How much can I claim total under SECURE 2.0 for a new 401(k)?

An employer with 1–50 employees can claim up to $5,000/year × 3 years ($15,000) in startup cost credits, plus up to $1,000/employee × eligible employees in the contribution credit (declining from 100% in years 1-2 to 25% in year 5), plus $500/year × 3 years ($1,500) for auto-enrollment. For a 10-person firm with 8 eligible employees all receiving $1,500 annual employer contributions, total credits over 5 years can reach $55,500+.

What counts as a "startup cost" for the credit?

Eligible startup costs include ordinary and necessary expenses to establish, administer, and educate employees about the plan. This includes: plan document preparation fees, TPA and recordkeeping fees, investment advisory fees charged to the employer (not the plan), employee enrollment and education materials, and payroll integration costs. It does not include employer contributions to the plan or investment management fees paid from plan assets.

Can I claim the contribution credit for highly compensated employees?

No. The employer contribution credit under §45T applies only to contributions made for non-highly compensated employees (non-HCEs) who are not more-than-2% owners. HCEs are employees earning more than $150,000 (indexed) in the prior year, or 5% owners. This means the credit is targeted at helping small employers fund retirement savings for rank-and-file workers, not the owners themselves.

Do I have to keep the plan open to keep the credits?

Yes — if you terminate the plan within the first few years, the IRS may recapture credits. The credits are designed to encourage long-term plan sponsorship. Practically, once you have employees participating and accumulating vested benefits, plan termination has significant administrative and compliance costs anyway, so most employers that start a plan maintain it.

Can I use both the startup credit and the contribution credit?

Yes. The startup cost credit (§45E) and the employer contribution credit (§45T) are separate and can both be claimed in the same year for the same plan. You can also stack the auto-enrollment credit on top of both. All three credits are dollar-for-dollar reductions of your tax liability.

Are these credits available to S-Corp and sole proprietor owners?

Yes — if you have at least one W-2 employee who is not a spouse or owner. A business with only owner-employees (including a husband-and-wife business) does not qualify for the startup credit because there are no non-owner employees to benefit. However, if you have even one non-owner W-2 employee, the plan qualifies, and you can claim the credits on the employer (business) tax return.

What happens after the 5-year credit period ends?

After year 5, the contribution credit phases out entirely. The startup cost credit ends after year 3. The plan continues operating with no special credits, but the employer contributions themselves remain tax-deductible as an ordinary business expense. The credits are an incentive to start the plan — once employees are participating and the plan is running, its ongoing value comes from the tax deduction and employee retention benefits.

Do these credits apply to SIMPLE IRAs and SEP-IRAs too?

The startup cost credit applies to SIMPLE IRA, SEP-IRA, and 401(k) plans. However, the employer contribution credit under §45T applies only to defined contribution plans (including 401(k) and 403(b)) — not SIMPLE IRAs or SEP-IRAs. If you want to capture both credits, you need a 401(k) or similar DC plan, not a SIMPLE or SEP.

Business Finance

Small Employer 401(k) Startup Credit Calculator (SECURE 2.0)

Calculate the IRS tax credits available when you start a 401(k) for your small business — up to $5,000/year in startup costs plus $1,000/employee in contribution credits under SECURE 2.0.

By The FinCalc TeamUpdated May 28, 2026

Small business owners who start a 401(k) for their employees can claim substantial IRS tax credits that dramatically reduce — or in many cases completely eliminate — the cost of the plan. SECURE 2.0, effective January 1, 2023, made these credits far more generous: employers with 1–50 employees can now claim 100% of startup costs (up to $5,000/year for 3 years) plus a brand-new employer contribution credit that offsets up to $1,000 per employee per year for 5 years. For a 10-person shop paying modest employer matches, total credits over 5 years can exceed $50,000. This calculator shows your exact credit schedule, year by year.

How the SECURE 2.0 Small Employer 401(k) Credits Work

Two Separate Credits, Stackable

SECURE 2.0 created or expanded two distinct tax credits for small employer plans:

1. Startup Cost Credit (§ 45E) — Years 1–3

| Employer Size | Credit Rate | Max Credit/Year | 3-Year Max | |--------------|-------------|----------------|------------| | 1–50 employees | 100% of eligible costs | $5,000 | $15,000 | | 51–100 employees | 50% of eligible costs | $2,500 | $7,500 |

Before SECURE 2.0, the credit was 50% for all employers — SECURE 2.0 doubled it for small employers.

