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What the Retirement Plan Start-up Cost Tax Credit Means for Healthcare Practice Owners

Apr 24, 2024

Have you built a healthcare practice and are looking for ways to improve employee retention/satisfaction? Do you want to plan for growth, your eventual exit from the practice, and financial independence upon retirement? Implementing a retirement plan could be the ideal solution. 

Key Benefits of the Retirement Start-up Tax Credit for Healthcare Providers  

There are three key factors that healthcare providers can benefit from including, tax liability reduction, employee retention rates, and financial planning.

  1. Tax liability reduction – This typically occurs when cash flow and profitability are high. The practice is getting a tax deduction from transferring money into a retirement account. This provides current year tax benefits and long-term wealth building opportunities. 
  2. Employee retention - Rates increase when a practice offers a retirement plan, which can set your practice apart from competitors. By allowing employees to take part in these benefits systems, practice owners are putting a plan into action that positively affects future periods of everyone’s lives. A secure retirement plan lets employees know that their employer cares not only about the work they do but also wants to provide a path for future success even after the job is completed.
  3. Financial Planning - Retirement plans set the groundwork for long-term savings in a disciplined fashion. There is no temptation to spend and build assets in a tax-favored environment. 

Form 8881 Basics  

Depending on the implemented plan, initiating a retirement plan allows eligible employers to claim a tax credit for each of the first three years of up to $5,000 each year. The credit helps offset the plan’s start-up and administrative costs during the first three years of its existence. It’s equal to a percentage of the qualified start-up costs, which include necessary operational expenses and employee training costs. 

The amount of credit is also based on the number of employees. Practices with 50 or fewer employees will receive a credit that covers “100% of all the ordinary and necessary eligible costs.The credit covers a maximum of $250 per non-highly compensated employee (NHCE) eligible to participate in the plan, but not more than $5,000 or less than $500 in any single year.”  

However, in a practice with 51-100 employees, only 50% of all the ordinary and necessary eligible costs incurred to set up and maintain a qualified retirement plan are factored into the credit calculation. Like practices with 50 or fewer employees the credit covers up to a maximum of $250 per NHCE eligible to participate in the plan, but not more than $5,000 or less than $500 in any single year. 

In addition to a credit for implementing a qualified retirement plan, there is also a credit available for contributions made by the practice on behalf of eligible employees.  For practices with 50 or fewer employees, the credit can be up to 100% of the employer’s contribution/match in the first two years (75% in the third year) up to a maximum of credit of $1,000 per eligible employee making wages of $100,000 or less. For practices with 51-100 employees, the credit percentage is reduced by 2% for every employee over 50. 

No retirement plan is a “one-size-fits-all” solution for their employees. Every practice owner should have a unique plan that is based on their needs and unique features such as the number of employees, revenue, and profit.  

Important Considerations for Form 8881 

If you’re considering initiating a retirement plan, it is important to strategize and design when and how to implement the plan. Generally, from 8881s are geared toward “K plans,” such as traditional 401K plans, Safe Habor 401Ks, and New Comparability 401Ks. Once the right plan is selected for your practice, timing is of the essence. When implementing a retirement plan, leaving enough time in the calendar year to activate the plan is vital. For instance, if you start the plan from January to August, your organization can use it for the rest of the year. However, if you wait until September to activate the plan, you would have to wait until the following year to begin the plan.  

It’s important to note that the three-year credit is only for the creation of new plans, so a new credit is not given when a plan is amended. However, what you do today does not have to be the same thing you are doing twenty years from now. Plans can evolve with your changing needs and practice.  

Get Personalized Support  

The last few years have had unprecedented changes in the healthcare sector. Leveraging the benefits of a retirement plan to increase employee retention rates and increase wealth, all while decreasing government tax rates not only creates a foundation for long-term financial success, but also for your practice and your employees. For questions or more specific information on your situation, contact EisnerAmper’s team with the form below.  

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Erick Cutler

Erick Cutler is a Partner in the Private Client Services Group, with nearly 25 years of public accounting experience including health care and the real estate industry.

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