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/employer-resources.
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. 

This content was prepared with the assistance of artificial intelligence tools and reviewed by Castle Rock Investment Company for accuracy and completeness.