Is there a tax credit for starting a retirement plan?

The credit in one paragraph

Starting a plan costs money: plan documents, setup fees, and the time spent teaching employees how it works. Publication 560 points to a business tax credit that offsets part of that cost. In the publication’s Reminders section it is called the small employer pension plan startup cost credit, added to the tax code as section 45E and enlarged by the SECURE 2.0 Act. An eligible employer claims it for the first year the plan is in place (the first credit year) and for each of the 2 tax years right after it, so up to 3 years in all.

The credit is not a deduction. A deduction lowers the income you are taxed on; a credit lowers the tax itself, dollar for dollar. The usual deductions for plan contributions, covered on our employer contribution deduction page, are a separate topic.

How much the credit is worth

The publication gives two numbers that work together. First, the percentage of qualified startup costs. Under the SECURE 2.0 change, employers with 1 to 50 employees get 100% of qualified startup costs, and employers with 51 to 100 employees get 50%. Second, a cap. The credit cannot exceed the greater of $500 or the lesser of two amounts: $250 for each employee who is not a highly compensated employee and who is eligible to participate in the plan, or $5,000.

Read that cap slowly, because it has three layers. Take $250 times your eligible rank-and-file employees. If that is more than $5,000, the $5,000 ceiling applies. If the result is under $500, you still get a $500 cap. So the cap is never lower than $500 and never higher than $5,000. A business with 8 eligible non-highly compensated employees has a cap of $2,000 ($250 × 8). A business with 40 has a cap of $5,000, because $250 × 40 is $10,000 and the lesser figure is $5,000.

One wrinkle: the same Reminders section prints the older 2020 wording of this limit as well as the SECURE 2.0 increase and tells you to see the Form 3800 and Form 8881 instructions. Those form instructions are where the current computation lives, so confirm the exact figures there before you file.

Worked example

A bakery has 30 employees. Twelve of them are eligible for the new plan and are not highly compensated. In its first plan year the bakery pays $6,000 in qualified setup and administration costs. Because it has 50 or fewer employees, the percentage is 100%, so 100% of $6,000 is $6,000. The cap is the lesser of $250 × 12 = $3,000 and $5,000, which is $3,000; $3,000 is greater than $500, so the cap is $3,000. The credit is the smaller of $6,000 and $3,000, which is $3,000.

If the same bakery had 60 employees, the percentage would drop to 50%: 50% of $6,000 is $3,000, and the credit would be $3,000 if the cap is also $3,000. The calculator above runs exactly this arithmetic. It does not decide which of your costs qualify, and it does not model the additional employer contribution credit described below.

Other credits in the same section

The publication names three more credits that sit beside the startup cost credit. The small employer automatic enrollment credit is $500 per year over a 3-year period, starting with the first tax year the employer includes an eligible automatic contribution arrangement in a qualified plan. The employer contributions credit is an additional section 45E credit for certain eligible employers, equal to an applicable percentage of the employer’s contributions (not elective deferrals) to a plan other than a defined benefit plan, subject to limits. And the small employer military spouse participation credit, under section 45AA, is available to eligible small employers whose defined contribution plans have specific features that benefit military spouses.

For each, the publication simply refers you to the instructions for Form 3800 and Form 8881 for the conditions and the math. This page does not repeat conditions the publication does not spell out.

Credit for your employees, not for you

Do not confuse the employer credit with the retirement savings contributions credit that the same Reminders section mentions. That one belongs to the person saving: participants, including self-employed people, who contribute to their plans may qualify, using Form 8880. The maximum contribution eligible for it is $2,000. It rewards the saver; the startup credit rewards the business for setting the plan up. A business owner can in principle benefit from both, but they are claimed on different forms by different taxpayers.

What this page does not decide

The publication does not define qualified startup costs in detail in this passage, does not say which plan types qualify beyond referring to an eligible employer plan, and does not walk through the claim. It sends you to Form 8881 and Form 3800 instead. Treat the calculator as a quick estimate of the cap, not a filed number. If you have more than 100 employees, the percentage rules above do not apply as printed, so the calculator asks for 100 or fewer.

Sources

• IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (2025): Reminders (Small employer automatic enrollment credit; Increase in credit limitation for small employer plan startup costs; Increased small employer pension plan startup cost credit; Employer contributions credit; Small employer military spouse participation credit). Read November 2, 2026.

Edition read: Publication 560 (2025), for use in preparing 2025 returns. Where the publication gives 2026 figures, this page labels them 2026. Dollar limits change every year; check the current publication and form instructions for your plan year. This page summarizes the publication and does not replace it.