Tax Credits for Small Business Retirement Plans

Small businesses can significantly benefit from tax incentives designed to encourage the establishment of employee retirement plans. According to recent updates, small business owners who launch a new retirement plan can claim a tax credit of up to $5,000 annually for the first three years. This credit offsets the costs of setting up and administering these plans, making it easier for small businesses to provide valuable retirement benefits to their employees.

Additionally, businesses that implement automatic enrollment for new hires can qualify for an extra $500 tax credit per year, for up to three years. The One Big Beautiful Bill Act (OBBBA) has enhanced this incentive by increasing the credit to cover up to 100% of plan startup costs, a substantial improvement from the previous 50% cap. This allows small businesses to invest more confidently in their employees' financial futures.

For plans with auto-enrollment, the maximum contribution in the first year is set at 10% of an employee's compensation. Employees must retain the right to opt out of this automatic enrollment to ensure flexibility and choice. After the first year, safe harbor plans can incrementally increase contributions up to 15% of compensation, with the opt-out option still available. This structure encourages consistent retirement savings while respecting employee choice.

Business owners also have flexibility in timing. You can establish a retirement plan and claim the associated tax credit for the previous year as late as the due date of your company's tax return, including extensions. This extended timeline enables businesses to make strategic profit-sharing contributions and maximize tax benefits.

These credits and flexible options make 2026 an ideal time for small businesses to explore or expand retirement plan offerings. Consult with your tax professional to ensure compliance and optimize these opportunities for your business and employees.