Section 45E of the tax code permits an eligible small employer to claim a tax credit versus a deduction for qualified startup costs and plan administration fees. The credit is 50 percent of the relevant expenses and is limited to $500 per year for the first credit year and each of the following 2 tax years. The credit is currently set to expire at the end of 2012; however, it has previously been extended.
For example, if such an employer paid $1,200 in fees to establish a new plan in 2011, and then paid $800 in plan administration fees in 2012, the allowable tax credit would be $500 in 2011 and $400 in 2012. Thus, the real cost to establish the plan is reduced from $1,200 to $700 because of the $500 tax credit.
An eligible small employer is one who had no more than 100 employees during the tax year preceding the first credit year and only employees who were paid more than $5,000 during that tax year are counted. Further, as the credit is intended to spur the adoption of new plans, if an otherwise eligible employer established or maintained a plan during the 3 tax years preceding the first credit year, they are not eligible to claim the credit.
Small businesses no longer have to be concerned that the 401(k) is too expensive for their company. There are experts available to assist design the appropriate plan for each business situation.
Many workers already prefer the closeness and greater impact they can achieve at a smaller firm versus the proverbial cog in the wheel syndrome that can take hold within a massive organization where individual contributions can go unnoticed. Historically, benefits have often been lacking in small businesses and that’s given top employeesreason to take pause. But now trends are aligning and 401(k)s are often used as an advantage by savvy small business owners. So what’s making this all possible? Two things:
The Availability of Low-Cost 401(k) Plans for Small Business: During the past decade, a new generation of 401(k) providers focused specifically on small businesses have made it affordable for any size business to start a plan. A ten person company can now expect to pay a one-time charge for plan setup, and around $100 a month on-going for recordkeeping. This cost is further offset by a tax credit of up to $500 each year for the first three years of starting a 401(k) plan (a total of $1,500 total tax credits over the three years). This is available to businesses with up to 100 employees. This credit is not available to owner-only 401(k)s, also known as individual 401(k)s.
401(k) Cost-Cutting by Big Business: Many large companies slashed their 401(k) plan benefits since the recession of 2008 and 2009. Suspending the employer match was a common practice for many corporations to both settle shareholders and get through the downtimes. For those large firms that have been fortunate enough to reinstate it, the match is often at a lesser amount or requires more contributions by the employee to receive a similar company match.
