Secure Act 2.0 Tax Credits: What Small Businesses Should Know

Offset the costs of offering your employees a retirement plan by taking advantage of the SECURE Act small business tax breaks. The startup credit, employer contribution tax credit, and auto-enrollment tax credit can make it more affordable for you to offer your employees a retirement plan.

Wondering if your small business qualifies for these new tax credits? This guide will provide you with detailed information about each tax credit, so you’ll be aware of your options.

Startup Credit

According to the enhanced SECURE Act 2.0, eligible employers with 50 or fewer employees can receive a tax credit of 100% of their startup costs for providing and properly maintaining an employer-sponsored 401(k) retirement plan. Eligible employers with 51-100 employees can receive a tax credit of 50% of start-up costs, as provided in the SECURE Act of 2019. Start-up tax credits are available for the first three years of plan implementation and maintenance. 

Eligibility Requirements

• Credit eligibility is based on the number of employees who received at least $5,000 in compensation in the preceding year.
• Your retirement plan covers at least one non-HCE (highly compensated employee)
• The employees enrolled in your new plan haven’t received contributions from another plan offered by you or any other predecessor during the past three years.

Who is not eligible for a startup credit?

Owner-only businesses don’t have employees. Therefore, solo businesses aren’t eligible for startup tax credits like small businesses with employees. Other types of plans that can’t take the tax credit are as follows:

• 100+ employees
• Plans with no non-NCEs
• Companies with no other retirement plan like a 403, SIMPLE, SEP, or 401(a) in the three previous tax years.

Employer contribution tax credit

Small business owners who provide employer matching or profit-sharing contributions to company-sponsored retirement plans can now receive a tax credit under the SECURE Act 2.0.  Employers with no more than 100 employees are eligible for this credit. The maximum credit is equal to the applicable percentage of employer contributions capped at $1,000 per employee.

This tax credit gradually reduces over a period of five years and is further reduced for businesses with 50-100 employees.

This applicable percentage is:

• 100% of contributions in the first two years
• 75% in the third year
• 50% in the fourth year
• 25% in the fifth year

Eligible employers must:

• Meet the requirements stated under the startup credit.

Auto-enrollment tax credits

The SECURE ACT 2.0 requires new employees to be auto-enrolled in company-sponsored retirement plans at the start of 2025, with a few exceptions. However, new employees can make the decision to opt out or change their contribution amount. The goal of auto-enrollment is to make saving for retirement easier for employees by eliminating the hassle of onboarding and completing enrollment paperwork.

Small businesses that implement an auto-enrollment feature to their new or existing retirement plan can receive a tax credit of $500 per year for the first three years that they offer the auto-contribution arrangement. Business owners can also choose to integrate this auto-enrollment feature with their payroll for additional convenience.

An employer must either:

• Contribute to an employee’s account a match of 100% of their contributions up to 1% of their compensation, and 50% match for deferrals above 1%, but no more than 6% of compensation, or
• Contribute a non-elective contribution of 3% of compensation to all plan participants including those who do not contribute to the company-sponsored retirement plan

Note: Employees must be fully vested after two years of employment.

Exceptions to the January 1, 2025 auto-enrollment requirement include:

• Businesses with 10 employees or fewer
• Businesses that are less than three years old.
• SIMPLE 401(k) plans
• Church and Government plans

Eligibility requirements for the auto-enrollment tax credit:

• Having 100 or fewer employees who were paid at least $5,000 in the previous year (only for EACA auto-enrollment, and also plans established after 12/29/2022).

Thanks to the provisions stated in SECURE Act 2.0, offering your employees a retirement plan can prove beneficial for employers as well. Now, you can retain talent, entice new hires, and receive tax credits for doing so.