Starting a 401(k) Is More Affordable Than Most Owners Think
Many small business owners assume a 401(k) is too expensive to start. Under current law, that’s often no longer true. Federal tax credits can significantly reduce — and in some cases largely offset — the early-year costs of launching a plan.
Here’s how it works.
- Startup Cost Tax Credit
If your business has 100 or fewer employees, you may qualify for a credit covering administrative and setup costs.
- Credit = 100% of eligible startup expenses
- Capped at the greater of:
- $500, or
- $250 × number of non-highly compensated employees (NHCEs)
- Maximum: $5,000 per year for 3 years
Example:
20 NHCEs × $250 = $5,000.
If annual admin costs are $6,000, you receive a $5,000 tax credit.
That’s up to $15,000 over three years.
Eligible expenses include recordkeeping, plan documents, and administrative fees (not employer contributions).
- Auto-Enrollment Credit
Add automatic enrollment and receive:
- $500 per year for 3 years
- Total potential credit: $1,500
This applies to new plans or when adding auto-enrollment to an existing one.
- Employer Contribution Tax Credit (SECURE 2.0)
For businesses with 50 or fewer employees, there’s an additional credit tied to employer contributions made to employees earning under $100,000.
- Up to $1,000 per employee
- 100% credit in Years 1–2
- 75% in Year 3
- 50% in Year 4
- 25% in Year 5
Example:
10 eligible employees × $1,000 contribution = $10,000.
In Years 1–2, you may receive a $10,000 tax credit, directly reducing your tax bill.
What This Means
In Year 1, a qualifying employer could receive:
- Up to $5,000 startup credit
- $500 auto-enrollment credit
- Up to $1,000 per eligible employee in contribution credits
For many small businesses, that can translate into five-figure tax savings in the early years of a new 401(k), dramatically lowering the real cost of offering a retirement plan.
