available in the first year if a new employer establishes a new plan in its first year of existence.

2. For new employers you would use the current year to make the determination since there is no preceding year.

It would seem without some revision to the instructions or other guidance from the IRS that the credit would not be available for the first year.  This would not seem to be the intent of the law but how it should be applied based on how for form 8881 and instructions were drafted.

[Tom Veal]

The employee count affects only eligibility for the credit. An employer is ineligible if it had (quoting the Form 8881 instructions) "more than 100 employees who received at least $5,000 of compensation from you during the tax year preceding the first credit year". If there is no preceding tax year, the employer didn't have more than 100 employees during it. Ergo, it is eligible for the credit. That interpretation is supported by the fact that an employer that is ineligible for the credit in the year in which the plan is established never becomes eligible. See Notice 2024-2, Q&A B-4(1).