2. Employer Contribution Credit

For the first five years of the plan, there’s a tax credit for employer contributions, both matching and profit sharing. The full credit is limited to employers with 50 or fewer employees and is reduced by 2% for each employee over 50 employees, up to a maximum of 100 employees. There’s a per-employee annual cap of $1,000, which excludes employees whose taxable income is more than $100,000 per year (indexed).  

The credit covers:

• 100% of the employer contributions in the first and second years
• 75% in the third year 
• 50% in the fourth year
• 25% in the fifth year 

Employers can’t claim a deduction for these two tax credits.

3. Automatic Enrollment Credit

New or existing retirement plans that offer automatic enrollment may claim an annual tax credit of $500 for the first three years.³

4. Military Spouse Credit

Military spouses often don’t remain employed long enough to become eligible for their employer’s retirement plan or to become fully vested in employer contributions. Small businesses with up to 100 employees that employ a military spouse are eligible for up to $500 per year.⁴

To qualify, the military spouse must be:

1. Eligible to participate in the plan within two months of being hired 
2. Eligible for any employer contributions they would’ve been eligible for after two years of service
3. 100% vested in employer contributions

The annual credit is $200, and 100% of the employer contribution, up to $300, for each participating military spouse. These  credits can be claimed for the first three years of the military spouses’ participation in the plan.

Tax Credits in Action

ABC Company has 25 employees and establishes a new plan.

Assumptions: Each employee makes less than $100,000 per year and annual administrative costs are $7,000 per year; the employer makes an annual contribution of $1,000 per employee.⁵

ABC Company has the potential to claim a total of $104,000 in tax credits over five years.