If you run a small business and you’ve put off offering a retirement plan because it felt like an expense you couldn’t justify, the math has quietly changed. Over the past few years, Congress rewrote the federal tax credits that help small employers start retirement plans — and for many businesses, those credits now cover most or all of the cost of getting started.
Here’s what’s on the table, who qualifies, and why the timing matters.
Why these credits exist
The reason is a problem that has proven stubborn for decades: most workers without a retirement plan don’t have one because their employer doesn’t offer it — and that gap lives almost entirely in small business. Research from the Center for Retirement Research at Boston College finds that, at any given time, only about half of workers ages 25 to 64 are participating in an employer-sponsored plan, and that workers whose employer offers no plan at all make up roughly three-quarters of everyone left uncovered. The Bipartisan Policy Center likewise reports that nearly half of U.S. workers lack access to a workplace retirement plan, and that small businesses are the least likely to offer one.
The gap isn’t because small-business owners don’t care. The barriers are practical: uncertain revenue makes a long-term commitment feel risky, and setup and administrative costs land harder on a small payroll. Congress’s answer was to attack the cost barrier directly — first with the SECURE Act of 2019, then much more aggressively with the SECURE 2.0 Act of 2022.
What SECURE 2.0 actually changed
SECURE 2.0 expanded an existing credit and added a brand-new one. They’re separate, and a qualifying plan can claim both.
1. The startup-cost credit (expanded). This credit offsets what you spend to establish and administer a new plan, plus what you spend educating employees about it. SECURE 2.0 doubled it for the smallest employers: for businesses with 1–50 employees, the credit now covers 100% of qualified startup costs (up from 50%), according to the IRS instructions for Form 8881. It’s capped at $5,000 per year for the first three years — a potential $15,000 total. Businesses with 51–100 employees remain at the 50% level. The annual cap is calculated as the greater of $500, or $250 per non-highly-compensated employee eligible to participate, up to that $5,000 ceiling.
2. The employer-contribution credit (new). SECURE 2.0 created an additional credit, also tied to Form 8881, based on the contributions you make on your employees’ behalf. For employers with up to 50 employees, it can cover up to $1,000 per employee, phasing down over five years: 100% in years one and two, then 75%, 50%, and 25% in years three through five. (This credit excludes contributions for employees earning above a defined threshold, and elective deferrals don’t count.)
3. The auto-enrollment credit. On top of the above, there’s a flat $500-per-year credit for three years for including an eligible automatic-enrollment feature — a small bonus for a design choice that also tends to boost participation.
A key point worth emphasizing: these are credits, not deductions. A deduction lowers the income you’re taxed on; a credit reduces your tax bill dollar for dollar. A $1,000 credit cuts what you owe by the full $1,000.
Who qualifies
The core eligibility rules, per the IRS:
Size: No more than 100 employees who earned at least $5,000 in the year before the plan started.
No recent plan: You can’t have had a retirement plan covering substantially the same employees in the three years prior.
At least one rank-and-file employee: The plan must have at least one participant who isn’t a highly-compensated employee. (This is why a true owner-only solo 401(k) generally can’t claim the startup credit.)
Note that “small employer” here is defined differently than in other parts of the tax code, so a business that counts as “large” under, say, the Affordable Care Act may still qualify for this credit. As always, your specific facts matter, and a CPA or plan provider should confirm your eligibility and the exact figures.
Most common plan types qualify, including 401(k) plans, SEP IRAs, and SIMPLE IRAs. The credits are claimed on IRS Form 8881, filed with your business return.
Why now
A few reasons the timing deserves attention rather than another year on the back burner:
The enhanced credits are fully in effect. The expanded amounts apply to tax years beginning after 2022 — this isn’t a future proposal, it’s current law, and the IRS released an updated Form 8881 and instructions in December 2025.
State mandates are spreading. A growing number of states now require employers that don’t offer a plan to enroll workers in a state-run program, often with automatic enrollment. For many owners, the practical question is shifting from “should I offer a plan?” to “would I rather choose my own plan, or have a state program chosen for me?” Setting up your own plan — while the federal government is helping pay for it — puts you in the driver’s seat.
It’s a recruiting and retention tool. Offering retirement benefits has long been something larger competitors used to win talent. With the cost barrier substantially lowered, a small business can put a comparable benefit on the table.
The bottom line
For a small business that has never offered a retirement plan, the combination of the startup-cost credit, the employer-contribution credit, and the auto-enrollment bonus can offset a large share — in some cases nearly all — of the cost of getting a plan off the ground in the early years. The plan isn’t literally free, and the credits eventually phase down, but the early-year economics are dramatically better than most owners realize.
If you’ve been waiting for the right moment to set up a plan for yourself and your team, the current credits are about as friendly as they’ve been. The next step is simply to run your own numbers — your employee count, expected costs, and contribution plans — and see what the credits would actually be worth to your business.
Sources
IRS, Instructions for Form 8881 (Rev. December 2025) and About Form 8881 — irs.gov
IRS, Publication 560, Retirement Plans for Small Business (2025) — irs.gov
Center for Retirement Research at Boston College, Closing the Coverage Gap — crr.bc.edu
Bipartisan Policy Center, The Retirement Plan Access Gap (2025) — bipartisanpolicy.org
National Association of Plan Advisors, Closing the ‘Opportunity’ Gap — napa-net.org
This article is for educational and informational purposes only and does not constitute investment, tax, or legal advice, nor a recommendation to buy or sell any security or to adopt any investment strategy. Tax credit amounts, eligibility requirements, and related rules are established by the IRS, are subject to change, and depend on your specific facts and circumstances. All investing involves risk, including the possible loss of principal, and past performance is not a guarantee of future results. Please consult a qualified professional regarding your individual circumstances before making any financial decisions.