Starting a 401(k) Is More Affordable Than Most Owners Think

Many small business owners assume a 401(k) is too expensive to start. Under current law, that’s often no longer true. Federal tax credits can significantly reduce — and in some cases largely offset — the early-year costs of launching a plan.

Here’s how it works.

1. Startup Cost Tax Credit

If your business has 100 or fewer employees, you may qualify for a credit covering administrative and setup costs.

• Credit = 100% of eligible startup expenses
• Capped at the greater of:
  • $500, or
  • $250 × number of non-highly compensated employees (NHCEs)
• Maximum: $5,000 per year for 3 years

Example:
20 NHCEs × $250 = $5,000.
If annual admin costs are $6,000, you receive a $5,000 tax credit.

That’s up to $15,000 over three years.

Eligible expenses include recordkeeping, plan documents, and administrative fees (not employer contributions).

2. Auto-Enrollment Credit

Add automatic enrollment and receive:

• $500 per year for 3 years
• Total potential credit: $1,500

This applies to new plans or when adding auto-enrollment to an existing one.

3. Employer Contribution Tax Credit (SECURE 2.0)

For businesses with 50 or fewer employees, there’s an additional credit tied to employer contributions made to employees earning under $100,000.

• Up to $1,000 per employee
• 100% credit in Years 1–2
• 75% in Year 3
• 50% in Year 4
• 25% in Year 5

Example:
10 eligible employees × $1,000 contribution = $10,000.
In Years 1–2, you may receive a $10,000 tax credit, directly reducing your tax bill.

What This Means

In Year 1, a qualifying employer could receive:

• Up to $5,000 startup credit
• $500 auto-enrollment credit
• Up to $1,000 per eligible employee in contribution credits

For many small businesses, that can translate into five-figure tax savings in the early years of a new 401(k), dramatically lowering the real cost of offering a retirement plan.

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