The IRS Will Cover Up to $5,000 a Year of the Cost of Setting Up Your Team's Retirement Plan

Most “tax savings” you read about are deductions — they knock a little off your taxable income. This one is different. Setting up a retirement plan for your employees comes with a tax credit, and a credit is a dollar-for-dollar cut to the tax you actually owe. The government decided it wants small businesses offering retirement plans badly enough that it’s willing to pay most of your setup tab to make it happen.

If you have a team and you’ve been putting this off because a 401(k) sounds expensive, read the numbers before you decide.

The startup credit: up to 100% of your costs

Under the current SECURE 2.0 rules, if you have 50 or fewer employees, you can claim a credit for 100% of the qualified cost of starting a plan — a 401(k), SEP, or SIMPLE — capped at $5,000 per year for three years. That’s up to $15,000 back over three years against money you were going to spend anyway on plan administration and setup.

Have 51 to 100 employees? The credit is 50% of those costs, same $5,000 annual cap.

Run it plainly: you stand up a 401(k), the third-party administrator charges you $4,000 a year to run it, and a $4,000 credit wipes that cost off your tax bill. The plan effectively costs you nothing to operate for the first three years. That’s not a deduction that “saves you 30 cents on the dollar.” It’s the whole dollar.

There’s a second credit for what you put in

The startup credit covers the cost of running the plan. A separate credit rewards what you contribute to your employees’ accounts.

If you have 50 or fewer employees, you can claim a credit of up to $1,000 per employee for the contributions you make on their behalf, available for five years (it phases down over that window, and only counts for employees earning $100,000 or less). Between the two credits, a genuinely small employer can have the federal government underwrite a real chunk of both the plan’s overhead and its early contributions.

The catch every owner needs to hear

Here’s the line that trips people up, and I’d rather you hear it from me than learn it on an amended return. The startup credit requires that you have at least one employee who isn’t you — specifically a “non-highly-compensated employee,” meaning a regular W-2 worker who isn’t an owner or a high earner.

If you’re a solo operator with no employees, you don’t qualify for this credit. You’re not left out, though — a one-person business has its own, frankly bigger, move: a Solo 401(k) can shelter up to $72,000 of your business income. Different tool, same goal of getting money off the IRS’s table and onto yours. And if your kids are on the books, putting them through a real plan is its own conversation — see putting your kids on payroll.

So the bottom line splits two ways. Have a team? The plan can cost you close to nothing for three years, and you should be claiming this. Fly solo? The credit isn’t yours, but the Solo 401(k) probably saves you more than the credit ever would.

This article is general information, not tax or investment advice. Credit amounts and eligibility depend on your employee count, compensation levels, and the plan you choose — let's confirm your numbers before you set up a plan or claim a credit.