Small-Business Retirement Plan Tax Credits You Don’t Want to Miss

If you’re a business with 100 or fewer employees, SECURE 2.0 made the federal tax credits for offering a retirement plan substantially richer—and easier to stack. Below is a plain-English guide to the three credits most small employers can use when they launch or refresh a plan (including when joining a pooled employer plan, or PEP).

This article is educational and not tax advice. Work with your CPA to confirm eligibility and amounts.

The Big Picture

SECURE 1.0 (2019) introduced small-employer retirement plan credits. SECURE 2.0 (2022) expanded them, especially for employers with 50 or fewer employees, and clarified how the credits apply across the first five years of a plan. Credits reduce tax liability dollar-for-dollar (they’re not deductions).

Credit #1: Startup (Administrative) Costs — up to $5,000/year for 3 years

What it covers: Eligible “startup” costs for establishing a new plan (e.g., administrative/recordkeeping, plan setup).
Who qualifies: Generally, employers with 100 or fewer employees, starting a new plan (no substantially similar plan covering the same employees in the prior three years).
How much:

• 1–50 employees: 100% of eligible startup costs, up to the cap
• 51–100 employees: 50% of eligible costs, up to the cap
• Cap/Formula: The credit is the lesser of (a) $250 × eligible employees (with a $500 minimum) or (b) $5,000
• Duration: First three years the plan is in place

Example:

• 10 eligible employees → $250 × 10 = $2,500 credit (years 1–3)
• 20+ eligible employees → capped at $5,000 (years 1–3)

Remember: This is a credit, not a deduction—if the calculated credit is $2,000, your tax bill is reduced by $2,000.

Credit #2: Auto-Enrollment (EACA/QACA) $500/year for up to 3 years

What it covers: Adding automatic enrollment (EACA or QACA) to a new or existing plan.
Who qualifies: Employers with 100 or fewer employees who earned $5,000+ in the preceding year.
How much: $500 in the year auto-enroll first applies and in each of the next two years (no tiering or phase-out like the startup credit).
Good news: This applies to new plans and to existing plans that add auto-enrollment. Employees may still opt out.

Credit #3: Employer Contributions — up to $1,000 per employee

What it covers: Employer matching or nonelective contributions for employees who earn $100,000 or less in FICA wages (indexed).
Who qualifies: Employers with 100 or fewer employees who earned at least $5,000 in the preceding year. For 51–100 employees, a reduction applies.
How much and how it phases down:

• Years 1–2: 100% of eligible employer contributions, up to $1,000 per employee
• Year 3: 75% of eligible contributions (still subject to the $1,000 cap per employee)
• Year 4: 50%
• Year 5: 25%
• 51–100 employees: Reduce the credit by 2% for each employee over 50 (applied to the credit amount)

Examples:

• 50 employees each receiving a $1,000 employer contribution
  • Year 1: $50,000 credit
  • Year 2: $50,000
  • Year 3: $37,500
  • Year 4: $25,000
  • Year 5: $12,500
  • Five-year total: $175,000
• 75 employees (assume all ≤$100k) — with the 2% per-employee reduction above 50
  • Year 1 (baseline $75,000) reduced by 50% → $37,500
  • Year 2: $37,500
  • Year 3: $28,125
  • Year 4: $18,750
  • Year 5: $9,375
  • Five-year total: $131,250

Stacking the Credits: A “20-Employee” Scenario

Assume you start a plan for 20 employees (each earns ≤$100k), add auto-enroll, and contribute $1,000 per employee:

• Startup credit: $5,000 in each of years 1–3 = $15,000
• Auto-enroll credit: $500 in each of years 1–3 = $1,500
• Contribution credit:
  • Year 1: $20,000
  • Year 2: $20,000
  • Year 3: $15,000
  • Year 4: $10,000
  • Year 5: $5,000
  • Five-year contribution credit total: $70,000
• Grand total over five years: $86,500 in credits

That’s a powerful offset to the cost of offering a high-quality plan—and a big boost to getting your team invested in their future.

Practical Eligibility Notes (What Trips Employers Up)

• “New plan” requirement: The startup credit is for new plans. If you had a plan in any of the prior three years that covered substantially the same employees, you can’t take the startup credit. (Auto-enroll and contribution credits may still be in play.)
• Employee counts matter: Several provisions look at the number of employees (and, for the contribution credit, apply a reduction for 51–100 employees).
• Wage ceiling for the contribution credit: Only contributions made for employees with ≤$100,000 in FICA wages (indexed) count toward the $1,000 per-employee cap.
• Credit vs. deduction: Credits reduce tax due dollar-for-dollar; you’ll coordinate credits with any deductions your CPA claims.

Why many small employers choose a PEP

Pairing these credits with a Pooled Employer Plan (PEP) can amplify the operational benefits: you outsource most administrative and fiduciary duties, leverage pooled pricing, and simplify the experience for HR and employees. For many teams, the credits offset a significant share of the early-year costs while a PEP structure reduces the ongoing workload.

Next steps

1. Estimate your credits (startup, auto-enroll, and employer contributions) based on your headcount and intended plan design online at https://castlerockpep.com/startup.
2. Talk to your CPA to confirm eligibility and how the credits apply to your specific situation.
3. Choose your plan path—stand-alone or PEP—and select auto-enrollment if appropriate.
4. Set your timeline to capture year-one credits and make the most of years 1–5.

Disclaimer: This post summarizes federal provisions at a high level. It is not tax, legal, or investment advice. Consult your professional advisors before acting.