26 U.S.C. § 45E — Small employer pension plan startup costs

(a) General rule: An "eligible employer" gets a tax credit equal to 50% of its qualified startup costs for starting a retirement plan, for that tax year. (b) Dollar limit: For the first credit year and the next two years after it, the credit cannot be more than the larger of $500, or the smaller of $250 times the number of non-highly-compensated employees who can join the plan, or $5,000. For any other year, the credit is zero. (c) Eligible employer: This uses the same definition as section 408(p)(2)(C)(i). But an employer does not count as eligible if it, or a related company, already ran a similar retirement plan covering mostly the same employees at any point in the 3 tax years right before the first year this credit would apply. (d) Other definitions: "Qualified startup costs" are ordinary, necessary costs of setting up or running the plan, or of teaching employees about retirement — but they do not count if the plan has no non-highly-compensated employee who can join. "Eligible employer plan" means a qualified employer plan as defined in section 4972(d). The "first credit year" is either the year the plan starts, or, if the employer chooses, the year right before that. (e) Special rules: Related companies treated as one employer under certain other tax rules are treated as one employer here too, and all of an employer's plans count as a single plan. The employer cannot also deduct the part of its startup costs, or its contributions, that this credit already covers. An employer can choose not to use this credit for a year. And if an employer would qualify using a "50 employees" cutoff instead of the usual "100 employees" cutoff, the credit becomes 100% of costs instead of 50%. (f) Extra credit for employer contributions: An eligible employer gets an additional credit for money it contributes to workers' accounts, not counting workers' own elective deferrals, for plans that are not traditional pensions. This extra credit cannot be more than $1,000 per employee. If the employer had more than 50 employees last year, the credit shrinks by 2 percentage points for every employee over 50. Contributions do not count for any employee who earned more than $100,000 in wages that year; starting in 2024, that $100,000 figure rises each year with inflation, rounded down to the nearest $5,000. In the year the plan starts, the extra credit is 100% of contributions. After that it drops: 100% in year 1 after the start year, 75% in year 2, 50% in year 3, 25% in year 4, and 0% after that. Whether an employer is "eligible" and how many employees it has is figured the same way as in subsection (c), except the "no similar prior plan" test only applies in the year the plan starts.