How SECURE 2.0 tax credits help small businesses offer 401(k) plans

Thanks to the SECURE 2.0 Act, starting a 401(k) for a small business no longer comes with such a heavy cost burden. Business owners can now more affordably sponsor a retirement plan that gives them the competitive advantage of offering a benefit that helps employees build wealth and financial security. With up to $16,500 in tax credits available over three years, businesses can reduce their tax bill while investing in their people through small business retirement plan incentives.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, first signed into law in 2019, was designed to encourage more Americans to save for retirement by making changes that helped expand access, increase participation and address retirement saving shortfalls. SECURE 2.0 is a follow-up law passed in 2022. It builds on these goals with more provisions to support retirement saving, including tax credits and incentives that help employers launch and maintain retirement plans.

What is the SECURE 2.0 Act?

The law includes more than 90 provisions to strengthen America’s retirement system further. Many of these provisions were created specifically to help employers reduce the cost, complexity and administrative load of sponsoring retirement plans. Along with enhanced tax credits, SECURE 2.0 offers automatic enrollment incentives and simplified plan design.

Why it matters for businesses

A well-structured 401(k) plan can:

• Improve recruitment and retention in a tight labor market
• Boost employee financial wellness and satisfaction
• Demonstrate commitment to long-term employee success
• Offer the business significant tax savings under the new rules
• Makes offering 401(k) for small businesses more financially accessible

401(k) tax credits for employers under SECURE 2.0

SECURE 2.0 tax credits make it financially feasible for small and midsize employers to offer retirement plans. The small business retirement plan incentives help offset common costs associated with starting and maintaining a 401(k) retirement plan, including administrative expenses and employer contributions.

1. 401(k) startup tax credit (expanded)

Who qualifies? Employers who have 1–100 employees, with at least one non–highly compensated employee (NHCE)

Credit amount:

• 100% of qualified plan startup costs for employers with 50 or fewer employees
• 50% for employers with 51-100 employees (up to existing limits)
• Capped at $250 per NHCE, up to 20 NHCEs
• Maximum of $5,000 per year for 3 years

Purpose: To cover the administrative and setup costs of establishing a new plan

2. Employer 401(k) contribution credit (new)

Who qualifies? Employers with 50 or fewer employees (employers with 51-100 employees receive a reduced credit)

Credit amount:

• Up to $1,000 per employee earning less than $100,000 (adjusted annually for inflation) in employer contributions
• Phases out over five years:
• Year one: 100%
• Year two: 75%
• Year three: 50%
• Year four: 25%
• Year five: 0%

Purpose: To incentivize employer contributions to employees’ retirement accounts

Auto-enrollment tax credit (new)

Who qualifies? Employers that add automatic enrollment to their 401(k) or 403(b) plans

Credit amount: $500 per year, for 3 years

Purpose: To encourage higher employee participation by adding auto-enrollment features

Military spouse participation credit (new)

Who qualifies? Employers with up to 100 employees who allow immediate plan eligibility and accelerated vesting for military spouses

Credit amount:

• $200 per military spouse
• Plus $300 in employer contributions per spouse
• Maximum of $500 per participating spouse per year

Duration: Up to 3 years per spouse

Purpose: To support military families with greater access to retirement savings

Small employer automatic enrollment mandate (began in 2025)

While not a tax credit, it’s worth noting that most new plans started in 2025 or later must include automatic enrollment, which triggers eligibility for the $500 auto-enrollment credit listed above.

