Increased Retirement Plan Start-Up Credit for Micro Businesses Proposed in Senate

Senators Maggie Hassan (D-NH) and Tedd Budd (R-NC) have introduced S. 4398, the Retirement Investment in Small Employers (RISE) Act. A companion bill was introduced in the House last fall by Representatives Claudia Tenney (R-NY), and Dan Kildee (D-MI). The legislation is intended to encourage small businesses with no more than 10 employees who received at least $5,000 of compensation in the prior year to adopt retirement plans.

SECURE 2.0 modified the credit for small employer pension plan start-up costs for plan years beginning in 2023. The credit formula is now the lesser of 100 percent of the qualified start-up costs, or the greater of $500 or $250 for each eligible non-highly compensated employee up to a maximum of $5,000. For example, an employer with five eligible employees and $2,000 in eligible start-up costs could receive a credit of $1,250 (5 x $250).

The RISE Act would replace “$500” with “$2,500” for a “Qualified Microemployer”. Using the same example, the proposed legislation would result in a credit of the full amount of start-up costs, or $2,000. To be eligible for this credit, the plan would be required to accept saver’s matching contributions pursuant to SECURE 2.0 (effective for taxable years beginning after December 31, 2026). The proposal would be applicable to taxable years beginning after December 31, 2026.