If you run a company with fewer than 50 employees and don't offer a 401(k), the federal government has essentially set up a program to help offset the cost of starting one.
Not a partial break. Not a small discount. Potentially up to $16,500 in direct tax credits over three years for eligible employers — before you even count the per-employee credits on top. Actual amounts depend on your specific situation; consult your tax advisor.
Most business owners have never heard of this. And that's the problem.
The Gap Nobody Talks About
According to the National Association of Plan Advisors, 82% of small business owners who don't offer a retirement plan are completely unaware these credits exist.
Meanwhile, 48% say they "can't afford" to start a 401(k). That's the irony. The government created a program specifically designed to make retirement plans free for small businesses — and the people it was built for don't know it's there.
The SECURE Act 2.0, signed into law in late 2022, created three separate tax credits for businesses that start or improve a retirement plan. Together, they can eliminate the cost of offering a 401(k) entirely.
If you've ever searched for "401k tax credit small business" and gotten a wall of jargon, here's the plain-English version.
Three Credits. Here's How Each One Works.
The Startup Cost Credit — Up to $15,000
This covers the basics: plan setup, recordkeeping, administration, and employee education.
For businesses with 50 or fewer employees, the credit covers 100% of qualified startup costs, capped at $5,000 per year for three years.
That's up to $15,000 in tax credits just for getting the plan off the ground. Companies with 51–100 employees get a reduced credit at 50% of costs, but it's still real money.
The Employer Contribution Credit — Up to $1,000 Per Employee Per Year
This is the one most people miss — and it's the biggest.
If you make employer contributions to the plan (like a match), the government gives you a tax credit equal to your actual contribution — up to $1,000 per employee per year. Only employees earning under $100,000 qualify, but for most small businesses, that's the majority of the team.
The credit phases down over five years:
- Years 1–2: 100% of contributions credited back
- Year 3: 75%
- Year 4: 50%
- Year 5: 25%
For a 25-person company, this credit alone could be worth $25,000 per year in the first two years.
The Auto-Enrollment Credit — $1,500
The simplest of the three. Add automatic enrollment to your plan and you get $500 per year for three years.
This applies to new plans and existing plans that add auto-enrollment for the first time. No complicated calculation. Flat $500 annual credit.
Here's the Math for a 25-Person Company
Let's say you run a business with 25 employees, most earning under $100,000. You start a 401(k) with a 4% employer match and automatic enrollment.
Here's what the 401k tax credit picture looks like for a small business your size:
| Credit | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Startup Cost | $5,000 | $5,000 | $5,000 |
| Employer Contribution (25 employees) | $25,000 | $25,000 | $18,750 |
| Auto-Enrollment | $500 | $500 | $500 |
| Total | $30,500 | $30,500 | $24,250 |
That's potentially up to $85,250 in tax credits over three years for an eligible 25-person company at maximum contributions. The employer contribution credit continues in Years 4 and 5 at reduced rates, potentially adding roughly $18,750 more.
Even if you only claim the base credits (startup + auto-enrollment) and skip employer contributions entirely, you could be looking at up to $16,500 over three years. That alone can go a long way toward covering the cost of most plans. Actual amounts depend on your specific situation and tax liability — consult your tax advisor.
Why Most Business Owners Don't Know This
The big 401(k) providers — Fidelity, Schwab, ADP — bury this information in educational content and compliance pages. They mention it, but they don't lead with it.
The fintech providers (Guideline, Human Interest, Betterment) are better about it. But they're selling software, not advice. They'll help you set up a plan. They won't help you figure out how the 401(k) fits into your tax strategy, your cash flow, or your exit plan.
And that's the real issue. A 401k tax credit for a small business isn't just a compliance checkbox. It's a strategic tool. The credits make the first few years essentially free. The employer match helps you keep people. The tax deductions compound. And if you're thinking about selling your company in the next 5–10 years, having a retirement plan in place makes your business more attractive to buyers.
Nobody connects those dots because nobody's paid to.
What to Do Next
If you have 10–50 employees and no retirement plan, the math is straightforward. The 401k tax credit for small business owners is designed to remove the cost barrier entirely. The three-year window of maximum credits is the time to act.
If you already have a plan, you may still qualify for the auto-enrollment credit and the employer contribution credit. It's worth checking.
Either way, the starting point is knowing your numbers.
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If you’re a South Carolina employer thinking about starting a 401(k), we can walk through what the numbers could look like for your headcount and contribution plans. No pitch.
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Austin advises employer-sponsored 401(k) plans and works with pre-retirees and business owners across South Carolina.
This article is for educational purposes only and does not constitute tax, legal, or individualized investment advice. Tax credit availability, amounts, and eligibility depend on your specific situation and can change based on IRS guidance. Consult your tax advisor before making any decisions.
Austin Harley is a financial advisor with Roadstead Capital Partners. Securities and advisory services offered through Osaic Wealth, Inc., member FINRA / SIPC. Roadstead Capital Partners is not affiliated with Osaic Wealth, Inc. Check the background of this firm on FINRA BrokerCheck.