Starting a 401(k) plan for your small business is a smart move that can help attract and retain talent while supporting long-term financial wellness for you and your employees. However, many small business owners hesitate to set one up due to the associated costs.
Fortunately, the IRS and recent legislation, including the SECURE 2.0 Act, offer generous tax credits that can significantly reduce or even eliminate many of these startup expenses.
One of the most impactful incentives is the Retirement Plans Startup Costs Credit. This credit allows eligible businesses to receive up to $5,000 per year for the first three years, covering up to 50% of the ordinary and necessary costs to set up and administer a new retirement plan, including employee education.
If your business has 100 or fewer employees who earned at least $5,000 in the previous year and you didn’t have a retirement plan in place in the last three years, you likely qualify.
Thanks to the SECURE 2.0 Act, there’s now an additional benefit: the Employer Contribution Credit. For businesses with 50 or fewer employees, the government now covers a portion of the employer contributions made to employees’ accounts, up to $1,000 per employee, phased down over five years. This new credit helps offset the cost of matching or non-elective contributions, making it easier for small businesses to offer competitive retirement benefits.
Additionally, the Auto-Enrollment Credit provides another $500 per year for three years if the plan includes an automatic enrollment feature—an increasingly popular way to boost employee participation and encourage saving.
To claim these credits, businesses should file IRS Form 8881 and consult with a tax professional to ensure they meet eligibility requirements and maximize their benefits. With the expanded support under SECURE 2.0, there’s never been a better and more affordable time for small businesses to start a 401(k) plan and invest in their employees’ futures.
