Small businesses often struggle to attract employees with a strong benefits package and still keep their business expenses down. A low-cost 401(k) plan can help ease this tension.
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​Small businesses that offer a qualified retirement plan, like a 401(k), may qualify for a startup cost tax credit, which can offset some expenses of launching a retirement benefit. In addition, businesses may be eligible for more credits if they include an employer contribution, or eligible automatic contribution arrangement (EACA) or qualified automatic contribution arrangement (QACA) provision in the plan.

For the purpose of these credits, you are a qualified small business if:

If you meet the criteria, this guide shares several tax credits your business may qualify for. You'll want to consult your own tax, legal, and accounting advisors to confirm eligibility.

The Credit for Small Employer Pension Plan Startup Costs allows qualified small businesses to claim a tax credit for their 401(k) startup costs for up to three years after establishing the plan, provided they continue to qualify. The credit is equal to a percentage of their qualified startup costs, which includes the ordinary and necessary costs to set up and administer the plan (such as Form 5500) as well as money spent on employee education about the plan. The amount of the credit will depend on the number of employees.
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The credit is part of the general business credit. If it can’t be used in the current year, it can be carried back one year or forward 20 years. The result is a reduction in the amount of the company’s federal income tax liability on a dollar-for-dollar basis.
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The credit covers 100% of all the ordinary and necessary eligible costs companies incur to set up and maintain a qualified retirement plan for each of the first 3 years of the plan. The credit covers up to a maximum of $250 per NHCE eligible to participate in the plan, but not more than $5,000 or less than $500 in any single year.
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The credit for employers with more than 50 and up to 100 employees remains unchanged by SECURE 2.0. It covers 50% of all the ordinary and necessary eligible costs companies incur to set up and maintain a qualified retirement plan for each of the first three years of the plan. The credit covers up to a maximum of $250 per NHCE eligible to participate in the plan, but not more than $5,000 or less than $500 in any single year.
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Please note that double dipping is not allowed. You must reduce the costs you claim as deductible relating to the retirement plan by the credit amount you claim in that year. For example, if you’re claiming a $500 credit for a $1,000 plan setup fee, you may only deduct $500 of those expenses.
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In addition to the startup tax credit, a credit is available for the cost of employer contributions to the plan. This credit maximum amount will vary based on the number of years the plan has been in existence and the number of employees.
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For a business with 50 or fewer employees, the tax credit can be up to 100% of contributions in the first 2 years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year.
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For a business with 51-100 employees, the tax credit specified above would be reduced 2% for each employee over 50. For example, if the business has 62 employees in the first year, their percentage would be 100 - (12 x 2) or 76% of employer contributions.
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This credit also has a maximum of up to $1,000 per eligible participant with wages of $100,000 or less.
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The credit amount is determined based on the actual contribution made to each individual participant and is not a blanket amount. For example, a company with 2 eligible participants makes a contribution of $500 to one and $1,400 to the other in the first year the plan has been established. The tax credit will be $1,500.
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Similar to the startup credit, the employer contribution credit will reduce the deduction an employer can take for making employer contributions to the plan.
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A qualified small business that adds an EACA or a QACA that meets the requirements to be an EACA (which Guideline plans do) can claim a tax credit of $500 per year for a 3-year taxable period, beginning with the first taxable year the employer includes the auto-enrollment feature. The automatic enrollment credit does not require the plan as a whole be new, just that the EACA feature be newly added. Additionally, there is no requirement that the plan cover at least one NHCE.
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A qualified small business that employs a NHCE who is a military spouse may receive a credit of up to $500 for each spouse that participates in the plan. This credit is subject to several requirements (e.g., the spouse must be eligible no later than 2 months after starting employment and if there are employer contributions, additional rules apply).
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Let’s say your business has 12 employees, 3 of whom are highly-compensated (HCE). The remaining 9 employees are NHCEs and are all participating in the plan.
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You choose to open a Guideline Core plan at $89 per month + $8 per participant. Therefore, your monthly costs would be $185, making your total annual cost $2,220. For this example, we are assuming that the census data and service tier remains the same for the 3 years.
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The maximum start-up tax credit is the greater of $500 or $2,250 ($250 x 9 NHCEs). For this example, we assume Guideline fees are the only cost but depending on the facts you may have other costs you could claim.
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Because all Guideline plans come with an EACA or QACA, you are likely eligible for an additional $500 tax credit each year for 3 years, on top of your other tax credit savings.
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Estimated values based on the above assumptions:

With a $2,220 startup tax credit and a $500 automatic enrollment tax credit, your total cost (outside of employer contributions to the plan) would essentially be offset to $0 per year for the first 3 years.¹
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If the plan offers an employer contribution, and we assume 7 employees earn less than $100,000, the contribution could also be offset by up to a $7,000 tax credit for the first 2 years (up to $1,000 for each employee with wages of less than $100,000). For years 3-5, the employer contribution tax credit could be up to $5,250 (year 3), $3,500 (year 4) and $1,750 (year 5) – assuming the plan continues to cover 7 employees who make less than $100,000 for each of those years and each receive at least $1,000 in employee contributions each year.

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​This content and illustration is for informational purposes only. It does not take into account a business entity’s specific circumstances. It is not intended to provide tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before determining any tax filing position. The analyses and calculations are based on certain assumptions described above. The analyses and calculations are also based on Guideline’s interpretation of prevailing law, which is subject to change at any time. No warranty or representation, express or implied, is made by Guideline, Inc., nor does Guideline, Inc. accept any liability with respect to the analyses, calculations, and data set forth herein. Furthermore, Guideline’s fees may be subject to modification in the future.
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​¹ This is an illustration of how your estimated tax credits may help offset your estimated overall costs to open and maintain your 401(k) plan with Guideline for your first three years. Any tax credits your company is eligible for cannot be directly applied to your Guideline invoice.
​² This offer is subject to change at any time. See this article for additional details and disclosures.