Form 8881--Credit for Small Employer Pension Plan Startup Costs

Instructions for Form 8881

Department of the Treasury
Internal Revenue Service

(Rev. December 2020)

Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment
How To Figure the Credit

Section references are to the Internal Revenue Code
unless otherwise noted.

Future Developments

For the latest information about developments related to
Form 8881 and its instructions, such as legislation
enacted after they were published, go to IRS.gov/
Form8881.

What’s New
Increase in limit for the small employer pension plan
startup costs credit. The Further Consolidated
Appropriations Act, 2020, increased the credit limit for the
credit for small employer pension plan startup costs.
New credit for small employer automatic enrollment
in retirement savings. The Further Consolidated
Appropriations Act, 2020, created a new credit for small
employers with an auto-enrollment option for retirement
savings.
Changes to the form. The title of Form 8881 is changed
to Credit for Small Employer Pension Plan Startup Costs
and Auto-Enrollment. In addition, the form now has two
parts. Part I is used to claim the credit for small employer
pension plan startup costs. Part II is used to claim the
credit for small employer auto-enrollment in retirement
savings.

General Instructions
Purpose of Form

Eligible small employers use Form 8881, Part I, to claim
the credit for qualified startup costs incurred in
establishing or administering an eligible employer plan.
The Part I credit is allowed under section 45E.
Eligible small employers can use Form 8881, Part II, to
claim the credit for first including an eligible automatic
contribution arrangement in an eligible employer plan. The
Part II credit is allowed under section 45T.
Taxpayers, other than partnerships and S corporations,
whose only source of these credits is from a partnership
or S corporation, are not required to complete or file this
form. Instead, they can report these credits directly on
Form 3800.

Part I. Credit for Small Employer
Pension Plan Startup Costs

The credit is allowed under section 45E and is part of the
general business credit. You may elect, however, to have
section 45E not apply for the tax year the credit is
available by not claiming it on your tax return for that year.

Dec 15, 2020

For an eligible employer, the credit is 50% of the qualified
startup costs paid or incurred during the tax year. The
credit is limited to the greater of $500 or the lesser of $250
for each employee that is eligible to participate in the plan
and not highly compensated (as defined in section 414(q))
or $5,000 for the first tax year and each of the following 2
tax years. No credit is allowed for any other tax year.
Eligible employer. To be an eligible employer, you must
have had no more than 100 employees during the tax year
preceding the first credit year who received at least
$5,000 of compensation from you during that tax year.
However, you are not an eligible employer if, during the 3
tax years preceding the first credit year, you established
or maintained a qualified employer plan with respect to
which contributions were made, or benefits were accrued,
for substantially the same employees as are in the new
qualified employer plan. See section 45E(c) for rules for
controlled groups and predecessor employers.
Qualified startup costs. Qualified startup costs are
expenses paid or incurred in connection with (a)
establishing or administering an eligible employer plan, or
(b) the retirement related education of employees about
the plan.
Eligible employer plan. An eligible employer plan is a
qualified employer plan (as defined in section 4972(d))
with at least one employee eligible to participate who is
not a highly compensated employee. All eligible employer
plans of the same employer are treated as one eligible
employer plan. See Member of Controlled Group or
Business Under Common Control below for rules on
treatment as a single employer.
First credit year. The first credit year is generally your
tax year that includes the date that the eligible employer
plan becomes effective. However, you may elect to have
the preceding tax year be the first credit year and claim
the credit for qualified startup costs paid or incurred during
that tax year. For example, a calendar-year eligible small
employer whose eligible plan is first effective on January
1, 2020, may elect to treat 2019 as the first credit year and
claim the credit on its 2019 tax return for qualified startup
costs incurred in 2019.

No Deduction Allowed for Credit Amount

You must reduce your otherwise allowable deduction for
startup costs by the credit amount on line 5.

Member of Controlled Group or Business Under
Common Control

For purposes of figuring the credit, all members of a
controlled group of corporations (as defined in section
52(a)), all members of a group of businesses under
common control (as defined in section 52(b)), and all
members of an affiliated service group (as defined in

Cat. No. 74839D

section 414(m)), are treated as a single employer. As a
member, compute your credit based on your
proportionate share of qualified startup costs giving rise to
the group’s credit for small employer pension plan startup
costs. Enter your share of the credit on line 5. Attach a
statement showing how your share of the credit was
figured, and write “See Attached” next to the entry space
for line 5.

preceding the first credit year who received at least
$5,000 of compensation from you during that tax year.

Specific Instructions

First credit year. The first tax year that the credit
applies is your first tax year in which you or a person
treated as a single employer with you first includes (or had
included) an eligible automatic contribution arrangement
in an eligible employer plan. See Member of Controlled
Group or Business Under Common Control below for
rules on treatment as a single employer.

Eligible employer plan. An eligible employer plan is a
qualified employer plan (as defined in section 4972(d)). All
eligible employer plans of the same employer are treated
as one eligible employer plan. See Member of Controlled
Group or Business Under Common Control below for
rules on treatment as a single employer.

Line 3

Enter the number of employees of the eligible employer
who are not highly compensated employees and who are
eligible to participate in the eligible employer plan
maintained by the eligible employer.

Member of Controlled Group or Business Under
Common Control

Part II. Small Employer
Auto-Enrollment Credit

For purposes of figuring the credit, controlled groups of
corporations under section 414(b), partnerships or sole
proprietorships under common control under section
414(c), and affiliated service groups under section 414(m)
are treated as a single employer. In addition, leased
employees described in section 414(n) are treated as
employed by the employer. As a member, compute your
credit based on your proportionate share of the $500
annual credit giving rise to the group's credit for small
employer automatic enrollment. Enter your share of the
credit on line 9. Attach a statement showing how your
share of the credit was figured, and write “See Attached”
next to the entry space for line 9.

The credit is allowed under section 45T and is part of the
general business credit.

How To Figure the Credit

The credit is $500 for the first tax year that an eligible
employer first includes an eligible automatic contribution
arrangement (under section 414(w)(3)) in an eligible
employer plan. The credit is $500 for each of the following
2 tax years, provided that you continue to maintain the
arrangement at any time during the applicable tax year.
No credit is allowed for any other tax year.

Eligible employer. To be an eligible employer, you must
have had no more than 100 employees during the tax year

Paperwork Reduction Act Notice. We ask for the information on this form to carry out the Internal Revenue laws of the
United States. You are required to give us the information. We need it to ensure that you are complying with these laws
and to allow us to figure and collect the right amount of tax.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act
unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be
retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax
returns and return information are confidential, as required by section 6103.
The time needed to complete and file this form will vary depending on individual circumstances. The estimated burden
for individual and business taxpayers filing this form is approved under OMB control number 1545-0074 and 1545-0123
and is included in the estimates shown in the instructions for their individual and business income tax return. The
estimated burden for all other taxpayers who file this form is shown below.
Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning about the law or the form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preparing and sending the form to the IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 hr.,

52 min.
53 min.
58 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler,
we would be happy to hear from you. See the instructions for the tax return with which this form is filed.

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Instructions for Form 8881 (December 2020)