Many business owners know that offering a retirement plan is one of the best ways to attract and retain employees amidst a competitive hiring market. What they don’t know is that there are numerous tax credits available to them to reduce the financial burden of offering a 401(k).
These credits not only help companies offset the costs of sponsoring a retirement plan but also provide subsidies for employer contributions, enhancing their company's overall benefits package.
Start-Up Credit for Small Employer-Sponsored 401(k) Plans
The Secure Act 2.0 offers a tax credit that covers 100% of 401(k) qualified costs for businesses with under 50 employees for the first three tax years the plan is maintained.
Businesses with 51 to 100 employees are eligible for the same tax credit with a coverage of 50%.
Maximum credit is lesser of $5,000 or $250 times the number of eligible non-highly compensated employees.
Automatic Enrollment Tax Credit
Businesses with up to 100 employees are eligible for a $500 tax credit for a 3-year taxable period by adding an automatic enrollment feature to a new or existing 401(k) plan.
Beginning in 2025, employers with new 401(k) and 403(b) plans (with certain exceptions) will be required to have an automatic enrollment provision.
The credit is for businesses with up to 100 employees, however, the credit is reduced by 2% per employee over 50 employees earning less than 100,000/year. The maximum credit is $1000 per year for each of those employees.
Employer Contribution Credit
Small businesses starting a new retirement plan are eligible to receive a tax credit for employer matching or profit-sharing contributions for the first five years of the plan.
The credit covers up to 100% of employer contribution for the first two years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year.
Size of Employer* |
Size of Employer* |
Employer Contribution Tax Credit |
Automatic Enrollment Credit |
1 - 50 employees |
100% of Eligible Start-up Costs |
Up to 100% employer contribution for first 2 years; 75% in third year; 50% in fourth year; 25% in fifth year |
$500 |
51 – 100 employees |
50% of Eligible Start-up Costs |
Same as above, but phased out based on number of employees above 50 |
$500 |
100+ employees |
Business expense deductions |
Contribution deductions |
$0 |
Small Employer Retirement Plan Eligibility Credit for Military Spouses
SECURE 2.0 provides small businesses a $200 credit for employing an eligible military spouse and claim 100% of employer contributions up to $300, for a maximum tax credit of $500 per military spouse. The credit may be claimed for a military spouse’s first three years of participation in the plan.
Employees are eligable if they (1) make the military spouse immediately eligible for plan participation within two months of hire, (2) upon plan eligibility, make the military spouse eligible for any matching or nonelective contribution that they would have been eligible for otherwise at 2 years of service, and (3) make the military spouse 100 percent immediately vested in all employer contributions.
Choose The Right Retirement Plan Administrator
There are many opportunies available that will help businesses save money while offering a 401(k) to employees. When starting a new retirement plan, it is important to partner with a plan administrator that has your best interests in mind. By starting a retirement plan with Leading Retirement Solutions, businesses can take advantage of these benefits and more to help them achieve a comfortable and secure retirement.
For tips and information regarding retirement plans, contact us.
