Plan Startup Credit

An employer became an adopting / participating employer in a PEP effective 1/1/2022.  They have 10 eligible NHCE's.

In 2023 they established a new single employer 401(k) plan and did a spinoff from the PEP.

For purposes of the plan startup credits, would they qualify under the Secure 2.0 provisions for administrative expenses under both plans (PEP and single employer 401(k) plan) or are they limited in some way in the 401(k) plan?

I thought that 2.0 enhanced what was provided by 1.0, and 1.0 allowed credit only if the newly established plan did not cover substantially the same employees who were covered by and benefited in a plan of the same employer within the last three years, and it was clarified in 2.0 that commencing participation in a PEP was treated the same as a single employer establishing a plan. 

However, if you're asking if the spin out of the PEP to single employer plan essentially constitutes a continuation of the same plan for which second year (and subsequent) tax credits should be allowed - I don't know the answer to that very good question. Was the employer's participation in the PEP identified by it's own name, EIN, plan number, and optional provisions (AA)? If so, and its PEP assets were spun out to establish a separate plan, is the identifying information the same? I think that would make the case it's the same plan. That is, you take the letter B out of the alphabet, it is still the letter B.

BUT - since this is a tax question, I think it may be best to defer to a tax professional for interpretation.

I don't see an issue with them taking the enhanced startup credits and tax credits for 2022, given their participation in the PEP, since 2.0 clarified participation in a PEP was treated the same as a single employer establishing a plan.

To answer your question, the ER's participation in the PEP was in fact identified by name, EIN, plan number, etc. and their identifying information is the same in the newly established single employer plan, so I agree, it's "the same plan".  Along these lines, it seems reasonable they would remain eligible to take the enhanced startup and tax credits for 2023+.  The fact that their payroll company recommended they become an adopting employer in a PEP, which turned out to be a really bad idea, and now they have to incur additional costs to set up a new individual 401(k) plan to make things right, may be irrelevant.

But I agree with you, I will recommend they defer to their CPA for final interpretation on this.

Thanks for your input and any additional input on this.