Starting a 401(k): How Much Can Your Business Claim in Tax Credits?
If you're starting a 401(k), there are federal tax credits your business may be able to claim: one for your setup costs, one for adding automatic enrollment, and one for the money you put into your employees' accounts.
What Tax Credits Can a Business Claim?
SECURE 2.0, a federal tax law passed in 2022, enhanced the tax credits for businesses starting a retirement plan to encourage more business owners to offer company sponsored retirement plans.
| Credit | What it covers | How much | How long |
|---|---|---|---|
| Startup Credit | The cost of setting up and running a new plan | Up to $5,00 a year. $250 per eligible employee who is not an owner | First three years |
| Auto-Enrollment Credit | Adding automatic enrollment to your plan | $500 a year | Three years |
| Employer Contribution Credit | The money you put into employees' accounts—whether that’s a match or a profit sharing contribution | Up to the first $1,000 you contribute per employee. You get the full amount for the first two years, then it shrinks each year until it ends. | Five years |
These are the maximum amounts. Estimate what your business could claim with our tax credit calculator.1
What Is a Tax Credit?
A tax credit is a dollar-for-dollar amount that reduces the amount of tax owed by an individual or a business. Unlike a tax deduction, which lowers taxable income, a tax credit directly decreases the overall tax bill. For example, a $1,000 tax credit will lower your tax bill by $1,000.
1. The Startup Credit
What Is It and How Does It Work?
The Startup Credit helps businesses offset the costs of starting a retirement plan, up to $5,000 per year for the first three years. It covers “qualified startup costs”—or the costs of getting the plan up and running. These may include record-keeping fees, plan administration fees, costs of educating your employees about the plan, and the assistance of a financial advisor.
Depending on the number of employees a business has, they may be eligible for either a credit of 100% of qualifying expenses or 50% of qualifying expenses. Here is a breakdown of the credit based on a business’s employee count:
| For Employers With 50 or Fewer Employees | For Employers With 51 to 100 Employees | |
|---|---|---|
| Startup Credit | Credit of 100% for qualifying expenses, up to $5,000 annually | Covers half your setup costs, up to $10,000 |
How Much Is the Credit?
Businesses could receive up to $15,000 over three years. Your credit is $250 for each non-highly compensated employee (NHCE) eligible for the plan, up to a maximum of $5,000 a year.
What is an NHCE? An NHCE is anyone in the business who is not defined as a highly compensated employee (HCE). An HCE is an individual who:
- Owned more than 5% of the business at any time during the current year or the preceding year, regardless of how much compensation that person earned or received, or
- Received compensation from the employer in excess of a specified threshold, defined by the IRS, in the preceding year. For 2026, the threshold is $160,000.
Estimate what your business could claim with our tax credit calculator.
Who Qualifies for the Startup Credit?
The requirements for claiming the Startup Tax Credit are as follows:
- You had 100 or fewer employees whom you paid at least $5,000 in the previous year.
- At least one participating employee is not a highly compensated employee (NHCE).
- You haven’t offered your employees a retirement plan in the past three years.
How to claim it: file Form 8881 with your tax return. Your tax professional can handle this.
2. The Auto-Enrollment Credit
What Is It and How Does It Work?
The Auto-Enrollment Credit rewards businesses for adding automatic enrollment to their retirement plans, where eligible employees are enrolled unless they opt out. New plans started after December 29, 2022, are generally required to include it, though businesses with 10 or fewer employees and those in business under three years are exempt. The credit is available either way.
How Much Is the Credit?
The Auto-Enrollment Credit is $500 per year and can be claimed for up to three years, for a total maximum credit of $1,500. That’s on top of any other retirement plan tax credits that the business may be eligible for.
Who Qualifies for the Auto-Enrollment Credit?
Your business will qualify when you add automatic enrollment to your plan, and your provider will handle the paperwork.
Unlike the Startup Credit, this one is also open to businesses with existing retirement plans. A 401(k) plan you’ve run for years qualifies the year you add auto-enrollment.
3. The Employer Contribution Tax Credit
What Is It and How Does It Work?
The Employer Contribution Tax Credit rewards businesses that contribute to their employees' retirement plans. It helps offset the cost of employer contributions, making it more feasible for businesses to support their employees' retirement savings goals. You only earn credits on contributions to employees earning $100,000 a year or less.
How Much Is the Credit?
The credit covers a percentage of what you contribute to employees’ accounts, up to $1,000 per employee. It holds steady for two years, then phases down:
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
|---|---|---|---|---|---|
100% | 100% | 75% | 50% | 25% |
This applies to businesses with 50 or fewer employees. If you have 51 to 100, the credit is reduced by 2 percent for each employee over 50.
Estimate what your business could claim with our tax credit calculator.
Who Qualifies For the Employer Contribution Credit?
The requirements for claiming this tax credit are as follows:
- You had 100 or fewer employees whom you paid at least $5,000 in the previous year.
- At least one participating employee is not a highly compensated employee (NHCE).
- You haven’t offered your employees a retirement plan in the past three years.
- You make employer contributions to your employees' retirement plans.
Your Next Step
The tax credits you’re eligible for come down to two things: how many employees you have and which plan you choose.