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Department of the Treasury
Internal Revenue Service
Instructions for Form 8881

(Rev. December 2020)
Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment

Section references are to the Internal Revenue Code How To Figure the Credit
unless otherwise noted. For an eligible employer, the credit is 50% of the qualified
startup costs paid or incurred during the tax year. The
Future Developments
credit is limited to the greater of $500 or the lesser of $250
For the latest information about developments related to for each employee that is eligible to participate in the plan
Form 8881 and its instructions, such as legislation and not highly compensated (as defined in section 414(q))
enacted after they were published, go to IRS.gov/ or $5,000 for the first tax year and each of the following 2
Form8881. tax years. No credit is allowed for any other tax year.
What’s New Eligible employer. To be an eligible employer, you must
have had no more than 100 employees during the tax year
Increase in limit for the small employer pension plan preceding the first credit year who received at least
startup costs credit. The Further Consolidated $5,000 of compensation from you during that tax year.
Appropriations Act, 2020, increased the credit limit for the However, you are not an eligible employer if, during the 3
credit for small employer pension plan startup costs. tax years preceding the first credit year, you established
New credit for small employer automatic enrollment or maintained a qualified employer plan with respect to
in retirement savings. The Further Consolidated which contributions were made, or benefits were accrued,
Appropriations Act, 2020, created a new credit for small for substantially the same employees as are in the new
employers with an auto-enrollment option for retirement qualified employer plan. See section 45E(c) for rules for
savings. controlled groups and predecessor employers.
Changes to the form. The title of Form 8881 is changed Qualified startup costs. Qualified startup costs are
to Credit for Small Employer Pension Plan Startup Costs expenses paid or incurred in connection with (a)
and Auto-Enrollment. In addition, the form now has two establishing or administering an eligible employer plan, or
parts. Part I is used to claim the credit for small employer (b) the retirement related education of employees about
pension plan startup costs. Part II is used to claim the the plan.
credit for small employer auto-enrollment in retirement Eligible employer plan. An eligible employer plan is a
savings. qualified employer plan (as defined in section 4972(d))
with at least one employee eligible to participate who is
General Instructions not a highly compensated employee. All eligible employer
plans of the same employer are treated as one eligible
Purpose of Form employer plan. See Member of Controlled Group or
Eligible small employers use Form 8881, Part I, to claim Business Under Common Control below for rules on
the credit for qualified startup costs incurred in treatment as a single employer.
establishing or administering an eligible employer plan. First credit year. The first credit year is generally your
The Part I credit is allowed under section 45E. tax year that includes the date that the eligible employer
Eligible small employers can use Form 8881, Part II, to plan becomes effective. However, you may elect to have
claim the credit for first including an eligible automatic the preceding tax year be the first credit year and claim
contribution arrangement in an eligible employer plan. The the credit for qualified startup costs paid or incurred during
Part II credit is allowed under section 45T. that tax year. For example, a calendar-year eligible small
employer whose eligible plan is first effective on January
Taxpayers, other than partnerships and S corporations, 1, 2020, may elect to treat 2019 as the first credit year and
whose only source of these credits is from a partnership claim the credit on its 2019 tax return for qualified startup
or S corporation, are not required to complete or file this costs incurred in 2019.
form. Instead, they can report these credits directly on
Form 3800. No Deduction Allowed for Credit Amount
You must reduce your otherwise allowable deduction for
Part I. Credit for Small Employer startup costs by the credit amount on line 5.
Pension Plan Startup Costs
Member of Controlled Group or Business Under
The credit is allowed under section 45E and is part of the
general business credit. You may elect, however, to have Common Control
section 45E not apply for the tax year the credit is For purposes of figuring the credit, all members of a
available by not claiming it on your tax return for that year. 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

Dec 15, 2020 Cat. No. 74839D

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section 414(m)), are treated as a single employer. As a preceding the first credit year who received at least
member, compute your credit based on your $5,000 of compensation from you during that tax year.
proportionate share of qualified startup costs giving rise to
Eligible employer plan. An eligible employer plan is a
the group’s credit for small employer pension plan startup
qualified employer plan (as defined in section 4972(d)). All
costs. Enter your share of the credit on line 5. Attach a
eligible employer plans of the same employer are treated
statement showing how your share of the credit was
as one eligible employer plan. See Member of Controlled
figured, and write “See Attached” next to the entry space
Group or Business Under Common Control below for
for line 5.
rules on treatment as a single employer.
First credit year. The first tax year that the credit
Specific Instructions applies is your first tax year in which you or a person
treated as a single employer with you first includes (or had
Line 3 included) an eligible automatic contribution arrangement
Enter the number of employees of the eligible employer in an eligible employer plan. See Member of Controlled
who are not highly compensated employees and who are Group or Business Under Common Control below for
eligible to participate in the eligible employer plan rules on treatment as a single employer.
maintained by the eligible employer.
Member of Controlled Group or Business Under
Part II. Small Employer Common Control
Auto-Enrollment Credit For purposes of figuring the credit, controlled groups of
The credit is allowed under section 45T and is part of the corporations under section 414(b), partnerships or sole
general business credit. proprietorships under common control under section
414(c), and affiliated service groups under section 414(m)
How To Figure the Credit are treated as a single employer. In addition, leased
The credit is $500 for the first tax year that an eligible employees described in section 414(n) are treated as
employer first includes an eligible automatic contribution employed by the employer. As a member, compute your
arrangement (under section 414(w)(3)) in an eligible credit based on your proportionate share of the $500
employer plan. The credit is $500 for each of the following annual credit giving rise to the group's credit for small
2 tax years, provided that you continue to maintain the employer automatic enrollment. Enter your share of the
arrangement at any time during the applicable tax year. credit on line 9. Attach a statement showing how your
No credit is allowed for any other tax year. share of the credit was figured, and write “See Attached”
next to the entry space for line 9.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 hr., 52 min.
Learning about the law or the form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 min.
Preparing and sending the form to the IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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.

-2- Instructions for Form 8881 (December 2020)

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