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How tax credits can make offering a 401(k) affordable

See how new tax credits under the SECURE 2.0 Act could help with a new 401(k) plan’s implementation costs.

By Betterment Editors

Updated Dec. 12, 2023 |

How tax credits can make offering a 401(k) affordable Dec 12, 2023 3:13:11 PM See how new tax credits under the SECURE 2.0 Act could help with a new 401(k) plan’s implementation costs. After the passing of the SECURE 2.0 Act, CNBC published an article titled, “There may never be a better time to create a retirement plan.” The article largely focused on the increased tax credits smaller businesses can receive under the Act. These tax credits may amount to sizable savings for smaller employers looking to start a 401(k) plan. For that reason, we tend to agree with CNBC: This really may be the best time there has ever been to start a 401(k). What are the SECURE 401(k) tax credits? For businesses with 100 or fewer employees, there are three main tax credits to consider: Startup Tax credit: Provides businesses with 100 employees of fewer a three-year tax credit for up to 50% of plan start-up costs. Business owners with multiple companies should be aware of controlled group rules, which treat legally separate businesses under common ownership as a single employer. That means employee counts must be aggregated across all entities, so a business with 30 employees that's part of a larger ownership group totaling 200 would not qualify for "small employer" credits, even if that individual company would otherwise meet the threshold on its own. Increases the tax credit to up to 100% of the plan start-up costs for employers with 50 or fewer employees. The credit is based on the greater of $500 OR $250 per non-highly compensated employee (NHCE), capped at $5,000. Employer Contribution credit: Offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees, as much as $1,000 per participating employee with wages less than $110,000 (indexed annually). The credit covers the first five years of the plan allowing 100% of the employer contribution to be claimed in the first and second tax years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. The credit also applies to employers with 51–100 employees, but the amount is reduced by 2% for each employee over 50. Note that only contributions for employees earning $100,000 or less per year are eligible for the credit. Automatic Enrollment credit: 401(k) and 403(b) plans adopted after December 29, 2022 must automatically enroll employees at a 3%–10% contribution rate (employees can still opt out of the plan). Employers can advantage of a $500 tax credit per year for up to three years for new or existing plans. Employers can claim this tax benefit for up to three tax years if they have 100 or fewer eligible employees. How much could your business save? To illustrate how tax credits can impact a business, consider the following hypothetical scenario for a business starting a new 401(k) with 25 participating NHCEs with wages less than $100,000 and a $3,000 average annual employer matching contribution per employee. Startup Tax credit Employer Contribution credit Automatic Enrollment credit Total credits Year 1 $5,000 ($250 per NHCE up to $5,000) $25,000 (100% or $1,000 max per employee) $500 ($500 per year) $30,500 Year 2 $5,000 ($250 per NHCE up to $5,000) $25,000 (100% or $1,000 max per employee) $500 ($500 per year) $30,500 Year 3 $5,000 ($250 per NHCE up to $5,000) $25,000 (75% or $1,000 max per employee) $500 ($500 per year) $30,500 Year 4 $0 (No credit) $25,000 (50% or $1,000 max per employee) $0 (No credit) $25,000 Year 5 $0 (No credit) $18,750 (25% or $1,000 max per employee) $0 (No credit) $18,750 Note: All information provided above is hypothetical for educational purposes only. For employers using the employer contribution tax credit, a tax deduction won't typically apply. Please review scenarios unique to your plan with your accountant to decide which tax credits and deductions are best for you. How to claim your SECURE 2.0 tax credits: 3 steps Review which SECURE 2.0 credits your business qualifies for: You’re already reading this, so you’re headed in the right direction. If you are considering starting a 401(k) plan, be sure to research both the tax credit and other SECURE 2.0 provisions. Confirm how your plan design interacts with each credit: Whether you are starting a new plan or adding features to an established plan, to make the most of SECURE 2.0, you’ll need to review how your plan interacts with the law’s provisions and understand if your business is eligible. File Form 8881 with your accountant to claim the credits: Once you have a firm grasp of SECURE 2.0 provisions and how they impact your plan, reach out to your accountant and/or tax professional to plan for potential tax credits. They can walk you through your business’s situation and help you complete Form 8881.

