401(k) tax credit

What is a 401(k) tax credit?

A 401(k) tax credit is a specific financial incentive designed to encourage small businesses to offer retirement plans. Unlike a tax deduction, which lowers your business's total taxable income, a tax credit directly reduces your company's final federal tax bill.

Why do 401(k) tax credits matter? 

Offering a 401(k) plan can be a way to attract and retain top talent, but many small businesses worry about the administrative costs. Fortunately, recent legislation like the SECURE Act 2.0 has made offering a retirement plan more accessible through 401(k) tax credits.

What are the types of 401(k) tax credits? 

1. Retirement plan startup costs tax credit

• For businesses with 1 to 50 employees: 100% of qualified costs of starting a 401(k), up to $5,000 per year for the first three years (total potential of $15,000).

• For businesses with 51 to 100 employees: 50% of qualified costs of starting a 401(k), up to $5,000 per year for the first three years.

• The three-year rule: To qualify, businesses must not have sponsored a 401(k), 403(b), SEP IRA, or SIMPLE IRA plan covering substantially the same employees in the three tax years immediately preceding the first credit year.

2. The employer contribution tax credit

• Eligibility: Employers with up to 100 employees.

• Maximum credit: Up to $1,000 for each employee earning $100,000 or less in the prior year.

• The five-year phase-out: This credit is designed to help you start a match and decreases based on the number of years the plan has been in existence:

  • Years one and two: 100% of the contribution (up to $1,000 per employee)

  • Year three: 75%

  • Year four: 50%

  • Year five: 25%

  • Year six and beyond: 0%

• Size-based phase-out: For businesses with 51 to 100 employees, the credit is phased out by 2% for every employee in excess of 50 in the preceding taxable year.

3. The auto-enrollment tax credit

• Credit amount: A flat $500 per year.

• Duration: Three consecutive years, starting with the first year the feature is active.

Refer to our Learning Center article on SECURE Act 2.0 for more information.

Does my business qualify for tax credits? 

Human Interest simplifies claiming tax credits that may reduce or cover 401(k) plan start-up costs. For customers on our Concierge package, our embedded Tax Savings Maximizer provides tax filing reminders with downloadable inputs to IRS Form 8881, which can help make it easier to claim your tax credits.