Startup 401(k) Tax Credits: What Founders Need to Know
Most small business owners don't know this credit exists. Most ROBS-funded founders have an extra wrinkle that could delay when they can claim it. Both problems are manageable if you understand the rules.
SECURE (2019) and SECURE 2.0 (2022) created three distinct tax credits designed to encourage small businesses to adopt retirement plans. Together they can be worth well over $16,500 in the first few years of a new plan. Here's what they are, how they work, and why ROBS-funded startups need to read the fine print.
Credit 1: Startup Costs (Up to $5K/Year for Three Years)
If you establish a new 401(k) plan, you can claim a dollar-for-dollar credit for the ordinary and necessary costs of setting up and administering the plan, including employee education costs.
The math:
- Businesses with 50 or fewer employees: 100% of qualified startup costs, up to $5,000/year
- Businesses with 51-100 employees: 50% of qualified startup costs, up to $5,000/year
- Minimum: $500/year, maximum: $5,000/year
- Available for the first three plan years (or you can elect to start the clock one year early)
The floor formula: the annual max cannot exceed $250 x the number of non-highly compensated employees (non-HCEs) eligible to participate. So a business with 4 non-HCEs can claim up to $1,000/year ($250 x 4), not $5,000.
You claim this on IRS Form 8881 with your tax return.
Eligible startup costs include: plan setup fees, annual administration fees, and costs to educate employees about the plan, provided at least one non-HCE is eligible for the plan. Talcott Forge's plan administration fees typically qualify but make sure to confirm with your tax advisor.
Credit 2: Employer Contribution (Up to $1K/Year per Employee for Five Years)
This is where the real money is, especially if you're growing headcount.
SECURE 2.0 added a credit for employer contributions made to eligible employees earning $110,000 or less in 2026 (indexed for inflation). The credit phases down over five years:
| Plan Year | Credit (50 or fewer employees) |
|---|---|
| Year 1 | 100% of contributions, up to $1,000/employee |
| Year 2 | 100% of contributions, up to $1,000/employee |
| Year 3 | 75% of contributions, up to $1,000/employee |
| Year 4 | 50% of contributions, up to $1,000/employee |
| Year 5 | 25% of contributions, up to $1,000/employee |
Example: A business with 15 employees (each earning under $110,000 in 2026) that matches 100% of deferrals up to $1,000 would receive $15,000 in credits in years 1 and 2, $11,250 in year 3, $7,500 in year 4, and $3,750 in year 5 - a total of $52,500 over five years, on top of the startup cost credit.
Employer contributions not eligible for the credit can still be deducted as a business expense. You don't double-dip (can't deduct AND credit the same dollar), but the credit is almost always worth more than the deduction.
Credit 3: Auto-Enrollment ($500/Year for Three Years)
Add an Eligible Automatic Contribution Arrangement (EACA) to your 401(k) plan and you get a flat $500/year credit for the first three years, regardless of how many employees you have.
Unlike the other two credits, this one applies to existing plans too. Starting in 2025, most new 401(k) plans are required to include auto-enrollment anyway, so you might as well claim the credit.
Total from this credit alone: $1,500.
Note for new businesses: Companies in existence less than 3 years are exempt from the mandatory auto-enrollment requirement. If your ROBS-funded company is brand new, you are not required to add EACA, but you can add it voluntarily and claim the $500/year credit.
What ROBS-Funded Founders Should Understand
If you funded your business through a ROBS arrangement, your C-Corp already sponsors a 401(k) plan. That means the three credits above are potentially available to you. But there are two considerations that apply specifically to your situation.
1. The non-HCE requirement can freeze you out in year one.
To claim the startup cost credit, your plan must cover at least one non-highly compensated employee (non-HCE). The IRS defines an HCE as someone who owns more than 5% of the business at any point during the year or the preceding year. This means you are automatically an HCE.
If you're the only employee in your company's first year, you don't have a non-HCE, and you can't claim the startup cost credit. This is the wall most early ROBS founders hit.
The fix: as soon as you hire your first W-2 employee who isn't an HCE, you meet the requirement. Given that you can elect the year preceding the plan's first full year as year one, ROBS founders who hire employees early may be able to reach back and start the clock from formation.
2. The employer contribution credit requires the same non-HCE employee base.
The employer contribution credit is also gated on having eligible non-HCE employees whose earn under $110,000 (in 2026).
You haven't lost anything, and the credits are waiting for you when your business starts to scale and you bring on staff. The moment you hire employees and begin making employer contributions to the plan, the clock starts and you can capture years' worth of credits going forward.
One more thing: the "substantially same employees" lookback requirement, which would otherwise disqualify employers who already had a plan covering the same workforce, generally doesn't create a problem for ROBS-funded founders. The ROBS 401(k) is established as part of a new C-Corp, and your prior 401(k) at your old employer doesn't count as a plan you sponsored. You're starting clean.
The Short Version
| Credit | Max Value | When You Qualify |
|---|---|---|
| Startup costs | $5,000/year x 3 years | When you have at least one non-HCE employee |
| Employer contributions | Up to $1,000/employee/year x 5 years | When you make contributions for non-HCE employees earning < $110K |
| Auto-enrollment | $500/year x 3 years | When you add EACA auto-enrollment |
For a ROBS-funded business that hires even a modest team in its first few years, these credits can easily offset most or all of your 401(k) administration costs. At Talcott Forge, our admin fees typically qualify as startup costs, meaning the credit can reduce or even make your plan administration free while you're building.
Sources: IRS Notice 2025-67; IRS Form 8881 instructions; IRS retirement plan startup cost credit guidance; SECURE Act (2019); SECURE 2.0 Act (2022)
This information is presented for educational purposes only and should not be construed as tax, legal, or investment advice. These rules are highly fact-specific. Tax rules and IRS guidance may change, and tax treatment depends on individual circumstances. Whenever making an investment decision, please consult with independent legal, tax, and accounting professionals.