How 4 tax credits could cover 100% of your company's 401(k) plan costs for the first 3 years

If you’re a business owner looking for ways to attract new talent and improve retention, offering a retirement benefit, like a 401(k), can be a great way to give your company a competitive advantage. Sounds great, right?

As good as it may sound, many companies still don’t offer a retirement plan, with many business owners citing cost as a barrier. In a recent survey, more than two-thirds of benefits decision-makers who don’t offer a retirement plan said they believe offering a 401(k) is cost-prohibitive.¹ While retirement benefits are often perceived as expensive to start and complicated to manage, that's no longer always the case.

To make these benefits more accessible, Congress established retirement plan tax credits under the SECURE Act, which took effect in 2019 and was later expanded and revised in 2022. SECURE 2.0 aims to make it easier for businesses like yours to provide affordable retirement plans and expand access to benefits. In fact, thanks to the SECURE Act and SECURE 2.0, eligible businesses may receive up to $16,500 in tax credits over a plan's first three years. These credits include:²

While these tax credits were established to increase 401(k) access, our research shows that many businesses don’t know about them — nearly 50% of benefits decision-makers are unaware of the retirement tax credits their companies may qualify for.³

If you’re uncertain which retirement tax credits are available for your business, you’re not alone. In this post, we’ll break down the four credits that you may be eligible for that can help you affordably offer a 401(k), and show you how to claim them for your business.

Is your business eligible?

First things first – these tax credits aren't automatic, and several factors will determine if you're eligible and how much you can claim. You should consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim. But generally, your business may qualify if:

Now, let's review the tax credits your business may qualify for.

Startup costs tax credit

What it is:

If your business qualifies for the startup costs tax credit, you can claim a credit for your 401(k) startup costs for up to three years after establishing the plan, so long as you continue to qualify.

This credit equals a percentage of your qualified startup costs, including what the IRS calls "the ordinary and necessary costs" to set up and administer your plan. These costs can include record-keeping fees, payroll deduction software, printing costs for enrollment materials, and money spent educating your employees.

How it works:

You can claim the startup tax credit for the first three years of your company’s plan. Note, you’re able to begin claiming the credit the year before the tax year in which your plan becomes effective. When used, the credit will reduce your business' federal income tax liability on a dollar-for-dollar basis.

The amount of the credit may vary depending on the size of your business:

Credit amount:

The credit covers a maximum of $250 per eligible NHCE, but not more than $5,000 or less than $500 in any single year.

Automatic enrollment credit

What it is:

The automatic enrollment tax credit was established to encourage more employees to participate in their company-sponsored retirement plans. And as a business owner, you benefit from this tax credit simply by offering a qualified plan.

How it works:

If your business qualifies, you can choose one of two automatic enrollment arrangements:

Unlike the startup cost tax credit, your retirement plan doesn't need to be new to qualify — only the EACA or QACA feature needs to be new.

Credit amount:

If you're eligible and add auto-enrollment to your company's plan, you can claim a tax credit of $500 per year for three years, beginning with the first year you include auto-enrollment.

It's important to note that you must keep automatic enrollment active to continue to qualify for this credit. For example, if you stop auto-enrollment after two years, you'll only be eligible for the credit for those two years.

Employer contribution cost credit

What it is:

The employer contribution cost credit is a tax credit for the contributions you make to your employees’ retirement savings.

How it works:

The number of employees you have determines this credit’s value. For a business with 50 or fewer employees, the tax credit can be up to:

If your company has 51 to 100 employees, your tax credit would be reduced by 2% for each employee over 50. For example, if your business has 62 employees in the first year, your percentage would be 100 - (12 x 2) or 76% of employer contributions.

Credit amount:

The maximum credit is up to $1,000 per eligible participant with wages of $100,000 or less. However, the credit amount will vary depending on how many employees you have, how long you've offered the plan, and the actual contributions made to each employee. For example, a company with two eligible participants makes a contribution of $500 to one and $1,400 to the other in the first year the plan has been established. In this case, the tax credit will be $1,500.

Military spouse credit

What it is:

The military spouse credit encourages those employing spouses of active duty service members to allow them to participate in their retirement plan right away.

Military spouses often change employment frequently, which may delay their retirement savings if they have to keep re-meeting service eligibility requirements. Typically, service requirements prevent employees from enrolling in a company’s 401(k) until they have been employed with the business for a set amount of time. This credit was established to help those spouses save for their futures by forgoing service requirements that may otherwise be in place.

How it works:

If your business has 100 or fewer employees and employs a military spouse who is an NHCE, you can claim $200 per military spouse, as well as 100% of all employer contributions for the spouse, up to $300. This military spouse credit is available for three years per military spouse.

There are a few requirements to qualify for this credit, including but not limited to:

For more details, check out the IRS’ military family tax benefits resource.

Credit amount:

The maximum credit is $500 per military spouse per year for three years.

Potential tax credit savings

As we’ve stated above, the tax credits your business can claim depend on several factors, but to help give you an idea of how much you could potentially save, let's look at an example.

Suppose your business employs 12 people, and they all participate in your company's newly established 401(k) plan. Three of your employees are highly compensated, and the other nine are NHCEs.

In this example, you offer a 401(k) with Guideline's Core plan, which costs $89 per month + $8 per participant. Your monthly costs amount to $185, or $2,220 annually.

(Note: In this example, we’ll assume that all employee information and pricing stays the same for the three years of tax credit eligibility.)

First, let’s look at the startup tax credit. If you qualify, the credit covers up to $250 per eligible NHCE, for a total credit of $2,220 ($250 x 9 NHCEs.)

Then, we have the automatic enrollment credit. All Guideline 401(k) plans include automatic enrollment without exception, which means you'll be eligible for an additional $500 tax credit each year for three years.

Estimated values based on the above assumptions. This chart is illustrative, and for educational purposes only. They are not representative of any client account.

In this example, retirement tax credits would offset your total annual 401(k) costs completely. (Note: This doesn't include employer contributions, which may be 100% tax deductible

How do I claim retirement tax credits?

If you qualify for these tax credits, claim them on your organization’s tax filing using the IRS’ Form 8881, Credit for Small Employer Pension Plan Startup Costs. The IRS’ instructional guide provides in-depth guidance on how to complete this form.

Unlock tax credit savings for free with help from MainStreet

If you’re looking for support with preparing the paperwork to claim your tax credits, you’re in luck. MainStreet⁴ is offering Guideline's customers help with claiming their retirement tax credit services — for free.

How does it work? It’s simple.

Whether it’s the first time you’re offering a 401(k) or your benefits program is a well-oiled machine, MainStreet can help you claim the tax credits your business deserves. Learn more today.