Resources

SECURE 2.0 Retirement Plan Tax Credit Reminders

Credits to Remember:
Startup costs credit
SECURE 2.0 expanded the small employer retirement plan startup costs credit. For an eligible employer, the credit generally equals 100% of qualified startup costs for an employer that had 1-50 employees who received at least $5,000 of compensation in the preceding year (and 50% for an employer with 51–100 such employees). The annual credit is capped at the greater of $500 or the lesser of (i) $250 multiplied by the number of employees eligible to participate who are non-highly compensated employees or (ii) $5,000. The credit is available for the first credit year and the next two years. It is not available if the employer (or a related or predecessor employer) established or maintained a qualified employer plan that provided contributions or benefits for substantially the same employees during the prior three taxable years.

Qualified startup costs generally include ordinary and necessary expenses to establish and administer the plan, as well as retirement-related employee education.

Employer contributions credit
SECURE 2.0 added an additional credit, often referred to as the employer contribution credit, for certain employer contributions, generally excluding elective deferrals, made to an eligible employer plan (generally a defined contribution plan, SEP, or SIMPLE arrangement). For an eligible employer, the credit equals an applicable percentage of qualifying employer contributions, with the credit capped at $1,000 per employee per year, for the first credit year and the next four tax years. The applicable percentage is 100% in years 1 and 2, then 75%, 50%, and 25% in years 3-5. It is further reduced by two percentage points for each employee who received at least $5,000 of compensation in the prior tax year exceeding 50.

Qualifying employer contributions exclude contributions for any employee whose wages under Section 3121(a) of the Code exceed an indexed limit ($110,000 for taxable years beginning in 2026). Also, like the startup-costs credit, the credit is generally unavailable if, during the prior three tax years, the employer (including related or predecessor employers) established or maintained a qualified employer plan under which contributions were made or benefits accrued for substantially the same employees.

Auto-enrollment credit
An eligible employer may claim a $500 auto-enrollment credit for the first taxable year in which it includes an eligible automatic contribution arrangement (EACA) in a qualified employer plan, and for each of the next two taxable years so long as the plan continues to maintain the EACA during those years (no credit is available for any other year). For this purpose, an eligible employer generally is an employer that had no more than 100 employees who received at least $5,000 of compensation from the employer in the preceding taxable year.

Military spouse participation credit
If an eligible small employer maintains an eligible defined contribution plan (including a 401(k)) with military-spouse-friendly features (i.e., plan eligibility no later than two months after hire, immediate eligibility for employer contributions at least as generous as a similarly situated non-military spouse would receive after two years of service, and immediate vesting in employer contributions), the employer may claim the military spouse participation credit.

The credit is generally $200 for each eligible non-highly compensated military spouse employee who participates at any time during the tax year, plus up to $300 of employer contributions made on the spouse’s behalf (excluding elective deferrals). The credit is limited to three successive tax years per spouse, beginning with the first year the spouse begins participating after the plan is adopted or amended to satisfy these requirements.

Jesse St. Cyr, Partner, Poyner Spruill
Jesse is a member of the Employee Benefits and Executive Compensation team at Poyner Spruill LLP. He represents clients before the IRS and DOL in matters involving employee benefits. Jesse has experience working with a diverse range of benefits and compensation matters and has extensive experience working with a variety of employers. Jesse is recognized by Chambers USA as a leading lawyer for Business (Employee Benefits & Executive Compensation).