What Is the Retirement Plan Credit and How Do I Claim It?

The Credit for Small Employer Pension Plan Startup Costs is a federal tax incentive designed to make offering a retirement plan more affordable for small businesses. Recent legislation, specifically the SECURE 2.0 Act, enhanced this credit to encourage employers to establish new retirement plans for their workers. The credit directly reduces a business’s tax liability, helping to offset the initial expenses of setting up a plan, the ongoing costs of administering it, and a portion of employer contributions.

Employer and Plan Eligibility Requirements

To qualify for the retirement plan credit, a business must meet specific requirements. The primary rule is that the employer must have 100 or fewer employees who received at least $5,000 in compensation during the preceding tax year. A second condition is that the credit is intended for the establishment of a new retirement plan. This means the employer cannot have maintained another qualified plan for substantially the same employees during the three tax years immediately prior to the new plan’s effective date. This rule prevents businesses from repeatedly terminating and creating plans to claim the credit multiple times. The credit is also available to employers who join a multiple employer plan (MEP).

Finally, the plan must cover at least one employee who is classified as a Non-Highly Compensated Employee (NHCE). An NHCE is an employee who owns 5% or less of the company and, for 2025, earned $160,000 or less in the preceding year. This income threshold is set annually by the IRS.

Calculating the Credit Amount

The total value of the retirement plan credit is determined by combining two distinct components. The first part of the credit addresses the direct costs of starting and maintaining the plan. These qualified startup costs are defined by the Internal Revenue Code as the ordinary and necessary expenses to set up and administer the plan, as well as costs to educate employees about it. This can include fees for plan documents, setup charges from financial institutions, and ongoing administrative fees.

For businesses with 50 or fewer employees, the credit for these startup costs is 100% of the qualified expenses. For employers with 51 to 100 employees, the credit is 50% of the qualified costs. This credit is available for the first three years of the plan. The annual credit is capped at the greater of $500 or $250 multiplied by the number of NHCEs eligible to participate, up to a maximum of $5,000 per year.

The SECURE 2.0 Act introduced a second credit for eligible employer contributions, such as matching or non-elective payments. This credit is capped at $1,000 per employee per year and only applies to contributions made for employees earning $100,000 or less in FICA wages. For employers with 50 or fewer employees, the credit is available for five years with the percentage of contributions decreasing over time:

• Years 1 & 2: 100%
• Year 3: 75%
• Year 4: 50%
• Year 5: 25%

For businesses with 51 to 100 employees, this percentage is reduced by 2% for each employee over the 50-employee threshold.

Required Information for Claiming the Credit

The document for this calculation is IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs. Before filling out Form 8881, a business will need the total amount of qualified startup costs paid or incurred during the tax year. It will also need the total amount of eligible employer contributions made during that same period.

In addition to the financial data, specific information about the plan and the workforce is required. The business must have the exact date the retirement plan was established. It will also need the total number of employees and a specific count of the Non-Highly Compensated Employees (NHCEs) who are eligible for the plan.

How to File for the Credit

The credit calculated on Form 8881 is not filed as a standalone document. Instead, it becomes part of the business’s larger annual tax return through its classification as a general business credit. The first step is to transfer the total credit amount from Form 8881 to Form 3800, General Business Credit. Form 3800 is used to claim various business tax credits, and the retirement plan credit is consolidated here along with any others the business may be eligible for.

After the credit is included on Form 3800, that form is then submitted as a component of the business’s main income tax return for the year. The specific primary tax form depends on the business structure. For example, a corporation would attach Form 3800 to its Form 1120, a partnership to its Form 1065, and a sole proprietor would include it with their Schedule C (Form 1040).