Tax Credits for Small Employer Plans

While the original SECURE Act increased tax credits for small employer plans, SECURE 2.0 signicantly increases the available tax credits—including some that could cover the costs of operating/administering a small plan for up to three years. Here is an overview of the small employer tax credits, which are discussed in more detail below:

Size of Employer*Start-Up Cost
Tax Credit		Employer Contribution
Tax Credit		Automatic-Enrollment Credit
1 – 50 employees100% of Eligible
Start-up Costs		Up to 100% employer
contribution for first 2 years;

75% in third year;

50% in fourth year;

25% in fifth year		$500
51 – 100 employees50% of Eligible
Start-up Costs		Same as above, but phased
out based on number of
employees above 50		$500
100+ employees0% of costs$0$0
NotesAvailable for first three tax
years plan is maintained.
Maximum credit is lesser of
$5,000 or $250 times the
number of eligible non-highly
compensated employees.		Available for first five tax
years plan is maintained.

Credit available only for
contributions for employees
that make $100,000 or less in
FICA wages.

Maximum credit per
employee is $1,000.		Available for first three tax
years plan offers an eligible
automatic contribution
arrangement.

*Employees are based on the number of employees who made at least $5,000 in the preceding year

Credit for Start-Up Administrative Costs

Certain small employers who establish a new plan are eligible for a tax credit for the first three years in which the plan is maintained.

“Eligible startup costs” includes ordinary and necessary costs to set up and administer the new plan and educate employees about the new plan. This might include document fees, advisor fees, plan documentation fees, and any other expense necessary to establish and run the plan. The costs to establish in the year prior to the plan being eective could count as the rst year (establishing that as the rst year for the three-year cycle).

NOTE: This tax credit often makes it nearly free for employers with 50 or fewer employees to start a plan.

An employer is eligible for the tax credit if the employer had no more than 100 employees making at least $5,000 in the prior year and did not maintain a 401(a), 403, SIMPLE, or SEP plan in the three taxable years immediately preceding the tax year in which the plan is adopted. An eligible employer can take a credit as follows:

Size of Employer*Amount of Tax CreditMaximum CreditAdditional Notes
1 – 50 employees100% of Eligible
Start-up Costs		Lesser of $5,000 or
$250 times the number
of eligible non-highly
compensated employees
(for 2023, generally those
making less than $150,000)		Must have at least one
non-highly compensated
employee.

Minimum credit is $500.

Eligible for up to three tax years.
51 – 100 employees50% of Eligible
Start-up Costs		Lesser of $5,000 or
$250 times the number
of eligible non-highly
compensated employees
(for 2023, generally those
making less than $150,000)		Must have at least one
non-highly compensated employee.

Minimum credit is $500.

Eligible for up to three tax years.
100+ employees0% of costs$0

*Employees are based on the number of employees who made at least $5,000 in the preceding year

Credit for Employer Contributions

SECURE 2.0 also added a new tax credit for small employers that provide employer contributions to a new defined contribution plan. An employer is eligible the for a tax credit if the employer had no more than 100 employees making at least $5,000 in the prior year as follows:

Year Since Plan AdoptionTax Credit
1-50 employees		Tax Credit
51-100 employees		Maximum Credit
Year of Adoption*100% of eligible employer
contribution		Same minus 2% times
number of employees over 50		Lesser of actual employer
contribution or $1,000
for each employee making
$100,000 or less in
FICA wages

$0 for each employee making
>$100,000 in FICA wages
1st tax year after adoption100% of eligible employer
contribution		Same minus 2% times
number of employees over 50		Lesser of actual employer
contribution or $1,000
for each employee making
$100,000 or less in
FICA wages

$0 for each employee making
>$100,000 in FICA wages
2nd tax year after adoption75% of eligible employer
contribution		Same minus 1.5% times
number of employees over 50		Lesser of actual employer
contribution or $1,000
for each employee making
$100,000 or less in
FICA wages

$0 for each employee making
>$100,000 in FICA wages
3rd tax year after adoption50% of eligible employer
contribution		Same minus 1% times number
of employees over 50		Lesser of actual employer
contribution or $1,000
for each employee making
$100,000 or less in
FICA wages

$0 for each employee making
>$100,000 in FICA wages
4th tax year after adoption25% of eligible employer
contribution		Same minus 0.5% times
number of employees over 50		Lesser of actual employer
contribution or $1,000
for each employee making
$100,000 or less in
FICA wages

$0 for each employee making
>$100,000 in FICA wages

*If the employer maintained a 401(a), 403(a), SIMPLE, or SEP plan in the three taxable years immediately preceding the tax year in which the plan is adopted, the employer cannot take a deduction for the year of adoption, but is eligible for tax credits in the next four tax years

Credit for Automatic Enrollment

SECURE 2.0 also requires plans established after Dec. 29, 2022, to add an eligible automatic contribution arrangement (EACA) to the plan no later than the 2025 plan year. While this is an administrative complexity, the addition of a EACA feature will generate an additional tax credit for eligible small employers for the first three tax years in which the EACA feature is maintained. 

Size of EmployerAmount of Tax CreditAdditional Notes
1 - 100 employees$500Eligible for up to three tax years.

Unlike the start-up credit, there is no
requirement that there be at least 1
non-highly compensated employee.
100+ employees$0

*Employees are based on the number of employees who made at least $5,000 in the preceding year