Federal Tax Incetives

In the interest of helping American save for retirement, the federal government in Secure 2.0 has offered significant incentives for business owners to offer their employees a retirement plan. These include tax credits to cover plan expenses and matching. Tax credits are a carrot for business owners to offer a low-cost retirement plan for the benefit of their employees. Many states are also starting to mandate retirement plans. See our state by state pages below to learn more and see if your state has a requirement you should be aware of.

Federal Tax Credit for Startup 401(k)

Eligible employers

You qualify to claim this credit if:

You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
You had at least one plan participant who was a non-highly compensated employee (NHCE); and
In the three tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

Amount of the credit

If you have 50 or fewer employees who received at least $5,000, the credit is 100% of eligible startup costs, up to the greater of:

$500; or
The lesser of:
- $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or
- $5,000

If you have 51-100 employees who received at least $5,000, the credit is 50% of your eligible startup costs, up to the greater of:

$500; or
The lesser of:
- $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or
- $5,000.

Auto-enrollment tax credit

An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a 3-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature. This tax credit is available for new or existing plans that adopt an eligible auto-enrollment plan.

Federal Tax Credit for Matching

Tax credit for plan contributions

Small employers may claim a tax credit for plan contributions made to a defined contribution plan, SEP or SIMPLE IRA plan. The tax credit is not available for contributions to employees earning more than $100,000 (for 2023).

For employers with 1-50 employees, the tax credit available for each participant is:

First plan year: 100% of contribution, up to $1,000
Second plan year: 100% of contribution, up to $1,000
Third plan year: 75% of contribution, up to $1,000
Fourth plan year: 50% of contribution, up to $1,000
Fifth plan year: 25% of contribution, up to $1,000

For employers with 51-100 employees, the tax credit available for each participant is:

First plan year: 100% minus 2% for each employee exceeding 50 limit
Second plan year: 100% minus 2% for each employee exceeding 50 limit
Third plan year: 75% minus 2% for each employee exceeding 50 limit
Fourth plan year: 50% minus 2% for each employee exceeding 50 limit
Fifth plan year: 25% minus 2% for each employee exceeding 50 limit