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2026 Tax Credits for Small Business 401(k) Plans
Starting a 401(k)? SECURE 2.0 credits can cover up to $5,000 a year in plan costs, plus up to $1,000 per employee in employer contributions, for the first several years.
A new plan can cost far less than you think.
Let the Credits Pay
A free tax credit estimate for your business
What tax credits are available for starting a 401(k)?
Under SECURE 2.0, small businesses that start a new retirement plan can claim three federal tax credits. Credits reduce your tax bill dollar for dollar, which makes them more valuable than deductions.
- Startup cost credit: up to $5,000 a year for three years.
- Auto-enrollment credit: $500 a year for three years.
- Employer contribution credit: up to $1,000 per eligible employee a year, for up to five years.
Use our tax credit calculator for a quick estimate.
How each credit works
| Credit | How much | For how long |
|---|---|---|
| Startup cost credit | 100% of eligible plan costs for employers with up to 50 employees (50% for 51 to 100), up to the greater of $500 or $250 per eligible non-highly compensated employee, capped at $5,000 a year | First 3 years |
| Auto-enrollment credit | $500 a year for adding automatic enrollment | First 3 years |
| Employer contribution credit | Up to $1,000 per employee earning about $100,000 or less (adjusted for inflation). 100% in years 1 and 2, then 75%, 50%, and 25%. Reduced for employers with 51 to 100 employees | First 5 years |
Who qualifies?
- 100 or fewer employees who earned at least $5,000 in the prior year
- At least one eligible non-highly compensated employee. Plans covering only owners don’t qualify.
- No retirement plan in the prior three years covering substantially the same employees
- Eligible costs include setup, administration, and employee education. Investment fees generally don’t count.
The employer contribution credit applies to defined contribution plans like a 401(k), not to defined benefit plans, and doesn’t include employees’ own salary deferrals.
How We Build Your Plan
From first call to first contribution, we handle the design, the math, and the compliance.
1
Review Your Business
We look at your income, age, staff census, and current plan to see what’s possible.
Design Your Stack
We layer your 401(k), profit sharing, and cash balance plan around your tax goals.
See the Numbers First
You get a clear illustration of your deduction, your savings, and your staff cost before you commit.
We Run It for You
Plan documents, annual actuarial work, testing, and filings, handled every year.
Example: a 10-employee business starts a 401(k)
A business with 10 eligible employees, all earning under $100,000, starts a safe harbor 401(k) with automatic enrollment and contributes about $1,500 per employee.
| Credit | Year 1 | Year 2 |
|---|---|---|
| Startup cost credit (on $3,000 of plan costs) | $2,500 | $2,500 |
| Auto-enrollment credit | $500 | $500 |
| Employer contribution credit | $10,000 | $10,000 |
| Total credits | About $13,000 | About $13,000 |
Hypothetical example for illustration only. The startup credit is limited to $250 per eligible non-highly compensated employee, here assumed to be 10. Credits depend on your costs, employees, and contributions. Confirm with your CPA.
Getting the most from the credits
- Add automatic enrollment to pick up the extra $500 a year.
- Use the contribution credit to offset a safe harbor contribution in the early years.
- Keep good records of plan costs for Form 8881, which your CPA files with your return.
- Check your state. Many states now require employers to offer a plan, and a 401(k) usually satisfies the mandate.
Planning bigger contributions for owners? See The Retirement Plan Stack.
Michael, a successful business owner with no employees, wanted to maximize his retirement savings while minimizing taxes.
Through a custom-designed retirement plan stack, he and his wife were able to contribute over $575,000 across multiple plans in a single year.
This strategy not only helped secure their financial future but also generated over $222,000 in immediate tax savings, significantly increasing their cash flow and long-term wealth-building potential!
James runs a construction company with high employee turnover and wanted a way to protect cash flow while maximizing retirement contributions.
Through a custom 401(k) and profit-sharing plan design, we used strategic eligibility and vesting schedules to limit costs from short-term employees while allowing ownership to maximize contributions.
This strategy protected company assets, controlled expenses, and helped James build significant retirement wealth.
Eileen, a small business owner, needed a low-cost retirement plan that would meet state mandate requirements while helping her recruit and retain high-quality employees.
Eileen used a customized 401(k) solution focused on minimizing expenses, giving Eileen a competitive edge in hiring without pulling resources away from reinvesting in her growing business.
By using tax credits, her design allowed her to stay compliant, attract top talent, and keep her financial priorities aligned.
*These are hypothetical clients with hypothetical situations and plan designs.
Why business owners work with Life, Inc.
- Everything under one roof. Plan design and administration, investment advisory, and insurance strategies, all from one team. No juggling three different firms.
- A credentialed, in-house team. Our plan specialists hold industry designations including QKA, QPA, and AIF, and handle your plan year round.
- Independent and unbiased. We work with the recordkeeper that fits your business and don’t take kickbacks from any of them.
- Custom, not cookie-cutter. Every plan is designed around the owners’ tax goals first, then built to pass IRS testing.
- Nationwide. We design and administer plans for businesses across the country.
Learn more: Tax Credit Calculator | Safe Harbor vs. Traditional | The Retirement Plan Stack | Tax Strategies for Business Owners | About Us
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Our Most
Asked Questions
What tax credits can a small business get for starting a 401(k)?
Up to $5,000 a year for three years for startup costs, $500 a year for three years for automatic enrollment, and up to $1,000 per eligible employee a year for employer contributions, phasing down over five years.
Can I get the startup credit if I’m the only employee?
No. The plan must have at least one eligible non-highly compensated employee, so owner-only plans don’t qualify.
Can I get the credit if I had a plan before?
Not if you had a plan covering substantially the same employees in any of the three prior years.
Do employee deferrals count for the employer contribution credit?
No. Only employer contributions, such as a match or nonelective contribution, count, and only for employees earning about $100,000 or less, adjusted for inflation.
How do I claim the 401(k) tax credits?
Your CPA claims them on IRS Form 8881 with your business tax return. We provide the plan cost and contribution records you need.
Is a credit better than a deduction?
Yes. A credit reduces your tax bill dollar for dollar, while a deduction reduces taxable income. Expenses used for the credit can’t also be deducted.
Do the credits apply to a cash balance plan?
The startup cost credit can apply to a new defined benefit plan, including a cash balance plan, if eligibility rules are met. The employer contribution credit does not.
Some Of Our Trusted Partners:
Life, Inc. Retirement Services does not offer tax advice. Please always consult your tax professional about your eligibility for tax credits.
Life, Inc. Retirement Services is a Registered Investment Advisory Firm of the state of Ohio and licensed in Florida and Maryland. All emails and communication are meant to be informative and educational and should not be considered a sale of security until proper notification and disclosures are given.