Eligibility Check: An Employer Must Meet these three conditions to be eligible for the triple tax advantage
- Employer must have 100 or fewer employees who earned at least $5,000 in the prior year.
- Employer must cover at least one non-highly compensated employee (NHCE).
- Employer must not have had a prior plan for the same employees in the last 3 years.
| Three Federal Tax Credits Available to Eligible Small Employers (under 100 employees): | |
| Credit 1: Start-Up Cost Credit-Good for 3 years | Amount: Up to $15,000 to Cover Plan Administration What it Covers: Ordinary and necessary expenses for setting up, administering, and educating employees about the plan. Maximum Credit: $5,000 per year for the first 3 years -Maximum total of $15,000. Employer Size. Credit Calculation 50 or fewer employees. 100% of costs up to annual limit 51 to 100 employees. 50% of costs up to annual limit |
| Credit 2: Employer Contribution Credit– Good for 5 years | Amount: A 5-Year Subsidy for Employee Contributions What it Covers: Employer contributions-within limits- made to the plan on behalf of employees earning less than $100,000 (indexed). Maximum Annual Credit: $1,000 per eligible employee. The Phase-Out Schedule (Employers with 50 or fewer employees): Plan Year Credit Percentage of Employer Contribution (up to $1k/Employee) Year 1: 100% Year 2: 100% Year 3: 75% Year 4: 50% Year 5: 25% Note for 51-100 Employees: The credit percentages above are subject to a phase-out reduction of 2% for every employee over 50. |
Credit 3: The Automatic Enrollment Credit
The $500 Bonus: Auto-Enrollment (“AE”) Credit
| Automatic Enrollment Credit (Max $1,500) | ||
| Credit 3: Automatic Enrollment Credit– Good for 3 years | Amount: Up to $1,500 – $500 a year for 3 years Mandate: For most new 401(k) plans effective 2025 or later, an auto-enrollment feature is required (does not apply to employers with 10 or fewer employees). Credit: Eligible employers can claim an additional $500 per year for the first 3 years for including an eligible automatic contribution arrangement. | |
| Year | ||
| 1 | $500 | |
| 2 | $500 | |
| 3 | $500 | |
Value
- This credit is additive to the Startup and Contribution credits.
- Provides a simple $1,500 total to offset the minor administrative changes for implementing this feature, which is now mandatory for most new plans anyway.
- Auto-enrollment is proven to dramatically increase employee participation.
The Power of Credits
Financial Impact: What This Looks Like in Dollars
Scenario 1: A New York State employer with 20 non-highly compensated employees and Annual Start-Up Costs of $4,000 decides to implement a 401(k) with a $1,000 employer contribution match for all 20 non-highly compensated employees and an automatic enrollment feature.
| Year | Start-Up Cost Credit (Max $5,000 per year for 3 years) | Contribution Credit (Max $20,000) | Automatic enrollment Credit | Total Tax Credit | Estimated Net Employer Cost |
| 1 | $4,000 (100% of costs) | $20,000 (100% of $20k contribution) | $500 | $24,500 | $4,000 start-up costs + $20,000 employer contribution = $24,000. Subtract total tax credits of $24,500. Net cost to employer = $0 |
| 2 | $4,000 (100% of costs) | $20,000 (100% of $20k contribution) | $500 | $24,500 | Same as above: Gross costs $24,000 to employer. Subtract total tax credits of $24,500. Net cost to employer = $0 |
| 3 | $4,000 (100% of costs) | $15,000 (75% of $20k contribution) | $500 | $19,500 | $4,000 start-up costs + $20,000 employer contribution = $24,000. Subtract total tax credits of $19,500. Net cost to employer = $5,000 |
| 4 | $0 (Startup Credit Ends) | $10,000 (50% of $20k contribution) | $0 | $10,000 | $4,000 start-up costs + $20,000 employer contribution = $24,000. Subtract total tax credits of $10,000. Net cost to employer = $14,000 |
| 5 | $0 (Startup Credit Ends) | $5,000 (25% of $20k contribution) | $0 | $5,000 | $4,000 start-up costs + $20,000 employer contribution = $24,000. Subtract total tax credits of $5,000. Net cost to employer = $19,000 |
Scenario 2: A New York State employer with 3 non-highly compensated employees and Annual Start-Up Costs of $4,000 decides to implement a 401(k) with a $1,000 employer contribution match for all 20 non-highly compensated employees.
| Year | Start-Up Cost Credit (Max $5,000) | Contribution Credit (Max $20,000) | Automatic enrollment feature Credit | Total Tax Credit | Estimated Net Employer Cost |
| 1 | $4,000 (100% of costs) | $20,000 (100% of $20k contribution) | $500 | $24,500 | $0 |
| 2 | $4,000 (100% of costs) | $20,000 (100% of $20k contribution) | $500 | $24,500 | $0 |
| 3 | $4,000 (100% of costs) | $15,000 (75% of $20k contribution) | $500 | $19,500 | $5,000 |
| 4 | $0 (Startup Credit Ends) | $10,000 (50% of $20k contribution) | $10,000 | $10,000 | |
| 5 | $0 (Startup Credit Ends) | $5,000 (25% of $20k contribution) | $5,000 | $15,000 |
Conclusion: A large portion of both setup and contribution costs can be offset for the first five years.
Why Act Now: The New York Advantage
Dual Benefit: Tax Savings & Mandate Exemption
New York State Mandate for Employers with 10+ Employees:
- The New York Secure Choice Savings Program mandates retirement savings arrangements for employers with 10 or more employees (if they’ve been in business for 2+ years and don’t offer a qualified plan).
- The Exemption: Offering your own qualified 401(k) plan exempts you from the Secure Choice mandate.
Federal Opportunity:
- The tax credits are available only for the first three (or five) years the plan is maintained. Waiting means giving up money.