After the passing of the SECURE 2.0 Act, CNBC published an article titled, “There may never be a better time to create a retirement plan.” The article largely focused on the increased tax credits smaller businesses can receive under the Act.

These tax credits may amount to sizable savings for smaller employers looking to start a 401(k) plan. For that reason, we tend to agree with CNBC: This really may be the best time there has ever been to start a 401(k).

What are the SECURE 401(k) tax credits?

For businesses with 100 or fewer employees, there are three main tax credits to consider:

Startup Tax credit:

Provides businesses with 100 employees of fewer a three-year tax credit for up to 50% of plan start-up costs.
Business owners with multiple companies should be aware of controlled group rules, which treat legally separate businesses under common ownership as a single employer. That means employee counts must be aggregated across all entities, so a business with 30 employees that's part of a larger ownership group totaling 200 would not qualify for "small employer" credits, even if that individual company would otherwise meet the threshold on its own.
Increases the tax credit to up to 100% of the plan start-up costs for employers with 50 or fewer employees.
The credit is based on the greater of $500 OR $250 per non-highly compensated employee (NHCE), capped at $5,000.

Employer Contribution credit:

Offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees, as much as $1,000 per participating employee with wages less than $110,000 (indexed annually).
The credit covers the first five years of the plan allowing 100% of the employer contribution to be claimed in the first and second tax years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year.
The credit also applies to employers with 51–100 employees, but the amount is reduced by 2% for each employee over 50. Note that only contributions for employees earning $100,000 or less per year are eligible for the credit.

Automatic Enrollment credit:

401(k) and 403(b) plans adopted after December 29, 2022 must automatically enroll employees at a 3%–10% contribution rate (employees can still opt out of the plan). Employers can advantage of a $500 tax credit per year for up to three years for new or existing plans.
Employers can claim this tax benefit for up to three tax years if they have 100 or fewer eligible employees.

How much could your business save?

To illustrate how tax credits can impact a business, consider the following hypothetical scenario for a business starting a new 401(k) with 25 participating NHCEs with wages less than $100,000 and a $3,000 average annual employer matching contribution per employee.

	Startup Tax credit	Employer Contribution credit	Automatic Enrollment credit	Total credits
Year 1	$5,000 ($250 per NHCE up to $5,000)	$25,000 (100% or $1,000 max per employee)	$500 ($500 per year)	$30,500
Year 2	$5,000 ($250 per NHCE up to $5,000)	$25,000 (100% or $1,000 max per employee)	$500 ($500 per year)	$30,500
Year 3	$5,000 ($250 per NHCE up to $5,000)	$25,000 (75% or $1,000 max per employee)	$500 ($500 per year)	$30,500
Year 4	$0 (No credit)	$25,000 (50% or $1,000 max per employee)	$0 (No credit)	$25,000
Year 5	$0 (No credit)	$18,750 (25% or $1,000 max per employee)	$0 (No credit)	$18,750

Note: All information provided above is hypothetical for educational purposes only. For employers using the employer contribution tax credit, a tax deduction won't typically apply. Please review scenarios unique to your plan with your accountant to decide which tax credits and deductions are best for you.

How to claim your SECURE 2.0 tax credits: 3 steps

Review which SECURE 2.0 credits your business qualifies for: You’re already reading this, so you’re headed in the right direction. If you are considering starting a 401(k) plan, be sure to research both the tax credit and other SECURE 2.0 provisions.
Confirm how your plan design interacts with each credit: Whether you are starting a new plan or adding features to an established plan, to make the most of SECURE 2.0, you’ll need to review how your plan interacts with the law’s provisions and understand if your business is eligible.
File Form 8881 with your accountant to claim the credits: Once you have a firm grasp of SECURE 2.0 provisions and how they impact your plan, reach out to your accountant and/or tax professional to plan for potential tax credits. They can walk you through your business’s situation and help you complete Form 8881.

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