Retirement Plan Startup Credits Under SECURE 2.0
Three federal credits that can cover most of the cost of starting a small employer retirement plan — and the first years of employer contributions.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Three federal credits support small employers that start a retirement plan. Employers with 50 or fewer employees can claim 100 percent of startup costs up to $5,000 a year for three years, a credit for employer contributions of up to $1,000 per employee phasing down over five years, and $500 a year for three years for automatic enrollment.
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What are the three credits?
| Credit | Amount | Who qualifies |
|---|---|---|
| Startup cost credit | 100 percent of eligible costs for employers with 50 or fewer employees (50 percent for 51–100), capped at the greater of $500 or $250 per non-highly compensated employee, up to $5,000 a year, for three years | Employers with 100 or fewer employees who earned at least $5,000 in the prior year, at least one non-highly compensated participant, no plan in the prior three years |
| Employer contribution credit | Up to $1,000 per employee with wages of $110,000 or less in 2026 ($105,000 in 2025; indexed): 100 percent in years one and two, 75 percent in year three, 50 percent in year four, 25 percent in year five; phased out for employers with 51–100 employees | Same employer size rules; defined contribution plans, SEPs, and SIMPLE IRAs (not defined benefit plans); elective deferrals do not count |
| Automatic enrollment credit | $500 a year for three years | Employers with 100 or fewer employees whose new or existing plan adds an eligible automatic contribution arrangement |
Eligible startup costs include plan setup, administration, and employee education.
How does it work in practice?
A business with eight employees that starts a 401(k) with a 3 percent match pays, say, $3,000 in setup and administration in year one. The startup credit covers $2,000 of it — the cap is the greater of $500 or $250 times eight eligible non-highly compensated employees — and the other $1,000 remains deductible. If the employer contributes $900 for each of eight employees, the contribution credit returns $7,200 in each of the first two years, $5,400 in year three, and so on. Contributions for an owner or any other employee with 2026 wages over $110,000 do not count toward the contribution credit.
What are the limits?
Costs covered by the credit cannot also be deducted. The credits are part of the general business credit, nonrefundable, with carryforward. A plan that replaces a plan the employer had within the prior three years does not qualify as new. Plans must cover eligible employees; a solo plan for an owner with no staff has no non-highly compensated participants and earns no credit.
How is it claimed?
On Form 8881 with the business return, with the credit flowing through to owners of pass-through businesses.
Frequently asked questions
Does a SIMPLE IRA qualify?
Yes, for the startup and contribution credits; the automatic enrollment credit applies to plans with an automatic contribution arrangement.
Can I claim the credit if a payroll provider's plan has no setup fee?
The credit is based on costs actually paid; low-cost plans produce small startup credits but the contribution credit still applies.
What if I have more than 100 employees?
The startup credits are unavailable; the small employer limit is measured by employees earning at least $5,000 in the prior year.
Is the credit available for a plan started mid-year?
Yes. The three-year period begins with the year the plan becomes effective, or the employer can elect to start the credit the year before.
Official sources
The IRS explains: “Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.)” — Internal Revenue Service, Retirement plans startup costs tax credit, https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit
The IRS explains: “Eligible small employers use this form to claim the credit for qualified startup costs incurred in establishing or administering an eligible employer plan.” — Internal Revenue Service, About Form 8881, Credit for Small Employer Pension Plan Startup Costs, https://www.irs.gov/forms-pubs/about-form-8881
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk models the plan cost net of credits before an employer chooses a design. See pricing or book a free fit call.
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