Tax Credit for New Pension Plans – IRS Form 8881

Small business owners who establish pension plans may be eligible to receive an IRS tax credit to offset expenses incurred in establishing the plan.  Pawleys Investment Advisors does not provide tax or legal advice, but over the years I have found that most business clients are unaware of this credit.  Eligible plans include SEP IRA’s, SIMPLE IRA’s and qualified plans including 401(k) plans, profit sharing plans, money-purchase plans and defined benefit plans.  The annual credit is 50% of the first $1,000 in expenses, so it is limited to $500, and is available for 3 years.  Qualified expenses include those incurred in establishing the plan, administrative fees, and costs to provide employee education.  Employers may choose to claim the credit or use it as a deductible business expense. This credit is in addition to any tax deduction you may receive for making company contributions for your employees.  The credit applies to companies with no more than 100 employees who have received at least $5,000 in compensation.  Companies that qualify that later grow beyond 100 employees who receive at least $5,000 in compensation may be grandfathered, depending on the current tax code.  The established plan must cover at least one non-highly compensated employee as defined by the IRS.  Additionally, control-group aggregation rules apply, so be sure to consult with your tax and legal advisors or Third Party Administrator.  If you established a plan, your advisor should have provided you with information regarding Form 8881 to discuss with your tax professional.  If you have not yet established a retirement plan for your business, please call Pawleys Investment Advisors.  You will be surprised about the relative ease and low cost of setting up a new plan.  It will help you better prepare for retirement and, if you have employees, help improve their satisfaction and better prepare them for retirement.

Click to access f8881.pdf

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