How Retirement Plan Tax Credits Can Benefit Your Business

Written by the William Allan team · Published 2025-09-01

SECURE 2.0 expanded incentives for eligible small employers to offer retirement benefits. Two parts deserve a separate look: the credit for plan startup costs and the credit based on employer contributions.

What Do the Credits Cover?

The startup-cost component applies to qualifying plan setup, administration, and employee-education expenses. It is available for up to three years, subject to eligibility and annual limits. The IRS startup-cost credit overview explains that component.

The contribution component is calculated from qualifying employer contributions. Employee elective deferrals are excluded. It is not a reimbursement of the same setup expenses under a different name.

Who May Qualify?

The contribution credit generally requires no more than 100 employees earning at least $5,000 in the relevant preceding year. A qualifying plan and prior-plan history matter: maintaining a plan for substantially the same employees in the preceding three years can prevent eligibility. Defined benefit plans are excluded from this component, and related-employer rules also apply.

The startup-cost component has its own requirements, including at least one eligible participant who is not a highly compensated employee. Headcount alone does not establish eligibility for either calculation.

How Is the Contribution Credit Calculated?

For eligible employers, it covers the plan’s first five years. The applicable contribution percentage is 100% in years one and two, 75% in year three, 50% in year four, and 25% in year five, subject to the $1,000-per-employee cap and additional reductions for employers above 50 employees. Contributions for employees above the applicable indexed wage limit are excluded.

The IRS Form 8881 instructions provide the calculation. The business must reduce its otherwise allowable contribution deduction by the contribution-credit amount. A tax professional should calculate the available benefit for the specific employer and year.

Why It Matters

A retirement plan is an ongoing commitment to employees. A potential tax credit belongs in the decision alongside contribution costs, administration, plan design, and the benefits the business wants to offer.

Before adopting a plan, compare those responsibilities with the credits the business actually qualifies to claim. Do not assume that improving an existing plan creates a new five-year contribution credit.

If you are considering a retirement plan for your team, William Allan can help identify the financial-planning questions to discuss with your plan administrator and tax professional.

This commentary is for informational purposes only and is not investment, tax, or legal advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.