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Instant Analysis: Small Plan Start-Up Tax Credit: 401(k) Plans Half-Off (or Better) Beginning Jan. 1


Surveys of small business owners have consistently shown cost to be a significant impediment to the adoption of a retirement plan for employees. Well, the recently enacted SECURE Act has a provision that could really make a difference.  

Congress has previously tried to address this concern by providing a tax credit to offset the start-up costs of establishing/administering the plan for the first three years to small businesses with no more than 100 employees and at least one non-highly compensated employee (NHCE), and previously without a plan. However, this credit was capped at $500, or 50% of the year’s start-up costs, whichever was lower. While there has been some utilization of this credit, small business retirement plan coverage continues to lag behind larger businesses, and surveys continue to suggest cost as a significant reason. Some have pointed out that the current credit does not begin to offset those early start-up costs.

Enter the SECURE Act, which dramatically expands this tax credit to cover potentially more than half of the cost of a new small business retirement plan. Under SECURE, the amount of the tax credit is now capped at $250 times the number of NHCEs eligible to participate in the plan up to a $5,000 annual maximum (but never less than $500), though, as we saw with prior law, the credit is still limited to 50% of the start-up costs. Additionally, if the new plan automatically enrolls employees into the plan on a uniform basis (but at no minimum rate), the employer will get an additional annual credit for start-up costs of $500 per year. And all of this is effective Jan. 1, 2020. Yes, effective for new plans beginning now!

For example, take a small business employer with 15 NHCEs that wants to establish a safe harbor 401(k) plan for her employees and is willing to do automatic enrollment. The provider quotes an out-of-pocket cost to the employer of $1,500 per year. In that case, the tax credit available to this employer will be $750 plus $500 or $1,250, which is almost the entire cost to the employer. 

I have spoken to representatives of several companies that specialize in start-up plans for the small business market and they all believe these new credits could have a meaningful impact on small plan adoption and coverage. Obviously time will tell, but this is definitely a good message for small business owners previously reluctant to offer a retirement plan to their employees. 

Brian Graff is the Executive Director of NAPA and CEO of the American Retirement Association.


All comments
Mike Sladky
3 years 9 months ago
The example used in the article (safe-harbor plan with auto enrollment), the tax credit would be barely measurable against the cost of the match. So not sure if these legislative changes offer much incentive. Better than nothing I guess.
Mark Kempf
3 years 9 months ago
Is there a definition of "start up costs"? In our shop, there may be an initial charge for documents, but the other costs are routine ongoing expenses, not related to start up.
Nevin Adams
3 years 9 months ago
It includes ongoing administrative costs.