SECURE 2.0 tax credits summary table

SECURE 2.0 tax credit	Who is eligible?	Amount	Duration	Purpose
401(k) startup tax credit	Employers who have not maintained another qualified plan in the past 3 years with 1–100 employees and at least one NHCE	• Up to $250 per NHCE, max 20 employees • Max $5,000 per year	3 years	Offset the cost of starting a new retirement plan
Employer 401(k) contribution credit	Employers with up to 50 employees (phased out for 51–100)	• Up to $1,000 per employee • Phased: 100%, 75%, 50%, 25%, 0% over 5 years	5 years	Encourage employer contributions to employee retirement accounts
Auto-enrollment credit	Any employer that includes automatic enrollment in the plan design	• $500 per year	3 years	Encourage adoption of automatic enrollment to boost participation
Military spouse participation	Employers with ≤ 100 employees who offer immediate eligibility and vesting to military spouses	• $200 per military spouse plus up to $300 in employer contributions • Max $500 per spouse, per year	upto 3 years per spouse	Support retirement savings for military families

The costs and benefits of offering a 401(k)

Short-term costs	Long-term benefits
Plan setup: $500–$3,000 (often offset by credits)	Competitive edge in recruiting and retaining talent
Administrative fees: $1,000–$2,000 per year	Tax deductions on contributions and business expenses
Employer match: Optional (but expected)	Improved financial wellness and employee satisfaction
Payroll integration (if not already supported)	Strengthened employer brand and total compensation package

What employees need to know

Clear employee communication helps maximize participation and appreciation of company benefits. Employers should ensure employees understand:

• Auto-enrollment: Unless they opt out, employees are automatically enrolled at a default contribution rate.
• Employer match: If employees contribute, they may receive “free” money from the business.
• Roth vs. traditional: Many plans allow both after-tax (Roth) and pre-tax (traditional) contributions.
• Student loan match: Employers can match qualified student loan payments as if they were 401(k) contributions.
• Retirement readiness: Encouraging employees to participate supports their financial wellness.

Explore 401(k) matching: How it works – a guide for employers

What plan administrators need to know

Third-party administrators (TPAs) or retirement plan providers play a critical role in maximizing SECURE 2.0 incentives, benefits and compliance.

TPA responsibilities:

• Plan design: Customize eligibility, contribution formulas and plan features that align with business and credit eligibility.
• Compliance monitoring: Stay ahead of required rule changes (e.g., auto-enrollment requirements for new plans in 2025).
• Tax credit filing: File IRS Form 8881 and other necessary documentation to claim available credits.
• Reporting requirements: Ensure annual Form 5500 and participant disclosures are completed on time.

Employers should choose a provider with retirement plan compliance experience and tools to streamline administration and tax reporting.

Six steps to getting started with a 401(k) plan

1. Assess the business needs

• Evaluate whether offering a 401(k) supports the company’s talent strategy
• Estimate costs and tax benefits of offering a 401(k) with the ADP Tax Credit Calculator

2. Choose the best type of plan for the business

Plan type	Best for	Features
Traditional 401(k)	Flexibility with optional matching	Subject to annual nondiscrimination testing
Safe harbor 401(k)	Employers seeking simplified compliance	Requires mandatory employer contributions; avoids certain testing
Starter 401(k)	New plans with no prior retirement benefit	Limited features that require auto-enrollment; low administrative requirements

3. Work with a plan provider like ADP

• Look for integration with payroll systems, transparent pricing and hands-on support
• ADP Retirement Services offers compliance help, participant education tools and easy onboarding

4. Design the plan by deciding on:

• Eligibility rules
• Vesting schedules
• Matching formulas
• Roth contributions
• Profit sharing
• Auto-escalation features

5. Communicate with employees

• Provide onboarding materials and Q&A sessions
• Highlight the value of the benefit, especially employer match and tax savings

6. Claim tax credits

• File IRS Form 8881 for startup and contribution credits
• Include auto-enrollment credit where applicable

An opportunity to invest in people

SECURE 2.0 makes offering a retirement plan a smart investment with significant return potential.

Businesses can now:

• Offset setup and employer contribution costs with federal tax credits
• Strengthen benefits offerings to attract and retain talent
• Build a more financially secure workforce

Whether employers are starting their first 401(k) plan or optimizing an existing plan, the time to act is now.

Compliance Code:

M-791200-2025-08-18

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