The 401(k) is one of the most common types of retirement plans, with over half of every employed individual having access to one. However, as an employer, it can be daunting to determine which type of plan is best for you – SEP IRAs, SIMPLE IRAs, pensions, 401(k)s, etc. One of the most important factors to consider when choosing a plan is the cost of establishing and maintaining it. It is no secret that 401(k)s are the most expensive plan to start, but what is much less commonly known is the numerous tax credits associated with the implementation of a 401(k) that can greatly reduce the burden associated with providing your employees this benefit.
Expected Costs of Establishment
Before we get into the available tax credits, it is important to understand the common costs of starting a 401(k). Although fees vary depending on where you choose to start your 401(k), most will have the same fee types associated with them.
These fee types can include:
- Annual Base Fees
- Recordkeeping/Reporting Fees
- Asset-based Fees
- Plan Conversion Fees
These fees can deter many business owners from choosing 401(k)s, as they can be very costly. Before deciding to implement a 401(k) for your business, you should understand what it will cost you to do so. Consulting with your financial professional to determine whether a 401(k) plan is right for your needs is essential. If you would like to schedule a meeting with one of our team members to discuss establishing a 401(k) to determine its suitability, click here.
Now that you understand some of the costs you can expect when starting a 401(k), we are ready to move on to the more exciting part – how to save money in doing so! The SECURE Act 2.0 has introduced several credits to help offset the costs of starting a 401(k). Understanding these credits will allow you to make a more educated decision in determining if the 401(k) is the best fit for your business’s retirement plan.
Startup Tax Credit
The Startup Tax Credit is designed to offset all ordinary and necessary costs for establishing and administering a new plan. This credit is based on the number of employees (defined as anyone receiving over $5,000 in compensation, including part-time employees) and is capped at $5,000.
It is important to understand where this amount comes from. This credit is limited to $250 per non-highly compensated employee, up to $5,000. A non-highly compensated employee is any employee who earned less than $160,000 and owns less than 5% of the company.
Employer Contribution Tax Credit
The Employer Contribution Tax Credit is designed to encourage employer contributions to the plan by offering a tax credit for making them. Employer contributions are deductible by the employer, and this tax credit offers even more savings for making these contributions. These credits are also based on the number of employees.
Employees earning less than $5,000 do not count for this credit either. This credit also only applies to employees earning less than $100,000, but those earning more still count as employees. For example, if you, as the employer, make contributions to an employee's 401(k) who earns $110,000, these contributions are not deductible, but the employee is still counted for the credit determination. This credit is limited to $1,000 per employee making $100,000 or less.
Automatic Enrollment Tax Credit
The Automatic Enrollment Tax Credit is a credit awarded for three years if you automatically enroll all eligible employees into the 401(k) plan as they become eligible. This is designed to promote participation in the plan. It is also limited based on the number of employees.
This is the least complex of all the credits, as it requires automatic enrollment of all eligible employees for an easy $500 tax credit per year for the first three years of the plan.
Navigating the costs and tax advantages of starting a 401(k) can feel overwhelming, but with the right guidance, the benefits often outweigh the challenges. At Whitaker-Myers Wealth Managers, we help business owners understand the nuances of 401(k) plans, including how to leverage startup, employer contribution, and automatic enrollment tax credits to maximize savings while providing meaningful retirement benefits to employees. Partnering with a knowledgeable team ensures you make informed decisions that support both your business goals and your employees’ financial futures.
The Hidden Tax Advantages of Starting A 401(k)
March 11, 2026
David Gearhart
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