When to Take Tax Credit for Small Employer Pension Plan Startup Costs

[shmuey529]

My LLC brought on its first employee in late 2022, who was immediately eligible to participate in our new 401k plan following a 3 month waiting period, which didn't end until January 2023. We paid $495 in Fall 2022 to startup our plan with Ubiquity, which per Ubiquity, didn't "start" until January 2023. Again, no payments were made to any employee. Up until January 2023, I had a Solo 401k with Schwab which I contributed to. Does this $495 cost to Ubiquity qualify for Pension Plan Startup Costs? And should it be deducted in 2022 (when I was billed and paid) or in 2023 (when the plan officially started)?

[AliciaP1 · Accepted solution]

Yes, the $495 seems to qualify and you can take the credit in 2022.

Per the IRS:

Eligible employers

You qualify to claim this credit if:

• You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
• You had at least one plan participant who was a non-highly compensated employee (NHCE); and
• In the three tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

And:

Eligible tax years

You can claim the credit for each of the first 3 years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.