8564 / What tax credit is available for small business retirement plan start-up costs?

Eligible small employers (under IRC Section 408(p)(2)(C)(1)) who provide an eligible auto-enrollment feature are eligible for an additional $500 per year credit (for the first three years the auto-enrollment feature is offered).

Planning Point: The credit for auto-enrollment can be claimed even if a new auto-enrollment feature is added to an existing plan.

Planning Point: Starting with the 2025 tax year, the SECURE Act 2.0 will require employers that establish new 401(k) or 403(b) plans to auto-enroll employees in the savings plans. The minimum auto-enrollment contribution rate will range from 3% to 10%. Each year, the minimum contribution rate will then increase by 1% until the rate reaches 15%. Under the law, small business employers with 10 or fewer employees and new businesses will be exempt from the auto-enrollment requirement.

A tax credit for qualified retirement plan start-up costs is available to small business owners. A small business employer is eligible if, during the preceding tax year, it employed 100 or fewer employees who received at least $5,000 in annual compensation from the employer (the same definition that generally applies for SIMPLE retirement plans).¹ The plan must be available to at least one employee who is a non-highly compensated employee (a highly compensated employee is one who owns 5 percent of the business or who has earned more than $155,000 in 2024).²

Importantly, the small business employer is only eligible for the credit if its employees were not able to participate in another retirement plan sponsored by the employer, a member of a controlled group or a predecessor of either within three years of establishing the new plan (essentially, this requirement ensures that the plan truly is a newly-established retirement plan).³