How SECURE 2.0 Can Help Small Businesses Save on Retirement Plan Costs

If your practice doesn't offer a retirement plan, cost is probably the reason. There are setup fees, ongoing administration, and the contributions themselves. SECURE 2.0 changed that math for small employers by expanding three tax credits that offset those costs directly. Here is how they work, who qualifies, what the credits do not do, and why the timing is tighter than it looks.

The Three Tax Credits

• The startup cost credit. If you have 50 or fewer employees, you can claim a credit for 100% of your qualified startup costs, which means the ordinary expenses of setting up and administering the plan and educating employees about it. If you have 51 to 100 employees, the credit is 50%. Either way there is an annual cap: the greater of $500, or the lesser of $250 for each eligible employee who is not highly compensated and $5,000. In plain terms, reaching the full $5,000 takes at least 20 eligible non-highly compensated employees. The credit applies for the first year of the plan and the two years after it.

• The employer contribution credit. If you put money into employees' accounts, you can claim an additional credit for those contributions, up to $1,000 per employee per year. Two things matter here. First, it counts only your contributions, such as a match or a non-elective contribution, and not the pay employees defer on their own. Second, it applies to employees earning up to $100,000, adjusted for inflation each year (about $110,000 for 2026). The credit is full value in the year the plan starts and the year after, then steps down to 75%, 50%, and 25% over the next three years. If you have 51 to 100 employees, the credit is reduced by 2 percentage points for each employee over 50, so it fades out as you approach 100. It is not available for defined benefit plans.

• The auto-enrollment credit. If your plan automatically enrolls employees, you can claim another $500 a year for three years.

Who Qualifies for These Credits?

You generally qualify if you had 100 or fewer employees who earned at least $5,000 in the prior year, and you have not had a retirement plan covering substantially the same employees in the three years before the credit starts. The plan also has to cover at least one employee who is not highly compensated, so a plan that covers only an owner does not qualify. The credits work with a 401(k), profit-sharing plan, SEP-IRA, SIMPLE IRA, and certain other plans, with the exception noted above for defined benefit plans and the contribution credit.

An Example of How the Credits Can Add Up

Take a 20-person practice with two owners and 18 other employees who each earn under $100,000. It starts a 401(k) with auto-enrollment, spends $5,000 a year on setup and administration for the first three years, and contributes $1,000 per year for each of the 18 employees.

The startup credit is capped at $4,500 a year (18 employees times $250), so that is $13,500 over three years. The contribution credit is $18,000 in each of the first two years, then $13,500, $9,000, and $4,500, for $63,000 over five years. Add $1,500 for the auto-enrollment credit and the total is about $78,000 over five years, against roughly $105,000 in plan costs and contributions.

That is an illustration, not a forecast. Your numbers depend on headcount, pay levels, how much you contribute, and which employees count as highly compensated.

What to Know Before Counting on the Savings

The headline number is bigger than your net benefit, for two reasons.

First, you cannot deduct the same dollars twice. For the part of your startup costs and contributions that a credit covers, the deduction is disallowed. The credit replaces that deduction instead of stacking on top of it. A credit still reduces your tax dollar for dollar, while a deduction only saves your tax rate on those dollars, so the credit is usually the better deal, but the gain is smaller than the credit amount.

Second, the credits run out. The startup and auto-enrollment credits last three years and the contribution credit five, while the plan and its costs continue. It also helps to know that new 401(k) plans are generally required to include automatic enrollment, with exceptions for employers with 10 or fewer employees and businesses less than three years old, so plan design is not entirely optional.

The credits are claimed on Form 8881 and are part of the general business credit. If your business is a pass-through, the credit flows to the owners.

Timing Depends on the Plan

This is where waiting costs you. The deadline to set up a plan depends on which kind you choose.

A SEP-IRA can be set up as late as your tax filing deadline for the year, including extensions. A profit-sharing plan, or a 401(k) funded only with employer contributions, can also be adopted by the filing deadline. A SIMPLE IRA has to be set up between January 1 and October 1, so for 2026 that window has closed. And a 401(k) that lets employees defer their own pay generally needs to be in place by the end of the year for 2026 contributions to count.

There is also some flexibility on the credit itself. If you set up a plan this year and it takes effect next year, you may be able to elect to treat the prior year as the first credit year and claim the startup credit sooner. Setup also takes time in practice, so waiting for the deadline is risky.

What to Bring to a Planning Meeting

Come with your employee count, a rough list of pay levels, which employees are owners or highly compensated, and any plan your business has had in the past three years. If you already have a provider quote, bring it, because setup and administration costs drive the startup credit. From there it is a matter of comparing plan types against your goals and the credit math.

For a small practice, these credits can offset a meaningful share of what it costs to start a retirement plan, and they reward you for contributing to your employees. But the credits are capped, they replace deductions you would otherwise take, and the deadlines depend on the plan you choose. If you are thinking about starting a plan, this is a good time to run the numbers for your actual practice.

This article is for general information only and is not tax, legal, or investment advice. Credit amounts, eligibility, and deadlines depend on your specific facts and are subject to change. Talk with your tax advisor before acting.