401(k) tax credits for small businesses: how much can you get back?
If you have 100 or fewer employees and start a plan, the IRS offers up to three credits: one toward the cost of setting it up and running it, $500 a year for adding automatic enrollment, and one for the money you put in for your employees.
The startup credit is capped each year at $250 for each eligible non-highly compensated employee, never less than $500 and never more than $5,000, for three years. Whether you qualify, and for how much, is something to confirm with your CPA.
What are the three credits?
- The startup cost credit. Covers part of what it costs to set up and run the plan and to teach your employees about it, in each of the first three years. With 50 or fewer employees it covers 100% of those costs up to a yearly cap; with 51 to 100 it covers 50%, up to the same cap.
- The automatic enrollment credit. $500 a year for three years, starting with the first year your plan enrolls employees automatically unless they opt out. It applies to a new plan or to an existing one that adds the feature, if the feature meets the IRS rules for an eligible automatic contribution arrangement.
- The employer contribution credit. A share of the money you put into the plan for employees, such as a match, counting up to $1,000 per employee a year, for five years. What employees put in from their own pay doesn't count.
How big can the startup credit be?
Each year the cap is $250 times the number of non-highly compensated employees who are eligible for the plan, with a floor of $500 and a ceiling of $5,000. Highly compensated employees are, broadly, owners and your best paid; the tax code sets the line, and your CPA can tell you who counts.
| Eligible non-highly compensated employees | How the cap works out | Yearly cap |
|---|---|---|
| 1 | $250 × 1 = $250, so the $500 floor applies | $500 |
| 2 | $250 × 2 = $500 | $500 |
| 5 | $250 × 5 = $1,250 | $1,250 |
| 10 | $250 × 10 = $2,500 | $2,500 |
| 20 | $250 × 20 = $5,000 | $5,000 |
| 30 | $250 × 30 = $7,500, so the $5,000 ceiling applies | $5,000 |
How does the contribution credit work?
It's a percentage of what you contribute for each employee, counting up to $1,000 per employee a year. The percentage steps down over five years:
| Year | Share of your contributions credited | Most per employee |
|---|---|---|
| Year 1 | 100% | $1,000 |
| Year 2 | 100% | $1,000 |
| Year 3 | 75% | $750 |
| Year 4 | 50% | $500 |
| Year 5 | 25% | $250 |
Two limits sit beside it:
- Over 50 employees, the percentage is reduced by 2% for each employee over 50 in the year before.
- Higher earners don't count. Contributions for an employee paid more than $105,000 in wages for the year are left out. That's the figure in the current Form 8881 instructions; the IRS has used a lower figure in earlier years, so check the year you're claiming.
Who can claim them?
The IRS sets three conditions:
- You had 100 or fewer employees who were paid at least $5,000 in the year before.
- At least one employee who isn't highly compensated is eligible for the plan.
- In the three tax years before the first credit year, you didn't have another plan covering substantially the same employees (counting related companies and predecessors).
This is a summary, not a promise that you qualify. The IRS page has the full rules, and your CPA can check them against your payroll and plan history.
What counts as a startup cost?
In the IRS's words, the credit is for “ordinary and necessary costs” to set up and administer the plan and to educate your employees about the plan. You can't both deduct those costs and take the credit for the same expense.
Which charges in a particular proposal count is a question for your CPA. Ask any provider to list each setup and running cost on its own line so your CPA can sort them.
How do you claim them?
On Form 8881, filed with your business tax return. If the only place the credits come from is a partnership or S corporation you own part of, you can report them directly on Form 3800 instead. You can also choose to treat the year before the plan started as the first credit year for the startup credit.
Confirm every figure on this page with your CPA before you count on it. If you're also weighing what a plan costs, our pricing page sets out our fees and published prices from two other providers.
Questions to ask your CPA
- Do we meet the eligibility rules: 100 or fewer employees paid $5,000 or more last year, and no plan for substantially the same employees in the last three years?
- How many of our employees count as non-highly compensated and eligible for the plan, and what does that make our startup credit cap?
- Which of the costs in a provider's proposal count as eligible startup costs?
- Should we take the startup credit or deduct those costs? We can't do both for the same expense.
- Would an automatic enrollment feature qualify for the $500 credit?
- How much of our employer contributions would the contribution credit cover, given our headcount and pay?
- Should we elect to treat last year as the first credit year?
- Do we file Form 8881, or do the credits come to us through a partnership or S corporation and go on Form 3800?
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- Internal Revenue Service, Retirement plans startup costs tax credit, last reviewed or updated May 31, 2026; read Oct 13, 2026.
- Internal Revenue Service, Instructions for Form 8881, Credit for Small Employer Pension Plan Startup Costs, Auto-Enrollment, and Military Spouse Participation, revised December 2025 (page last reviewed Apr 30, 2026); read Oct 13, 2026.
General information, not tax advice. The examples illustrate the IRS rules; your CPA can tell you what applies to your business.
Want us to look at your plan?
- Tell us about your business: how many people, and your current plan if you have one.
- We send a written proposal that lays out the fees and how the plan would work.
- If you go ahead, we set it up with you and your payroll, and help your team enroll.