Many small businesses have heard about the 401(k) plan credits expanded under SECURE 2.0, but they’re often left with one question: What do these credits actually look like for a business like mine?
The answer varies, and depends on different factors like employee count, plan costs, and eligibility requirements. For businesses with just a handful of employees, however, the savings opportunity can be significant and can even offset most or all startup costs during the first few years.
In this guide below, we’ll dive into real-world examples of how SECURE 2.0 tax credits apply to businesses with 1-10 employees, including family businesses, dental practices, LLCs, and growing startups.
The Quick Answer: How Much is the SECURE 2.0 Tax Credit Worth for a Small Business?
The answer depends on:
- Number of employees
- Number of non-highly compensated employees (NHCEs)
- Retirement plan startup costs
- Employer contributions
- Whether the business sponsored another retirement plan within the previous three years
The following examples illustrate how the credits may apply in real-world situations and can help you see where you stand before jumping in and getting started.
What Tax Credits are Available?
The most common tax credits include:
Startup Cost Tax Credit
Eligible employers with up to 50 employees may qualify for a tax credit covering up to 100% of their plan startup and administrative costs, which are also subject to annual limits.
Employer Contribution Tax Credit
During the first five years of a new plan, businesses may also qualify for a tax credit based on their contributions they’ve made to their employees’ retirement accounts.
Automatic Enrollment Tax Credit
Employers that add an eligible automatic enrollment feature to a new or existing retirement plan may qualify for an additional tax credit of up to $500 per year for up to three years.
Military Spouse Participation Tax Credit
Certain employers can qualify for a tax credit when offering retirement benefits to eligible military spouses.
SECURE 2.0 Tax Credit Scenarios at a Glance
| Business Type |
Employees |
Potential Startup Credit Eligibility |
| Solo Owner |
0 |
Generally not eligible |
| Husband-Wife Business |
0 |
Eligible, but subject to very strict rules |
| LLC With 2 Employees |
3 total |
Often eligible |
| Family-Owned Business |
5 total |
Often eligible |
| Dental Practice |
8 total |
Often eligible |
| Startup Company |
10 total |
Often eligible |
Scenario #1: A 3-Person LLC Starting its First 401(k)
Business Structure
- One owner
- Two full-time employees
- No previous retirement plan
Common Question
“Can my 3-person LLC qualify for SECURE 2.0 tax credits?”
Potential Answer
In many cases, yes. Because the business has eligible non-owner employees and is implementing a brand-new retirement plan, it may be able to meet the requirements for startup tax credits.
Example
| Expense |
Amount |
| Plan setup |
$1,200 |
| Administration |
$800 |
| Employee education |
$500 |
| Total |
$2,500 |
Potential startup credit: Up to $2,500
Potential first-year net cost: $0
What This Means
For micro-businesses, the cost of setting up a retirement plan may be significantly lower than expected once tax credits are applied.
Scenario #2: Husband-and-Wife Business with No Employees
Business Structure
- Husband owner
- Wife owner
- No W-2 employees
Common Question
“Can a business run by only a husband and wife receive the SECURE 2.0 startup credit?”
Potential Answer:
Generally, no. The startup tax credit is designed to encourage 401(k) adoption for businesses with eligible non-highly compensated employees. For a husband-and-wife business to even et considered for a startup credit, the requirements are very strict.
But it’s important to remember that this doesn’t mean this business type cannot establish a retirement plan. Many with this business structure end up exploring Solo 401(k)s, SEP IRAs, and even Defined Benefit Plans.
Scenario #3: A Family-Owned Business with Five Employees
Business Structure
- Two owners
- Three employees
Common Question
“Does being family-owned affect tax credit eligibility?”
Potential Answer
Not necessarily, because what really matters is if the business has eligible employees who satisfy SECURE 2.0 requirements.
Example
| Expense |
Amount |
| Setup and implementation |
$2,000 |
| Administration |
$1,000 |
| Education and enrollment |
$1,000 |
| Total |
$4,000 |
Potential startup credit: Up to $4,000
Based on eligibility and contribution levels, additional credits may be available for this business structure.
