Form 8800: How to Claim the Pension Startup Credit
Reduce the expense of starting a new employee retirement plan. This guide clarifies the process for claiming the small employer tax credit using Form 8800.
Small businesses looking to offer retirement benefits can use Form 8881, Credit for Small Employer Pension Plan Startup Costs, to reduce their federal tax liability. This form allows employers to claim a tax credit for costs associated with establishing and administering a new retirement plan. It is a nonrefundable credit, meaning it can lower a business’s tax bill to zero, but no portion of the credit will be paid out as a refund.
Determining Eligibility for the Credit
To qualify for the pension startup credit, a business must be an eligible small employer. The employer must have had 100 or fewer employees who received at least $5,000 of compensation from the business for the tax year preceding the first credit year.
The credit applies to new qualified retirement plans, which include a 401(k), profit-sharing plan, defined benefit plan, Savings Incentive Match Plan for Employees (SIMPLE) IRA, or a Simplified Employee Pension (SEP) plan. The plan must be new, meaning the employer has not had a preceding plan that covered substantially the same employees. The credit is available for the first three years of the plan’s existence.
Information Needed to Complete Form 8881
The primary figures needed are the qualified startup costs, which include expenses paid to establish and administer the plan and costs to educate employees about the plan. Examples of these costs are fees for setting up the plan with a financial institution, consultant fees for plan design, and expenses for enrollment meetings or materials.
The SECURE 2.0 Act enhanced the calculation for this credit. For employers with 50 or fewer employees, the credit is 100% of qualified startup costs. For those with 51 to 100 employees, the credit is 50% of these costs. For both groups, the annual credit is limited. It is capped at the greater of either $500 or a variable amount, which is the lesser of $250 for each non-highly compensated employee eligible to participate in the plan, or $5,000.
In addition to the startup credit, the SECURE 2.0 Act introduced a separate credit for employer contributions for businesses with up to 50 employees. This credit is based on a percentage of the contributions made to employees earning less than $100,000 annually, a figure that is adjusted for inflation. The credit is capped at $1,000 per employee and phases down over five years. It covers 100% of contributions in the plan’s first and second years, 75% in the third year, 50% in the fourth, and 25% in the fifth.
When completing the form, the employer will enter the total qualified startup costs and any applicable employer contributions on the designated lines. The number of non-highly compensated employees eligible to participate in the plan is also a required piece of information.
How to File the Completed Form
Form 8881 cannot be submitted as a standalone document and must be included as part of the employer’s annual business income tax return. The specific primary tax form depends on the business structure; for instance, a corporation would file it with Form 1120 or a partnership with Form 1065.
The resulting credit amount is first reported on Form 3800, General Business Credit. The total from Form 8881 is carried over to Form 3800, and the final credit from Form 3800 is then entered on the business’s main income tax return.