By Matt Sumnicht, CPFA®, CEPA®

There are two things that come up in almost every conversation I have with business owners about their retirement plans: they want to attract and keep good employees, and they want to keep costs manageable. In the past, a 401(k) plan has been the answer to the first problem, but a source of stress for the second.

Thankfully, that equation has changed. With the SECURE 2.0 Act, small businesses can now access tax credits that, in some cases, offset nearly all of the cost of starting and running a 401(k) plan for the first few years. 

Between the startup credit, the employer contribution credit and the auto-enrollment credit, a business with 50 or fewer employees can potentially cover 100% of qualified administrative costs for the first three years and receive additional credits for up to five years of employer contributions.

But here’s the unfortunate part. A Georgetown University Center for Retirement Initiatives study suggests roughly three out of four small business owners who don’t currently offer a plan aren’t aware these credits exist. And even among businesses that are eligible, only about 5.5% actually claim them. 

Of course, what small business owner has time to sit down and read through tax code?

That’s the job I’m going to try to do here. A plain-language walkthrough of each credit, what you need to qualify and how to think about whether it’s the right move for your business.

Key Takeaways

  • Small businesses with 50 or fewer employees can now receive tax credits covering up to 100% of qualified 401(k) startup costs (capped at $5,000 per year for three years).
  • An additional employer contribution credit provides up to $1,000 per employee for the first two years, phasing down through year five.
  • Adding auto-enrollment to a new or existing plan qualifies for a separate $500-per-year credit for three years.
  • Working with a qualified advisor or credentialed tax preparer can help you claim each credit correctly.

What Is the SECURE 2.0 Act, and Why Should Small Business Owners Care?

SECURE 2.0 is a piece of legislation Congress passed in 2022 that expanded on the original SECURE Act of 2019. It made a long list of changes to how retirement plans work in the United States, some technical and some consequential.

For small business owners, the most important changes are the tax credits. SECURE 2.0 recognized what most small business owners already knew: offering a 401(k) plan can be a little costly, complicated and, for a business of 20 or 30 employees, often feel out of reach. 

Basically, the law took the existing small business retirement plan credits and roughly doubled them, added a new credit for employer matching contributions, and stacked a bonus credit on top for auto-enrollment.

For an eligible business, the first three years of running a plan can cost close to nothing after the credits are applied.

The Startup Cost Credit: How to Cover 100% of Your 401(k) Setup Costs

This is the headline credit and the one most business owners will hear about first.

Who qualifies: Any business with 50 or fewer employees can qualify for the full 100% credit. Businesses with 51 to 100 employees remain at the pre-SECURE 2.0 level of 50%. In either case, the plan must cover at least one non-highly compensated employee (NHCE), meaning an employee who isn’t a 5%+ owner and who earned less than a certain threshold in the previous year.

How much: The credit covers qualified startup and administrative costs, capped at the greater of $500 or $250 per eligible NHCE, up to an annual maximum of $5,000. That maximum applies each year for the first three years of the plan.

A practical example: Consider a business with 10 non-highly compensated employees eligible to participate. The calculation is $250 x 10 = $2,500, which is less than the $5,000 cap, so the credit for this business would be up to $2,500 per year for three years. That’s up to $7,500 in total credits, potentially covering all of the plan’s administrative costs during the ramp-up years.

What “qualified costs” actually means: Setup fees, ongoing administrative fees, third-party administrator costs and even the cost of educating employees about the plan. Investment advisory fees typically aren’t included, but most other real costs are.

The Employer Contribution Credit: Getting Reimbursed for Your Match

Matching employee contributions can be one of the biggest ongoing expenses of running a plan. Now, for small businesses that offer a match or make profit-sharing contributions, SECURE 2.0 provides an additional credit that can offset most or all of those contributions for the first two years.

Who qualifies: Businesses with 100 or fewer employees. The full credit applies to businesses with 50 or fewer; businesses with 51 to 100 receive a reduced percentage.

How much: Up to $1,000 per employee per year, on a phase-out schedule:

  • Years 1 and 2: 100% of employer contributions (up to $1,000 per employee)
  • Year 3: 75% of contributions (up to $1,000 per employee)
  • Year 4: 50% of contributions (up to $1,000 per employee)
  • Year 5: 25% of contributions (up to $1,000 per employee)

Important exclusion: The credit doesn’t apply to contributions made for employees earning more than $100,000 per year. This is a small business credit by design, with the incentive aimed at getting employees enrolled and contributing.

