If you are a small business owner who has established a retirement plan this year, you may be eligible to receive a tax credit for the cost of implementing a plan. And a tax credit can be better than a tax deduction. The same legislation that Congress passed in 2001 that increased benefit and contribution limits – which the Pension Protection Act of 2006 extended – provided a tax credit to encourage small businesses to establish retirement plans. This tax credit is in addition to the tax deduction you may receive for the contributions to the plan. The tax credit may be claimed for a maximum period of three years for retirement plans established for the 2002 plan year or later.

Here are some questions and answers  about the tax credit:

Who is an eligible employer?
The tax credit is available to employers with no more than 100 employees who earned at least $5,000 in the previous year.

How much is the tax credit?
The credit is limited to 50% of the first $1,000 in expenses; therefore, the credit cannot exceed $500. The credit is nonrefundable, i.e, you may not generate an income tax refund for the credit.

What expenses are eligible?
Expenses eligible for the tax credit include those defined as the plan’s start-up costs, which are ordinary or necessary for the establishment of the plan. These include expenses incurred to establish the plan, administrative fees and costs incurred to educate employees about the plan.

What plans are eligible for the tax credit?
Eligible plans include SEP IRAs, SIMPLE IRAs and qualified plans, such as 401(k) plans, profit-sharing plans, and defined benefit plans. The plan must cover at least one employee who is not classified as a highly compensated employee.

How do you claim the tax credit?
You must file IRS Form 8881 – Credit for Small Employer Pension Plan Startup Costs.

Check the fine print with your tax adviser to see if you are eligible to take advantage of the tax credit.

I’m not an art critic, and I don’t play one on the Internet.

So I understand this picture, (Untitled by Jackson Pollack, incidentally), as much as perhaps … say the average 401(k) participant understands his or her plan’s summary plan description (SPD). Which is to say, in many cases, not much.

And it’s quite obvious why not. Despite the regulatory requirement that SPDs should be written to be understood by the average plan participant, they are written by attorneys for attorneys. And why that is so should also be obvious. Despite such disclaimer clauses in an SPD as

This Summary Plan Description is a brief description of your Plan and your rights and benefits under the Plan. This Summary Plan Description is not meant to interpret or change the provisions of your Plan. A copy of your Plan is on file at your Employer’s office and may be read by you, your Beneficiaries, or your legal representatives at any reasonable time. If you have questions regarding your Plan or this Summary Plan Description, you should ask your Plan Administrator. If any discrepancies exist between this Summary Plan Description and the actual provisions of the Plan, the Plan shall govern.

attorneys have told me that courts often permit employees to rely on the SPD when it conflicts with the terms of the plan document.

And so what’s a plan sponsor to do?

Steve Rosenberg makes a very sensible suggestion in a recent post in his Boston ERISA & Insurance Litigation Blog, Summary Plan Descriptions and Grants of Discretion:  

And some of this goes back to a fundamental issue, of whether participants really understand – or even read – the summary plan description, or whether it is instead simply something that gets pulled out by a participant’s lawyer after a claim for benefits has been denied. The summaries exist because we need to mandate disclosure, and certainly the more the better – but I don’t think it is realistic to structure a legal rule and indeed an entire regime around the myth that participants actually do read them, rely on them and understand them. When we do that, we move into simply creating traps that make the administration of plans more difficult and create loopholes to be exploited in litigation; while this may be good for lawyers’ wallets, I think we are all better served by legal rules that fit comfortably with how non-lawyers actually conduct themselves in their day to day lives.

Could this ever happen?