SECURE 2.0 for employers
SECURE 2.0, signed into law in December 2022, added tax credits for small employers that start a plan and phased in new rules for plan design.
Employers with 50 or fewer employees (counting those paid at least $5,000) may claim 100% of eligible costs to set up and run a new plan and educate employees, up to the greater of $500 or the lesser of $250 per eligible non-highly compensated employee or $5,000, for each of the first three years. Employers with 51–100 employees get 50%.
Up to $1,000 per employee of the employer’s contributions to a new defined contribution plan, SEP or SIMPLE IRA: 100% in the first two years, then 75%, 50% and 25%. The credit shrinks for employers with 51–100 employees and doesn’t apply to employees above an inflation-adjusted pay level ($100,000 for 2023).
$500 a year for three years when an eligible employer adds an automatic enrollment feature to a new or existing plan.
Most 401(k) and 403(b) plans established after December 29, 2022 must automatically enroll eligible employees for plan years beginning after December 31, 2024: 3% to 10% of pay at first, rising 1 percentage point a year to at least 10% (no more than 15%). Employees can opt out. Businesses less than 3 years old, those with 10 or fewer employees, SIMPLE 401(k)s and church and governmental plans are exempt.
Starting in 2026, employees 50 and older whose prior-year FICA wages from the employer exceeded $150,000 must make any catch-up contributions as Roth. A plan without a Roth option can’t offer those employees catch-up contributions. Final IRS regulations generally apply from 2027; for 2026, plans use a reasonable, good-faith reading of the law. Payroll coordination matters.
For plan years beginning after December 31, 2024, 401(k) plans must let employees age 21 or older who work at least 500 hours in each of two consecutive years make salary deferrals, even if they never reach 1,000 hours in a year. SECURE 2.0 applied a similar rule to 403(b) plans covered by ERISA.
Hypothetical A company with 20 employees, 18 of them eligible non-highly compensated employees, starts its first 401(k) and pays $4,800 in eligible setup and administration costs in year one. The cap is the greater of $500 or the lesser of 18 × $250 = $4,500 or $5,000, so the startup credit could be up to $4,500 that year, if the company meets the IRS conditions. The numbers are an illustration only.
Credits are claimed on IRS Form 8881, and the same costs can’t be both deducted and credited. This is not tax advice; confirm eligibility with your CPA or tax adviser.
Sources: IRS retirement plan startup-cost and contribution credits · IRS proposed regulations on automatic enrollment (section 414A) · IRS final Roth catch-up regulations · IRS catch-up contributions · IRS proposed regulations on long-term, part-time employees.
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Prepared by Strong Tower Advisors for general education about employer retirement plans. Rule-based content is linked to primary public sources (IRS, U.S. Department of Labor and Federal Register) and is reviewed periodically because plan limits and regulations change.
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