Scenario #4: An Eight-Person Dental Practice
Business Structure
- Dentist owner
- Clinical staff
- Administrative staff
Common Question
“Would a dental practice qualify for SECURE 2.0 tax credits?”
Potential Answer
Often, yes. Many dental practices fall right within the requirements to qualify for SECURE 2.0 tax credits. This especially matters because dental practices often face challenges with employee retention, competitive hiring markets, and growing benefit expectations from experienced staff. So, a retirement plan may help strengthen overall compensation while reducing startup and administration costs through tax credits.
Example
| Expense |
Amount |
| Startup costs |
$4,500 |
| Potential startup credit |
$4,500 |
| Estimated net startup cost |
$0 |
Scenario #5: A Startup Company with 10 Employees
Business Structure
- Founder-led company
- Ten employees
- No previous retirement plan
Common Question
“Can startups qualify for SECURE 2.0 tax credits even if they’re growing quickly?”
Potential Answer
Yes, as long as a business satisfies eligibility requirements, they may be able to benefit from tax credits. In fact, SECURE 2.0 was designed to encourage earlier plan adoption for growing businesses, especially to improve recruitment and retention, create a stronger benefits package, and to motivate earlier savings participation.
How the Employer Contribution Tax Credit Works
While many business owners focus exclusively on startup cost credits, under SECURE 2.0, they also should consider the employer contribution credit as an additional benefit.
For eligible businesses:
- Employer contributions may qualify for additional credits, meaning more savings
- Credits are available for the first five years
- The credit gradually phases down over time
This means employers may receive more incentives not only for establishing a plan, but also for contributing to employee retirement accounts.
Conclusion:
SECURE 2.0 has created valuable opportunities for small businesses to reduce the cost of starting and maintaining a retirement plan through tax credits. While eligibility and savings will still vary based on different business factors, these credits help make offering retirement benefits more affordable than most employers realize.
So, whether you’re running a 3-person LLC, a family-owned business, or a growing business with 10 employees, understanding how these credits apply to your specific situation now can help you make a more informed decision, and ensure you get the savings you deserve. And if you haven’t set up a plan yet, this is the perfect time to consider working with a plan provider like Ubiquity to determine which incentives you may be eligible for.
Frequently Asked Questions:
How much could a business save with SECURE 2.0 tax credits?
The amount a business can save depends on factors like startup costs, the number of employees, and employer contributions, and our tax credits calculator is a great place to start and see what your savings may be like in real time. Eligible businesses with up to 50 employees may qualify for a tax credit covering up to 100% of startup, subject to annual limits. Employers may also be able to benefit from additional credits tied to employer contributions, enhancing savings further.
How long are SECURE 2.0 startup tax credits available?
Generally, eligible businesses can claim the 401(k) startup cost tax credit for the first three years after adopting their new plan. The employer contribution tax credit may be available for up to five years, but the difference is that the percentage of eligible contributions covered by the credit gradually decreases over time.
Are there other SECURE 2.0 tax credits available to small businesses?
Yes. In addition to the startup cost credit and employer contribution credit, some employers may qualify for other incentives. For example, eligible businesses that add automatic enrollment to a new or existing retirement plan may qualify for an additional tax credit of up to $500 per year for up to three years. Businesses that have military spouses as employees may also be eligible for a separate credit designed to boost 401(k) participation.
Can an LLC qualify for SECURE 2.0 tax credits?
Yes, LLCs may qualify for tax credits under SECURE 2.0 as long as they meet the program’s requirements. Generally, the business must have 100 or fewer employees who earned at least $5,000 in the previous year, at least one eligible non-highly compensated employee, and must not have sponsored a similar retirement plan during the previous three years.
Are Safe Harbor 401(k) plans eligible?
Yes, Safe Harbor 401(k)s may qualify for SECURE 2.0 tax credits as long as they meet the eligibility requirements. In fact, many businesses benefit from choosing Safe Harbor plans because they can help simplify annual IRS testing requirements while providing employers and employees with more savings opportunities, including from tax credits.
