Retirement Plan Startup Tax Credits Under SECURE Act

A small business that starts a new 401(k), SEP IRA, or SIMPLE IRA can claim a package of retirement plan startup tax credits worth up to several thousand dollars a year for the plan’s first several years. Under Internal Revenue Code Section 45E, as expanded by SECURE 2.0, an eligible employer with 100 or fewer workers can stack four separate credits covering plan setup costs, employer contributions, automatic enrollment, and military spouse participation. Each one reduces your tax bill dollar-for-dollar rather than lowering taxable income, so they are worth substantially more than a deduction of the same size.

Who Qualifies

Three requirements gate every credit on this list:

You employed no more than 100 workers who each earned at least $5,000 in the prior calendar year.
At least one plan participant is a non-highly compensated employee. For 2026, that means someone who earned less than $160,000 in the prior year.¹
You did not maintain a substantially similar retirement plan during the three tax years before the new plan’s effective date.²

The three-year rule prevents shutting a plan down and reopening it to harvest credits. If your previous plan covered the same group of employees in any of those three years, you are ineligible even if the new plan is a different type. Qualifying plans include 401(k)s, SEP IRAs, and SIMPLE IRAs.

Startup Cost Credit

The core credit reimburses what you spend to set up and run the plan during its first three years. Eligible expenses include fees paid to a plan provider or third-party administrator, legal and accounting costs for plan setup, and the cost of educating employees about the new benefit. Professional administration for a small plan typically runs $800 to $3,000 a year, so the credit can cover most of the bill.

How much you get depends on headcount. Employers with 50 or fewer employees get 100% of qualified startup costs; employers with 51 to 100 employees get 50%. Either way, the annual credit equals the greater of $500 or $250 multiplied by the number of non-highly compensated employees eligible to participate, capped at $5,000.³ A business with 50 or fewer employees and 20 eligible participants would run $250 × 20 = $5,000, then claim 100% of that against actual costs. The credit is available for three tax years beginning with the year the plan takes effect.

Employer Contribution Credit

SECURE 2.0 added a credit for money you actually put into employee accounts through matching or nonelective contributions. It applies only to contributions made for employees who earned $110,000 or less during the tax year (the 2026 threshold, adjusted annually for inflation).¹ The maximum is $1,000 per eligible employee, and it phases down over five years:

Years 1 and 2: 100% of contributions, up to $1,000 per employee
Year 3: 75% of contributions, up to $1,000
Year 4: 50% of contributions, up to $1,000
Year 5: 25% of contributions, up to $1,000³

After year five, the credit expires. Employers with 50 or fewer employees get the full percentages above. For employers with 51 to 100 employees, the amount shrinks by 2% for each employee above 50. A business with 75 employees loses 50% of the credit (25 employees over the line, times 2%). Near the top of the eligibility range, the phase-down bites hard.

This credit is the one that changes the economics. For a 30-person business contributing $1,000 per eligible employee in year one, the credit alone can approach $30,000, on top of the startup and auto-enrollment credits.

Auto-Enrollment Credit

A flat $500-per-year credit runs for three years if your plan includes an eligible automatic contribution arrangement. Section 45T provides this credit regardless of what you spend implementing the feature.⁴ If the setup costs you nothing through your plan provider, you still get $500.

SECURE 2.0 now requires most new 401(k) and 403(b) plans to include automatic enrollment, so many businesses starting fresh plans qualify by default. Exceptions apply to employers with 10 or fewer employees and businesses operating for fewer than three years. If either exception covers you and you add auto-enrollment voluntarily, you still get the credit.

Military Spouse Participation Credit

For each participating military spouse employee, you can claim $200 plus up to $300 in employer contributions made on that person’s behalf, for a maximum of $500 per military spouse per year.⁵ The credit runs for three consecutive tax years starting the year the military spouse begins participating. It is a small credit, but it stacks with the others and is easy to overlook.

The Deduction Trade-Off

You cannot double-dip. The amount you claim as a startup cost credit must come out of your business expense deduction for the same costs.² If you spend $4,000 on plan administration and claim a $4,000 credit, that $4,000 is no longer deductible as a business expense. The credit still beats the deduction in almost every scenario, because a credit cuts tax dollar-for-dollar while a deduction only cuts it by your marginal rate. Just do not plan on getting both.

If You Own More Than One Business

The IRS counts employees across all businesses you own or control when applying the 100-employee limit. Under controlled group and affiliated service group rules, parent-subsidiary chains, brother-sister corporate groups, and businesses with shared service arrangements are treated as a single employer for retirement plan purposes.⁶ An owner running three companies with 40 employees each has 120 employees under these rules and is ineligible, even though each company on its own falls below the threshold. If there is any ownership overlap between your entities, verify your combined headcount before claiming the credit.

What Happens If the Credit Exceeds Your Tax

These credits are part of the general business credit under Section 38, subject to the annual limitation that applies to that category. If your total general business credits exceed what you owe, the excess is not lost. Unused amounts can be carried back one year or carried forward up to 20 years.⁷ To carry a credit back, file an amended return for the prior year using Form 1040-X or Form 1120-X. For a business with little tax liability in its early years, the long carryforward is what makes the credit useful at all.

Claiming the Credit

You claim all four credits on IRS Form 8881, Credits for Small Employer Pension Plan Startup Costs, Contributions, Auto-Enrollment, and Military Spouse Participation.⁸ Before you fill it out, gather your payroll records to confirm the number of non-highly compensated employees eligible to participate, invoices from plan providers for your actual setup costs, and, if you are claiming the contribution credit, records of matching or nonelective contributions made to each eligible participant’s account. The total from Form 8881 flows to Form 3800 with your other general business credits.

Attach the completed Form 8881 to your annual income tax return: Form 1120 for C corporations, Form 1065 for partnerships, or Form 1040 for sole proprietors. Partnerships and S corporations report the credit on Schedule K so it passes through to partners or shareholders, who then include it on their own Form 3800.

You Can Claim the Startup Credit a Year Early

An election worth knowing about: you can claim the startup cost credit in the tax year immediately before the plan becomes effective, rather than waiting for the first active year.² If you spend money in December setting up a plan that launches in January, this election applies those costs against the prior year’s taxes. You still get the credit for the plan’s first three active years, so the total credit window effectively stretches to four.

How Long Each Credit Runs

The startup cost credit and the auto-enrollment credit each run for three tax years. The employer contribution credit runs for five years on the declining percentage schedule above. The military spouse credit runs for three years per qualifying employee. All of them start from the first year the plan takes effect, not the year you file.

1
Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
2
Office of the Law Revision Counsel. 26 USC 45E – Small Employer Pension Plan Startup Costs
3
Internal Revenue Service. Retirement Plans Startup Costs Tax Credit
4
Office of the Law Revision Counsel. 26 USC 45T – Auto-Enrollment Option for Retirement Savings Options Provided by Small Employers
5
Internal Revenue Service. Instructions for Form 8881
6
Internal Revenue Service. Chapter 7 – Controlled and Affiliated Service Groups
7
Internal Revenue Service. Instructions for Form 3800 and Schedule A
8
Internal Revenue Service. Form 8881