In our previous article, we discussed the New York Secure Choice Savings Program, which requires certain employers to offer a retirement savings option to employees.
Some businesses may instead choose to establish their own retirement plan, such as a 401(k) or similar program. When doing so, there are available federal tax credits and additional compliance considerations, including audit requirements.
Federal Tax Credits
Employers who establish a new retirement plan and make matching contributions may claim the Startup Costs Credit, Employer Contributions Credit, and Automatic Enrollment Credit, provided they meet the employee count and prior plan requirements. These credits can significantly reduce the cost of starting and maintaining a retirement plan for employees.
These credits can only be used to offset federal income tax liability and cannot be refunded if they exceed the tax owed. Unused credits may be carried back one year or forward up to 20 years.
- Small Employer Pension Plan Startup Costs Credit (IRC §45E)
- Purpose: Offsets the costs of establishing and administering a new qualified retirement plan (such as a 401(k), SEP, or SIMPLE IRA).
- Eligibility: Employers with 100 or fewer employees who each received at least $5,000 in compensation in the preceding year, and who did not maintain a qualified plan covering substantially the same employees in the prior three years.
- Credit Amount: For employers with 1–50 employees, the credit is 100% of qualified startup costs; for 51–100 employees, 50%. The annual maximum is the greater of $500 or the lesser of $250 per eligible non-highly compensated employee or $5,000. The credit is available for the first three years after the plan is established.
- Qualified Costs: Includes ordinary and necessary expenses to set up and administer the plan or provide retirement-related education to employees.
- Employer Contributions Credit (IRC §45E(f))
- Purpose: Provides a credit for employer contributions (such as matching contributions) to the new plan.
- Eligibility: Same as the startup costs credit.
- Credit Amount: Up to $1,000 per employee per year for employer contributions (excluding elective deferrals), for the first five years of the plan. The credit is 100% in years 1–2, 75% in year 3, 50% in year 4, and 25% in year 5. For employers with more than 50 employees, the credit is reduced by 2% for each employee over 50.
- Limitations: No credit for contributions on behalf of employees earning more than $105,000 (indexed for inflation) in the year.
- Automatic Enrollment Credit (IRC §45T)
- Purpose: Encourages employers to add an eligible automatic contribution arrangement (EACA) to a qualified plan.
- Eligibility: Employers with 100 or fewer employees who add an EACA to a new or existing qualified plan.
- Credit Amount: $500 per year for up to three years, beginning with the first year the EACA is included in the plan.
Retirement Plan Audit Requirements
Retirement plans subject to ERISA (such as most 401(k) plans) must obtain an independent audit once the plan reaches a certain size.
An annual plan audit is generally required when the plan has 100 or more participants with account balances at the beginning of the plan year.
Participants counted include:
- Active employees with balances
- Former employees with balances
- Retirees with balances
When this threshold is met, the employer must include an auditor’s report with the plan’s annual Form 5500 filing.
The audit is performed by an Independent CPA firm, which reviews
- Plan financial statements
- Employer and employee contributions
- Participant distributions and loans
- Compliance with ERISA requirements
- Internal controls over plan administration
Important Distinction: NY Secure Choice
The New York Secure Choice Savings Program does NOT require:
- ERISA compliance
- Form 5500 filings
- DOL audits
These requirements apply only if the employer establishes its own retirement plan (such as a 401(k)).
Retirement plans can offer meaningful tax benefits while helping employees build long-term financial security. However, audit requirements and compliance rules can become complex as a plan grows. For assistance and clarifications regarding Audits and Assurance, reach out to Tani Shadovitz, Assurance Manager
If you’re considering establishing a retirement plan or want to understand your reporting obligations better, our team can help guide you through the requirements and available tax opportunities. Reach out, we'll be glad to assist.
