Retirement Plan Startup Tax Credit: Up to $15,000 for New 401(k) or SIMPLE Plans (SECURE 2.0)

The SECURE 2.0 Act expanded the tax credit available to small businesses that establish new retirement plans. The credit now covers up to 100% of plan startup costs for businesses with up to 50 employees, worth up to $5,000 per year for the first 3 years of the plan. Combined with the auto-enrollment credit and the new employer contribution credit, a small business can receive up to $16,500 in total credits per year.

How much can a small business save?

Who should take advantage of this?

Every small business with 1-50 employees that doesn’t currently offer a retirement plan should evaluate this credit. The economics are unusually favorable: the government is effectively paying businesses to offer retirement plans. Even a Solo 401(k) (owner-only plan) qualifies for the startup cost credit ($5,000/year for 3 years = $15,000 in credits), though the employer contribution credit isn’t available to owners with more than 5% ownership.

The plan must be new (not a replacement for a terminated plan), and the employer must not have had a similar plan in the 3 years preceding the new plan’s effective date.

Can I set up a retirement plan if I have variable self-employment income?

Yes, and several plan types accommodate variable income well. A SEP-IRA allows contributions of up to 20% of net self-employment income (the effective rate for a self-employed owner) with no required annual contribution, so you can skip a year or reduce contributions when income drops. A solo 401(k) provides the same flexibility for employer contributions, plus an employee deferral of up to $23,000 (2024) regardless of income level (as long as you have at least that much in compensation). A SIMPLE IRA requires a fixed employer match or contribution each year, making it less ideal for variable income. The key is choosing a plan that does not lock you into contributions you cannot afford in a lean year.

What’s the set-up deadline for a new 401(k) or SIMPLE plan?

A new 401(k) can be adopted after year-end, up to the employer’s return due date with extensions, and treated as adopted on the last day of the prior year. A new SIMPLE IRA is stricter. It has to take effect between January 1 and October 1 of the year, unless the business itself started after October 1.

That difference shapes the first year. A 401(k) adopted after year-end can take employer contributions for the prior year, but employee deferrals for that year are allowed only for a sole proprietor with no employees, and only by the unextended return date (April 15, 2026 for 2025). A business with staff that wants employee deferrals in a given year needs the plan in place during that year.

• Once employees defer into a 401(k), their money has to be deposited as soon as it can reasonably be separated, and a plan under 100 participants has a 7-business-day safe harbor.

• SIMPLE deferrals are due no later than 30 days after the end of the month they’re withheld.

• Retirement Plan Comparison for Small Business Owners: Solo 401(k), SEP-IRA, SIMPLE IRA, and Defined Benefit

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.