Updated August 24, 2023

SECURE 2.0 significantly increases the available tax credits for small employer plans. This summary provides an overview of the credits and their value to businesses considering a new plan.

Credit for Start-Up Administrative Costs

First, SECURE 2.0 modifies the existing start-up credit by increasing the percentage of startup costs used in calculating the credit. Before SECURE 2.0, the credit equaled 50% of an eligible employer’s eligible startup costs, generally up to an annual $5,000 cap (limited by the number of non-highly compensated employees).

Certain small employers who establish a new plan are eligible for a tax credit for the first three years in which the plan is maintained. An employer is eligible for the tax credit if it (1) had no more than 100 employees making at least $5,000 in the prior year and (2) did not maintain a 401(a), 403(a), SIMPLE, or SEP plan in the three taxable years immediately preceding the tax year in which the plan is adopted.

An eligible employer can take a credit as follows:

Size of Employer*	Amount of Tax Credit	Maximum Credit	Additional Notes
1-50 employees	100% of eligible startup costs	Lesser of $5,000 or $250times # of eligible non-highly compensated employees	Must have at least one non- highly compensated employee Minimum credit is $500 Eligible for up to three tax years
51-100 employees	50% of eligible startup costs
100+ employees	0% of costs	$0

*Employees are based on the number of employees who made at least $5,000 in the preceding year.

“Eligible Startup Costs” includes ordinary and necessary costs to set up, administer, and educate employees about the new plan. This might include document fees, advisor fees, plan documentation fees, and any other expense necessary to establish and run the plan.  

This tax credit often makes it nearly free for employers with 50 or fewer employees to start a plan.

Credit for Employer Contributions

Second, SECURE 2.0 adds a new credit for small employers that provide employer contributions to a new defined contribution plan. An employer is eligible for a tax credit if it had no more than 100 employees making at least $5,000 in the prior year.

For the first five years of the plan, small employers are entitled to a tax credit for the employer contributions made to each employee who earns less than $100,000 (indexed after 2023), up to $1,000 per employee. In the year the plan is established and the next year the tax credit is equal to 100% of this amount. It is then phased out over the next three years: 75% of contributions up to the cap in year three, 50% of contributions up to the cap in year four, and 25% of contributions up to the cap in year five.      

Years Since Plan Adoption	Tax Credit		Maximum Credit
	1-50 Employees	51-100 Employees
Year of adoption	100% of eligible  employer contribution	100% minus 2% times number of employees over 50	Lesser of the employer contribution or $1,000 for each employee making $100,000 or less in FICA wages $0 for each employee making >$100,000 in FICA wages
1st tax year after adoption	100% of eligible employer contribution	100% minus 2% times number of employees over 50
2nd tax year after adoption	75% of eligible  employer contribution	75% minus 2% times number of employees over 50
3rd tax year after adoption	50% of eligible  employer contribution	50% minus 2% times number of employees over 50
4th tax year after adoption	25% of eligible  employer contribution	25% minus 2% times number of employees over 50

*If the employer maintained a 401(a), 403(a), SIMPLE, or SEP plan in the three taxable years immediately preceding the tax year in which the plan is adopted, the employer cannot take a deduction for the year of adoption, but is eligible for tax credits in the next four tax years (regardless of how long the prior plan had been maintained).

This provides an incredible incentive for small employers to provide employer contributions in the first five years of the plan!

Credit for Automatic Enrollment

SECURE 2.0 also requires plans established after December 29, 2022, to add an eligible automatic contribution arrangement (EACA) to the plan no later than the 2025 plan year. While this is an administrative complexity, the addition of an EACA feature will generate an additional tax credit for eligible small employers for the first three tax years in which the EACA feature is maintained. 

Size of Employer*	Amount of Tax Credit	Additional Notes
1-100 employees	$500	Eligible for up to three tax years
100+ employees	$0

*Employees are based on the number of employees who made at least $5,000 in the preceding year.

The Bottom Line for Business Owner

Tax credits are extremely valuable. These credits often make the qualified plan significantly more economical for the business owner. For example, the following shows how the tax credits make a qualified plan significantly more valuable for the business owner, even if the owner is only interested in making the IRA deferral limit and even if the plan is more expensive than an IRA. The economics become even better when employer contributions and higher deferrals are considered.

	Deferral IRA	Qualified (IRA deferral limit)	Qualified (ER contribution)
Revenue	$250,000	$250,000	$250,000
Admin Expenses for Plan	$1,000	$2,500	$2,500
Tax Credit for Admin Expenses	—	$2,500	$2,500
Tax Credit for Auto Enrollment	—	$500	$500
Owner Contribution	$6,000	$6,000	$66,000
Employer Contribution (for others)	—	—	$23,100
ER Contribution Tax Credit Amount	—	—	$12,000
Earnings Before Tax	$243,000	$241,500	$158,400
Tax Before Credits	$51,030	$51,240	$36,309
Tax Credits	—	$3,000	$15,000
Net Earnings	$191,970	$193,260	$137,091
Owner Retirement Benefit	$6,000	$6,000	$66,000
Net Retained Benefit for Owner	$197,970	$199,260	$203,091

The above example shows the cost savings that the tax credits create when setting up a plan. It does not include any analysis of the additional benefits created by the tax-deferred accumulation of savings, nor the benefit of the plan attracting new employees and retaining current employees.

Small employers can take advantage of the new tax credits starting with the taxable year that begins in 2023.

Let Pinnacle Plan Design Help

Now is a great time for business owners to establish plans. Consultants at Pinnacle Plan Design are actively monitoring new guidance concerning SECURE 2.0. This represents our understanding of the laws at this time. Additional guidance will provide additional clarity. If you have any questions about tax credits for small employer retirement plans, don’t hesitate to contact us at (520) 618-1305.