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.
