Tax credits for 2022 – Your retirement plan could pay for itself

How your retirement plan could pay for itself

Written by The Peppermint Team

Peppermint was created by a group of business owners, entrepreneurs, and benefits experts who have been on both sides of the table as employees and employers.

January 29, 2022

Many small- to medium-sized business owners feel that offering a retirement plan may be out of reach, but thanks to the SECURE Act, Pooled Employer Plans (PEPs) have become a game changer in the retirement plan market. 

PEP tax incentives make it easier for eligible SMBs to offer retirement plans at an affordable cost so that they can take care of their workforce for the long term.The SECURE Act tax credits can range from $250/non-highly compensated employee (someone who earns less than $130,000) up to $5,000 for 3 years. So there is a potential total of $15,000 worth of tax credit for the company. In addition, the auto-enrollment feature can get up an additional $500 per year or $1,500 for three years. 

Can you imagine? Up to $16,500 of tax credits can definitely go a long way for startups and small businesses.

Here at peppermint, we help SMBs, like yours, put together a Pooled Employer Plan that will work best for your business. We’ll also oversee all the time-consuming admin involved with getting benefits out to your employees. 

In this guide, we’ll cover what a Pooled Employer Plan is, who is eligible for tax credits, what forms to fill out to claim them and how much credit you stand to receive.

First thing’s first…

What is a tax credit and how is it different from a tax deduction?

A tax deduction only reduces the amount of taxable income. Tax credits, however, deduct from the taxes you owe on a dollar-by-dollar basis. 

For example, if you have $1000 in tax deductions, the most you might save is a few hundred dollars. If you have $1000 in tax credit though, the whole $1000 will be deducted from your taxes. 

Tax credits make a substantial difference in your savings and are a nice perk for small business owners looking to add a retirement plan to their compensation packages. 

What is a PEP?

In a Pooled Employer Plan (PEP), businesses come together and pool their resources into one retirement plan. By doing so, SMBs can tailor their plans to meet the needs of their employees while avoiding the high administrative burden, costs, and risks associated with traditional 401k retirement plans. Before the SECURE Act was put into place, the only way you could team up with other businesses to offer benefits was if you had something in common–like working in the same industry. In that instance, businesses would form what was called a Multiple Employer Plan or MEP.

PEPs are more cost-effective and accessible options for SMBs. They significantly help to level the playing field against corporate giants, as smaller businesses can now use retirement benefits as a means to boost worker retention and recruitment. 

With the help of a Pooled Plan Provider (PPP) like peppermint, unrelated businesses can pool their resources to give their employees access to great retirement plans. The best part is that the cost of setting up a retirement plan at your company could be covered by tax credits (we’ll cover this in detail later on).

One PEP – three options

There are a few different options to choose from when setting up your plan with peppermint. However, all of our plans allow you and your employees to:

  • Choose between pre-tax and post-tax Roth options
  • Transfer funds from prior retirement accounts 
  • Enroll with flexible options  
  • Enroll automatically, which can earn you additional tax credit
  • Borrow from retirement accounts 
  • Withdraw funds in an emergency 
  • Reduce employer’s taxable income
  • Profit sharing options

We offer three different types of plans that have different levels of flexibility in terms of employer contribution. 

Match — allows the employer and participants to maximize contributions. 

Easy — assures that all eligible employees receive retirement benefits.

Discretionary — gives the employer the ability to adjust contributions as business needs change.

The chart below provides a detailed comparison of the three plans.

Match Easy Discretionary
Safe Harbor Option – Exempt from most annual compliance testing Check Box Vector Art, Icons, and Graphics for Free Download Check Box Vector Art, Icons, and Graphics for Free Download Unchecked Checkbox Icon
Optimizes your highly-compensated employees’ personal retirement fund Check Box Vector Art, Icons, and Graphics for Free Download Check Box Vector Art, Icons, and Graphics for Free Download Unchecked Checkbox Icon
Offers employer the most flexibility to contribute as much or little as they like Unchecked Checkbox Icon Unchecked Checkbox Icon Check Box Vector Art, Icons, and Graphics for Free Download
Profit sharing options Check Box Vector Art, Icons, and Graphics for Free Download Check Box Vector Art, Icons, and Graphics for Free Download Check Box Vector Art, Icons, and Graphics for Free Download
Automatic enrollment Check Box Vector Art, Icons, and Graphics for Free Download Check Box Vector Art, Icons, and Graphics for Free Download Check Box Vector Art, Icons, and Graphics for Free Download
Vesting schedules available Unchecked Checkbox Icon Unchecked Checkbox Icon Check Box Vector Art, Icons, and Graphics for Free Download

As you can see, the enhanced and non-elective options are similar. Both include a safe harbor option that ensures all government regulations are followed so you can skip the annual testing (saving you both time and money).  The only real difference is how much the employer and employees contribute.