A practical example: A business with 15 non-highly compensated employees, each earning under $100,000, receives a match of $1,000 apiece. That’s a $15,000 employer contribution. And in years 1 and 2, the business can claim the entire $15,000 back as a tax credit.

The Auto-Enrollment Credit: A Small Bonus for a Big Design Choice

The third credit is smaller than the other two, but it’s paired with an important plan design choice.

Who qualifies: Businesses with up to 100 employees that add automatic enrollment to a new or existing 401(k) plan.

How much: $500 per year for three years, for a total of $1,500 in additional credits.

Why auto-enrollment matters beyond the credit: Auto-enrollment is the design feature that most consistently improves participation rates. According to Vanguard’s 2026 How America Saves report, plans with auto-enrollment reach a 94% participation rate, compared with 64% for voluntary enrollment. 

For a business owner, higher participation isn’t just good for employees. It reflects a plan that’s actually doing its job: helping employees build toward retirement and helping the business retain them along the way.

How a 401(k) Plan Advisor Can Help You Claim These Credits and Design a Better Plan

At Bowline, we advise small business owners on 401(k) plans across Metro Detroit and around the country. A common conversation we have about the SECURE 2.0 Act is with a business owner who thought they knew what a plan would cost and then finds out, after we walk through the credits together, that the number is a fraction of what they’d estimated.

The right fiduciary 401(k) plan advisor typically helps in three specific ways:

They tell you what you actually qualify for. The rules around NHCE counts, phase-out schedules and the $100,000 employee compensation limit are the kind of detail that either qualifies you for the credit or disqualifies you from it. Getting this right on the front end is what separates the businesses that claim the credit from the businesses that don’t.

They help you design a plan that works with the credits, not against them. Adding auto-enrollment isn’t just about the $500 bonus. Rather, it’s about designing a plan that actually delivers participant outcomes. The credits reward good plan design; the design decisions matter beyond the tax year they’re claimed in.

They stay involved after the setup. The credits phase down over five years. A plan that’s set up well and forgotten about is usually a plan that’s not still working well by year four or five. An advisor whose job is to review the plan annually can help keep the credits, the design and the outcomes all aligned.

Without an advisor, business owners might default to whatever their payroll provider or accountant recommends. Sometimes that works out. Often it doesn’t because those relationships don’t include ongoing fiduciary responsibility, participant education or plan-level benchmarking.

Frequently Asked Questions About SECURE 2.0 Tax Credits

Who qualifies for the SECURE 2.0 401(k) tax credits?
Small businesses with 100 or fewer employees can qualify for at least some of the SECURE 2.0 tax credits, but the largest benefits go to businesses with 50 or fewer employees. The plan must cover at least one non-highly compensated employee (NHCE). Businesses that offered a substantially similar retirement plan in any of the three preceding years are not eligible for the startup credit.

How much can a small business save with the SECURE 2.0 401(k) tax credits?
A business with 50 or fewer employees can claim up to $5,000 per year in startup credits for three years, up to $1,000 per employee per year in employer contribution credits (phasing down over five years), and $500 per year for three years in auto-enrollment credits. Depending on employee count and contribution levels, total savings over five years can range from tens of thousands of dollars into six figures.

How do I actually claim the tax credit?
The credits are claimed on IRS Form 8881 (Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment). Most business tax preparation software supports this form, and any CPA experienced with small business retirement plans should be familiar with it.

When do the SECURE 2.0 tax credits expire?
The startup and auto-enrollment credits are available for three years per plan. The employer contribution credit phases down over five years. 

Do the credits apply to existing 401(k) plans, or only new ones?
The startup credit is specifically for new plans (or businesses joining a Multiple Employer Plan for the first time). The employer contribution credit and the auto-enrollment credit can apply to both new and existing plans, depending on the specific circumstances.

Ready to See What You Could Save?

If you’ve been putting off starting a 401(k) plan because of the cost, the SECURE 2.0 Act tax credits are worth taking seriously. A short conversation is usually enough to figure out whether your business qualifies and what a plan designed around those credits would actually cost.

Schedule a no-pressure conversation today. We’re based in Grosse Pointe Woods and work with business owners across Metro Detroit and the U.S. We’ll walk you through what you qualify for and what a plan might look like for your business.

Matt Sumnicht is a managing partner at Bowline Financial, where he advises business owners on retirement plans, exit planning, executive deferred compensation and all the financial decisions that connect them. He brings more than 20 years of experience working with closely held businesses and holds the Certified Plan Fiduciary Advisor (CPFA®) and Certified Exit Planning Advisor (CEPA®) designations.