justanotheradmin Posted February 29, 2024 Posted February 29, 2024 I need clarification on something for the Employer Contribution Credit. The instructions seem to conflict (or perhaps just don't address) with my reading of the actual tax code. I would like to know what others think. Does the 3 year lookback apply for all years? or just the first year? - please read my entire question before commenting. I.R.C. § 45E(f)(4) Determination Of Eligible Employer; Number Of Employees — For purposes of this subsection, whether an employer is an eligible employer and the number of employees of an employer shall be determined under the rules of subsection (c), except that paragraph (2) thereof shall only apply to the taxable year during which the eligible employer plan to which this section applies is established with respect to the eligible employer. I.R.C. § 45E(c)(2) Requirement For New Qualified Employer Plans — 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. Based on 45E(f)(4) and 45E(c)(2) my understanding is that the other than year 1, an eligible employer doesn't have to look at the 3 year look-back. So if an eligible small employer sponsored a SIMPLE or 401(k) or such last year, and it terminated and closed. And next year wanted to start a new plan, they could. The first year of the new plan the employer contribution credit would not be available, but for years 2 -5 (before the phase out wipes it out completely) it would be available. The instructions to the Form 8881 don't align with my understanding - specifically under the Employer Contribution Credit section it says this: https://www.irs.gov/instructions/i8881 "Eligible employer. To be an eligible employer you must have had no more than 100 employees who received at least $5,000 of compensation from you during the tax year preceding the tax year during which the eligible employer plan becomes effective. However, you are not an eligible employer if during the 3 tax years preceding the tax year during which the plan becomes effective, you 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 new eligible employer plan. See section 45E(c) for rules for controlled groups and predecessor employers." The Form 8881 instructions do not mention that the 3 year lookback only applies for the first year. I know the conservative approach would say to follow the form instructions and the credit would not be allowed. But that's not how I read the actual text of the law. Why bother having "except that paragraph (2) thereof shall only apply to the taxable year during which the eligible employer plan to which this section applies is established with respect to the eligible employer." if they wanted the lookback to apply to all of the years? And yes, before anyone points this out, yes I understand that the lookback period is the 3 years before the plan starts. It's not a rolling 3 years. The three years is fixed. That's not my question. With the SECURE 2.0 rules for converting SIMPLEs to 401(k)s - we have plenty of employers wondering if they would be eligible for the contribution credit in the later years of the 401(k) plan. Thank you for reading! 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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