With the enhanced plan, employers match up to 100% of the first 4% of an employees’ deferred compensation. The non-elective option the employer automatically puts in 3% of an employees’ compensation, whether the employee chooses to contribute additional income or not. 

The discretionary option is not exempt from annual testing, but offers the most flexibility to employers, including deciding when employees take full ownership of the employer contribution portion through vesting plans.

If you aren’t sure which option is the best for your company, feel free to consult with one of our experts at peppermint. 

PEP costs  

Pooled Employer Plans vary in price based on the provider you choose. Here at peppermint, we keep our prices simple and affordable. 

  • Employers pay a one-time start-up fee of $750 and $1008 annual fee. 
  • Participants pay $8 per month plus .25% on contributions. 

Note that because the discretionary option requires yearly calculations and testing there is an additional $1000 fee annually.

How your PEP could pay for itself 

Now that you know the types of PEPs and how they can benefit both you and your employees, it’s time to talk about how setting up your PEP could pay for itself. 

This chart shows two types of tax credit incentives that could help cover the costs of setting up and administering your retirement plan. 

Type of Incentive

How many years 

Tax Credits

New Plan Incentive

For the first three years of a plan 

Up to $5,000

Automatic Enrollment Incentive 

For the first three years of a plan

Up to $500

Want to see exactly how much your SMB could save? For a rough estimate, check out our free tax credit calculator

There’s a bit of a catch – only certain businesses qualify to claim the tax credit. Read on to find out if your business is one of them!

Who qualifies for tax credits?

According to the IRS, your business qualifies for the tax credit if:

  • Your SMB employs 100 or fewer people who were compensated at least $5,000 the preceding year.
  • At least one plan participant was a non-highly compensated employee (NHCE).
  • Your business did not previously have a retirement plan in place in the last three years that covered roughly the same number of employees.

Note: A highly compensated employee is defined by the IRS as someone who owns more than 5% of the interest of the company during the current or preceding year, or was compensated more than $125,000 in 2019, $130,000 in 2020 & 2021, or $135,000 in 2022. Employers could also choose to include the top 20% of earners. 

My business qualifies, what’s next?

If your business meets the requirements for the tax credit, the next step is filling out Form 8881

You can find and download Form 8881 (Credit for Small Employer Pension Plan Start-Up Costs) through the IRS to calculate and report your tax credit. It’s a fairly self-explanatory form–only five lines long. 

  1. Enter start-up costs for the PEP, up to $1,000 
    • Start-up costs can include setting up and administering the plan, as well as educating employees about the plan
  2. Enter half of the amount on line 1 
  3. Enter any credit being passed along through an ownership interest in a partnership or S corporation (a corporation that elects to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes)
  4. Add the amounts from lines 2 and 3
  5. Enter the smaller of either $500 or the amount on line 5 

From there, the form will let you know what form to fill out next to report the credit, which will depend on the structure of your business. 

For partnerships and S corporations, the IRS directs you to report the final number on Schedule K, and for all other businesses to report on Form 3800 for General Business Credit in Part III on line 1 of the form. 

Note that your business may save more by taking the retirement plan start-up fees out as regular business expenses rather than claiming it on Form 8881–you can’t do both though, so make sure to choose wisely. 

Automatic Enrollment Incentive

There is an additional tax credit if you go with automatic enrollment–$500 to be exact. 

You can choose to add automatic enrollment with any of our plans. This means that a portion of employee’s’ compensation automatically goes into a retirement fund whether they choose to put in additional funds or not.

If you select this option, you can use the same forms to claim and report the credit (Forms 8881 & 3800). 

Both of these credits can be claimed for the first three years of the plan, and even the year before the plan. Overall, start-up tax credits could total upwards of $15,000 and automatic enrollment credits could be as much as $1,500 over the course of three years. 

Final thoughts

Through Pooled Employer Plans, SMBs have the ability to access a range of flexible, low-cost retirement plan options that are tailored to their unique needs. On top of being a low-risk alternative to the traditional 401k, for eligible businesses, PEPs can be paid for with tax credits that significantly reduce the cost to the employer over the first three years. 

In a competitive job market, this makes all the difference between a business with a strong workforce and one that experiences high turnover. As studies show, by offering good retirement benefits, companies can continue to attract top talent and keep their existing employees satisfied in knowing their employer cares about their future.

Ready to see what a PEP looks like in your business? Fill out this form and one of peppermint retirement experts will reach out to you to find out if a Pooled Employer Plan is right for your business.

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