SECURE Act Tax Credits: How Much a Small Employer Gets for Starting a Retirement Plan

The cost of a first retirement plan is the reason most small employers do not have one, and the SECURE Act tax credits exist to remove that reason. Three separate credits apply: one for the cost of setting up and running the plan, one for the money the employer puts into employees' accounts, and one for adding automatic enrollment. All three are claimed on Form 8881 and flow into the general business credit. This post sets out each credit's rule, who is excluded, and how the credits interact with the deduction the employer would otherwise take. The broader credit map for a new company is in tax credits for startups.

Who is an eligible employer

The definition borrows from the SIMPLE IRA rules: an employer that “had no more than 100 employees who received at least $5,000 of compensation from the employer for the preceding year” (IRC 408(p)(2)(C)(i), applied by 45E(c)(1) and 45T(c)). Two exclusions follow. The employer is not eligible if, during the 3 tax years before the first credit year, it or any member of its controlled group established or maintained a qualified employer plan “for substantially the same employees” (IRC 45E(c)(2)). And the costs of a plan that does not have “at least 1 employee eligible to participate who is not a highly compensated employee” are not qualified startup costs (45E(d)(1)(B)). Since any more than 5% owner is a highly compensated employee (IRC 414(q)(1)(A)), a plan covering only the owners earns nothing. An eligible plan is any qualified employer plan under section 4972(d): a section 401(a) plan such as a 401(k), a section 403(a) annuity plan, a SEP or a SIMPLE IRA (IRC 4972(d)(1)(A)).

The three credits at a glance

Credit 1: the startup cost credit (IRC 45E(a) and (b))

The base credit is 50% of the qualified startup costs paid or incurred in the year, and for an employer that would be eligible with “50 employees” substituted for 100, the statute substitutes 100% for 50% (45E(a), (e)(4)). Qualified startup costs are the ordinary and necessary expenses of establishing or administering the plan and of the retirement-related education of employees (45E(d)(1)). The dollar limit for the first credit year and each of the 2 years after it is “the greater of $500, or the lesser of $250 for each employee of the eligible employer who is not a highly compensated employee and who is eligible to participate, or $5,000” (45E(b)(1)). The first credit year is the year the plan becomes effective, or, at the employer's election, the year before it (45E(d)(3)); the Form 8881 instructions give the example of a plan effective January 1, 2025 whose sponsor elects 2024 and claims the design costs on the 2024 return (Instructions for Form 8881). The $250 per employee floor is what limits small plans: with four eligible NHCEs the cap is $1,000, whatever the setup fee.

Credit 2: the employer contribution credit (IRC 45E(f))

SECURE 2.0 added a second layer: the startup credit is increased by an “applicable percentage of employer contributions (other than any elective deferrals)” to an eligible plan other than a defined benefit plan (45E(f)(1)). The applicable percentage is 100% for the year the plan is established and the first year after, then 75%, 50% and 25% (45E(f)(3)). Three limits apply. The credit for any one employee cannot exceed $1,000 a year (45E(f)(2)(A)). An employer with more than 50 employees in the preceding year loses 2 percentage points for each employee over 50, so a 60-employee company gets 80% in its first year (45E(f)(2)(B)). And contributions for any employee whose wages exceed an indexed $100,000 are excluded; the amount is $105,000 for 2025 per the Form 8881 instructions and $110,000 for 2026 (Notice 2025-67). Because this credit is measured on money the employer would put in anyway, a 3% safe harbor contribution or a SIMPLE match on ordinary wages is often fully covered for two years, which changes the arithmetic of the safe harbor designs described in how a 401(k) profit sharing plan works.

Credit 3: the auto-enrollment credit (IRC 45T)

Section 45T gives an eligible employer “$500 for any taxable year occurring during the credit period,” the 3-tax-year period beginning with the first year the employer includes an eligible automatic contribution arrangement, as defined in section 414(w)(3), in a qualified employer plan (IRC 45T(a), (b)). The arrangement must stay in the plan for each year claimed. Unlike the other two credits, this one does not require a new plan; an existing 401(k) that adds an eligible automatic contribution arrangement earns it. Form 8881 carries it in Part II.

Form 8881 and the general business credit

All three credits are figured on Form 8881 (Rev. December 2025): Part I for the startup cost and contribution credits under section 45E, Part II for the auto-enrollment credit under section 45T, and Part III for the separate military spouse participation credit under section 45AA. The totals go to Form 3800 as part of the general business credit, so they offset income tax rather than being refunded, and any unused amount carries back 1 year and forward 20 (IRC 39(a)(1)). A partnership or S corporation files the form and passes the credit to its owners; an owner whose only source of these credits is the pass-through reports them directly on Form 3800 (Instructions for Form 8881). Members of a controlled group figure the credit as one employer and claim their proportionate shares.

How the credits interact with the deduction

A credit and a deduction for the same dollar is not allowed. No deduction is allowed for the portion of qualified startup costs equal to the startup credit, or for the portion of employer contributions equal to the contribution credit (45E(e)(2)), and the form instructions require the employer to reduce its deductions by the amounts on line 5 and line 6g. For a company with 50 or fewer employees the trade is favorable: a dollar of plan cost or contribution that would have saved 21 cents as a corporate deduction saves a full dollar as a 100% credit, and the credit is only for the covered portion, so the rest of the contribution is still deducted. An employer that would rather deduct, for example because it has no tax to offset and expects none within the carryforward window, may elect not to have section 45E apply for the year (45E(e)(3)). The IRS page adds the plain-language version: you cannot both deduct the startup costs and claim the credit for the same expenses, and you are not required to claim the credit (IRS, retirement plans startup costs tax credit).

A labeled illustration: 12 employees, a 3% contribution and automatic enrollment

Over five years the credits return $58,500 against $20,000 of administration costs and $90,000 of contributions, and the uncovered part of both is still deductible. The contribution credit does most of the work, which is why the plan design and the credit are decided together. Which plan to start is the subject of retirement plans for business owners; the full list of credits a small company can claim on Form 3800 is in federal tax credits for small businesses. Licensed tax professionals at BEG's tax partner check the three-year lookback and the NHCE count before the plan is adopted, as part of Forward Tax Planning with your CPA.

Sources: 26 U.S.C. 45E, small employer pension plan startup costs; 26 U.S.C. 45T, auto-enrollment option for retirement savings options provided by small employers; 26 U.S.C. 408(p)(2)(C)(i), eligible employer (100 or fewer employees); 26 U.S.C. 4972(d), qualified employer plan (includes SEPs and SIMPLE plans); 26 U.S.C. 414(q), highly compensated employee (5-percent owners); 26 U.S.C. 39, carryback and carryforward of unused credits; IRS, Instructions for Form 8881 (Rev. December 2025); IRS, Form 8881 (Rev. December 2025); IRS, Retirement plans startup costs tax credit, reviewed May 31, 2026; IRS, Notice 2025-67 (2026 wage limit for the contribution credit). Figures and rules checked against these sources on September 26, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.