2. Employer Contribution Credit (§ 45T) — Years 1–5 (1–50 employees only)

This is the new credit. It offsets the actual employer matching or nonelective contributions you make, per non-HCE employee, on a sliding scale:

| Year | Credit Rate | Max Credit per Employee | |------|-------------|------------------------| | 1 | 100% | $1,000 | | 2 | 100% | $1,000 | | 3 | 75% | $750 | | 4 | 50% | $500 | | 5 | 25% | $250 |

For a 10-person firm with 8 eligible non-HCE employees each receiving $1,500 in employer contributions:

Year 1: 8 × $1,000 = $8,000 credit
Year 2: 8 × $1,000 = $8,000
Year 3: 8 × $750 = $6,000
Year 4: 8 × $500 = $4,000
Year 5: 8 × $250 = $2,000
Total contribution credit: $28,000

3. Auto-Enrollment Credit (§ 45T) — $500/Year for 3 Years

Plans with automatic enrollment earn an additional $500 credit per year for the first 3 years — $1,500 total. SECURE 2.0 now requires most new 401(k)s established after 2022 to include auto-enrollment, so most new plans automatically qualify.

The Real Cost of a New 401(k) After Credits

For a 10-person employer with $3,000 in annual plan costs and $2,000/employee average contributions to 8 eligible employees:

Total 5-year startup costs: ~$15,000
Startup cost credit: $9,000 (3 × $3,000 at 100%)
Contribution credit: $28,000
Auto-enrollment credit: $1,500
Total credits: $38,500
Net cost after credits: ~negative $23,500 — the IRS is effectively paying you to start the plan

When to Use This Calculator

If you own a small business with 1–50 employees and do not yet have a retirement plan. The credits under SECURE 2.0 make 2023–2027 the most financially attractive window in history to start a 401(k). The contribution credit alone can offset most or all of your employer match cost for 5 years.

If you are deciding between a Solo 401(k), SEP-IRA, and a SIMPLE IRA. The startup cost credit applies to all three, but the contribution credit (§45T) applies only to 401(k)/403(b) plans — not SIMPLE IRAs or SEPs. If you have non-owner employees, the 401(k) wins on total credits.

If you are a CPA or benefits advisor helping a small business client. Run this calculator before the client's tax year ends — the plan must be established by December 31 to start generating credits for that year.

Related Calculators

Solo 401(k) vs SEP-IRA Calculator (2026) — if you have no W-2 employees, compare how much you can contribute under each plan type
Student Loan 401(k) Match Calculator (SECURE 2.0) — once your plan is established, SECURE 2.0 lets you match employees' student loan payments
Mandatory Roth Catch-Up Calculator (2026) — employees earning over $150K must make catch-up contributions to Roth accounts under your plan

Understanding the Inputs

Total Employees (W-2): The total number of W-2 employees at your company, including part-time employees who worked at least 500 hours in the prior year. Do not include 1099 contractors. The credit structure differs based on this number: 1–50 employees qualifies for the full 100% startup credit and the new contribution credit; 51–100 employees qualifies for only 50% of startup costs and no contribution credit. More than 100 employees: these credits do not apply.
Eligible Employees for Contribution Credit: The number of non-highly compensated employees (non-HCEs) who are not more-than-2% owners of the business. Highly compensated employees (HCEs) earning over $150,000 in 2024 and owner-employees are excluded from the contribution credit calculation. For example, a 10-person firm with 2 owners and no HCEs has 8 eligible employees for the contribution credit.
Annual Plan Startup Costs: The annual cost to set up and administer the 401(k) plan. This includes plan document preparation fees, recordkeeping fees, investment advisory fees paid by the employer, TPA (third-party administrator) fees, and employee education costs. Typical annual costs for a small plan run $1,500–$5,000 depending on plan complexity and number of participants. The credit covers these costs up to $5,000 per year for 3 years.
Avg Employer Contribution per Employee: The average annual employer matching or nonelective contribution per eligible non-HCE employee. For example, if you match 50% up to 6% of salary and your employees average $60,000 in salary and contribute at least 6%, your match averages $1,800/employee. The contribution credit offsets these actual employer contributions at declining rates over 5 years, up to $1,000 per employee per year.
Does the plan include auto-enrollment?: Plans that automatically enroll employees at a default contribution rate (typically 3–6%) with an opt-out right earn an additional $500 tax credit per year for the first 3 years. SECURE 2.0 also requires new 401(k) plans established after December 29, 2022 to include automatic enrollment at 3–10% with automatic escalation — so most new plans will qualify for this credit automatically.

Frequently Asked Questions

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Solo 401(k) vs SEP-IRA Calculator (2026)

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Student Loan 401(k) Match Calculator (SECURE 2.0)

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Retirement & Investing

The FinCalc Team

Personal Finance Experts

The FinCalc team is a group of personal finance writers, analysts, and engineers dedicated to building accurate, transparent financial calculators. Every formula is verified against industry standards and explained in plain language.

Last reviewed and updated: May 28, 2026