Tax Credits Simplified: A Guide for Small Businesses Setting Up Retirement Plans

By Jasmin Sethi and Sarah Urie

Setting up a retirement plan for your employees is one of the best investments you can make in your business’s future. Not only does it help attract and retain top talent, but it also opens the door to valuable tax credits that can offset the costs of getting started. This guide breaks down the key tax credits available to small businesses, making it easier than ever to create a strong financial foundation for your team while keeping costs under control.

Startup Costs Tax Credit

What It Is: The Startup Costs Tax Credit is designed to help small businesses cover the initial expenses of setting up a retirement plan for their employees. It’s a great way to reduce the financial burden of offering valuable benefits to your team.

• Eligibility: Small businesses with fewer than 100 employees may be eligible for a tax credit covering 50% of startup costs for retirement plans like SEPs, SIMPLE IRAs, or 401(k)s, up to $5,000 annually for the first three years.
• Enhanced Credit: The total annual credit amount for business with less than 50 NHCE is the greater of $500 or $250 multiplied by the number of NHCEs eligible for the plan. However, this credit amount is capped at $5,000 per year, meaning it may not cover all costs if expenses exceed this limit or if there are a high number of NHCEs. Examples of how the IRS formula applies to different business sizes can be found here.
• Requirements: At least one plan participant must be a non-highly compensated employee. The business should not have substantially the same employees who received benefits from another plan in the past three years.

Employer Contributions Credit

What It Is: The Employer Contributions Credit provides an additional incentive for small businesses to contribute to their employees’ retirement accounts. This credit rewards companies for directly investing in their employees’ financial futures.

• Overview: Secure 2.0 introduces a new credit for small businesses that contribute to employee retirement accounts.
• Eligibility: Available for businesses with up to 50 employees. Phases out gradually for those with 51–100 employees.
• Credit Breakdown: Businesses can receive a credit up to $1,000 per employee for employer contributions in the first year, decreasing gradually over five years. Additionally, for employees earning less than $100,000, employers can claim an extra $1,000 per person, which can be applied toward a matching contribution, up to a maximum of $50,000.
• Limitation: Contributions for employees earning more than $100,000 annually are not eligible.

Auto-Enrollment Credit

What It Is: The Auto-Enrollment Credit encourages small businesses to adopt automatic enrollment in their retirement plans, making it easier for employees to start saving for their future right away.

• Description: Small businesses that adopt automatic enrollment for their 401(k) plans can qualify for a tax credit.
• Credit Amount: This is a flat $500 credit each year, totaling $1,500 over three years.
• Eligibility: Applies to businesses that automatically enroll employees in their retirement plans unless they opt out.

Steps for a Small Business Owner to Take

• Ask your accountant about how starting a retirement plan would affect your taxes.
• Ask your payroll provider what options they have and the cost.
• Ask your financial adviser if they can connect you to a plan such as those found here.
• Seek information to decide which plan meets your needs and then get enrolled.

This guide outlines the main tax credits available to small businesses when setting up retirement plans. These incentives can significantly lower your costs and encourage employee savings, helping you to build a solid foundation for your workforce’s future.

Jasmin Sethi is the CEO of Sethi Clarity Advisers. She educates investors on the topic of building a secure retirement through a variety of asset classes. She assesses the implications of various policy and industry changes on individual opportunities for building a retirement portfolio and facilitate better outcomes for individual financial security.

Sarah Urie is a Research Associate at Sethi Clarity Advisers.