Military Spouse Retirement Plan Credit for Small Employers
A tax credit is available for small employers who help military spouses save for retirement by providing accelerated plan eligibility and contributions.
The Military Spouse Retirement Plan Eligibility Credit is a federal tax incentive for small businesses, created by the SECURE 2.0 Act of 2022. It addresses the financial challenges faced by military families who frequently relocate. Because of these moves, military spouses often have difficulty meeting service requirements to participate in an employer’s retirement plan or to become vested in employer contributions.
The credit encourages small employers to hire military spouses by rewarding them for providing accelerated access to their retirement savings plans. This helps military families build their retirement savings with fewer interruptions. The credit is available for tax years beginning after December 29, 2022.
Employer and Plan Qualification Requirements
To be eligible for the military spouse retirement plan credit, an employer must be a “small employer.” This is defined as a business with fewer than 100 employees who received at least $5,000 in compensation during the preceding tax year. This ensures the credit is targeted toward smaller businesses, and the employer must satisfy this requirement for each tax year it intends to claim the credit.
The credit applies only to eligible defined contribution plans. These are retirement plans that allow for individual accounts for each participant, with benefits based on the amounts contributed. Qualifying plans include 401(k)s, Savings Incentive Match Plans for Employees (SIMPLE) IRAs, and Simplified Employee Pension (SEP) plans.
An employer can claim the credit even if the military spouse participated in their plan before the SECURE 2.0 Act was in effect. The plan must meet the requirements of an eligible defined contribution plan for the tax year in which the credit is claimed, which may require amending plan documents to comply.
Eligible Military Spouse Criteria
For an employer to claim the credit, the employee must be a military spouse, defined as being married to a member of the uniformed services serving on active duty. The military spouse cannot be classified as a highly compensated employee (HCE). An HCE is an individual who owns more than 5% of the business or earned compensation above a specific, inflation-adjusted threshold in the preceding year.
The employer must take specific actions related to the spouse’s participation in the retirement plan. First, the spouse must be made eligible to participate in the plan within two months of their hire date. This accelerated eligibility is a requirement for the employer to qualify for the credit and addresses long waiting periods.
Once the military spouse becomes eligible, they must be entitled to receive any employer contributions that a similarly situated employee with two years of service would receive. This provision ensures the spouse is not disadvantaged by their shorter tenure.
Finally, the military spouse must be 100% immediately vested in all employer contributions made on their behalf. Vesting is an employee’s ownership of employer contributions, and this requirement guarantees they can take all employer-funded contributions if they have to relocate.
Calculating the Tax Credit Amount
The tax credit calculation consists of two parts for each eligible employee. The first component is a flat amount of $200 per military spouse who participates in the plan. The second component is based on employer contributions made to the military spouse’s retirement account.
The credit includes 100% of all employer contributions, both matching and non-elective, up to a maximum of $300 for the year. This calculation is based only on contributions made by the employer; the employee’s own elective deferrals do not factor into this part of the credit. The total maximum credit an employer can claim is $500 per eligible military spouse per year.
This credit can be claimed for each of the first three years of the military spouse’s participation in the plan. The credit is non-refundable, meaning it can reduce the employer’s tax liability to zero but will not result in a refund.
How to Claim the Credit
Employers claim the credit by filing Form 8881, Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment. On this form, the employer calculates the credit amount based on the number of eligible spouses and contributions made.
After calculating the total credit on Form 8881, the result is transferred to Form 3800, General Business Credit. Form 3800 consolidates various business credits, and the form calculates the total allowable credit for the tax year based on overall tax liability limitations.
The final credit from Form 3800 flows to the employer’s primary business tax return. This could be Form 1120 for corporations, Form 1065 for partnerships, or Schedule C for sole proprietorships, where it directly reduces the tax owed.