Tax Credits For Retirement Plans
- SiekmannCo
- Apr 10
- 4 min read
Ideas For Reducing Plan Start-Up Costs Through Federal Tax Credits
SECURE Act
• Increased existing tax credits available to small employers to offset the costs of starting, operating, and administering a new retirement plan.
• Created a separate $500 tax credit for those who incorporate automatic enrollment into their new
plans.
SECURE 2.0
• Further increased existing tax credits to some small employers who start new retirement plans.
• Created new tax credits to encourage small employers to contribute to employees’ retirement accounts and to incentivize immediate eligibility for military spouses, helping them save for retirement sooner.
Understanding these tax credits can be confusing because each individual tax credit is in different amounts, available over different periods, and has different qualification criteria. Instead of focusing on individual details, it is more important to see the bigger picture. Small business owners need to understand the potential financial impact of these various tax credits and how they can be combined to maximize tax and retirement savings. To illustrate this, we have provided a few examples below.
Case Study: NIMBUS & Co. 401(k) Plan
The charts show potential tax credits available to Nimbus & Co., a small business with a new 401(k) plan. The company has 15 full-time employees earning under $100,000 and two management employees earning more. Starting in 2025, Nimbus & Co. will implement a new 401(k) plan with automatic enrollment, following SECURE 2.0 legislation. Below are the initial tax credits Nimbus & Co. may qualify for.
Startup Tax Credit Estimates
2025 | 2026 | 2027 | Total | |
Startup Credit* up to | $3,750 | $3,750 | $3,750 | $11,250 |
Auto-enroll Credit | $500 | $500 | $500 | $1,500 |
Total Tax Credits up to | $4,250 | $4,250 | $4,250 | $12,750 |
*Tax credit calculated as $250 x 15 rank-and-file employees = $3,750
Nimbus & Co. has implemented a matching system for employee 401(k) contributions, encouraging employees to save for retirement while allowing the company to earn tax credits that reduce the cost of these matches. If all 15 full-time employees contribute at least $1,000 each year, the company can receive additional tax credits over the first five years of the 401(k) plan, on top of the credits available in the first three years. The tax credit structure is as follows: 100% for the first two years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. This system boosts employee participation and provides financial benefits to the company, promoting a culture of retirement savings.
Employer Contribution Tax Credit Estimates
Step | Description | 2025 | 2026 | 2027 | 2028 | 2029 |
1 | FT employees deferring $1K or more | 15 | 15 | 15 | 15 | 15 |
2 | Maximum credit (step 1 multiplied by $1K) | $15K | $15K | $15K | $15K | $15K |
3 | Available tax credit | $15K | $15K | $11,250 | $7,500 | $3,750 |
Case Study: AquaSure Solutions 401(k) Plan
AquaSure Solutions employs 25 full-time workers, each earning less than $100,000 annually, alongside two management-level employees whose salaries exceed $100,000. In 2025, the company launched a new 401(k) plan featuring an automatic enrollment option in compliance with SECURE 2.0 regulations.
The company will match employee contributions to the 401(k) plan using a standard safe harbor formula. This strategy enables AquaSure Solutions to qualify for additional tax credits to offset the costs associated with these matching contributions. If all 25 full-time employees contribute at least $1,000 each year, AquaSure Solutions stands to gain further tax credits over the first five years of the 401(k) plan, in addition to the start-up and automatic enrollment tax credits available for the first three years.
The chart below outlines the potential tax credits for AquaSure Solutions' 401(k) plan. Over the first five years, the plan is expected to grow in participant numbers and assets, reaching a value of one million dollars by the end of this period. During these five years, AquaSure Solutions incurred total costs of $380,450 for safe harbor matching contributions and administrative/start-up fees (comprising $371,200 and $9,250, respectively). However, the business received $105,750 in tax credits ($6,750 + $97,500 + $1,500), effectively covering more than 25% of these combined costs.
Moreover, AquaSure Solutions may be able to deduct an additional 25% of the matching contributions as a business expense when preparing its annual tax return.
Potential Tax Credits For AquaSure Solutions' 401(k) Plan
Year | Full-Time Employees | Projected Payroll (average of $64k) | Annual Deferrals (5% w/ 1% auto increase) | 4% Safe Harbor Match | Total Plan Assets (all contributions +4% growth) | Average Hard Dollar Fees Total | Start-Up Cost Tax Credit | Employer Contribution Tax Credit | Automatic Enrollment Tax Credit | Annual Cost To Employer After Credits |
1 | 25 | $1.6M | $80,000 | $64,000 | $144,000 | $3,250 | $3,250 | $25,000 | $500 | $38,500 |
2 | 27 | $1.73M | $102,400 | $69,120 | $321,280 | $2,000 | $2,000 | $27,000 | $500 | $41,620 |
3 | 29 | $1.86M | $126,080 | $74,240 | $534,451 | $1,500 | $1,500 | $21,750 | $500 | $51,990 |
4 | 31 | $1.98M | $151,040 | $79,360 | $786,229 | $1,500 | $- | $15,500 | $- | $65,360 |
5 | 33 | $2.11M | $177,280 | $84,480 | $1,079,438 | $1,000 | $- | $8,250 | $- | $77,230 |
$371,200 | $9,250 | $6,750 | $97,500 | $1,500 | $274,700 |
Could Tax Credits Help You Offset Retirement Plan Costs?
The examples above demonstrate how SECURE and SECURE 2.0 tax credits can help reduce the expenses of initiating a new plan. If you are a small business owner interested in utilizing tax credits to start a retirement plan for your employees in a cost-effective manner, contact us at 614.873.5200 or email us at info@siekmannco.com.
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