Section 45E: The Overlooked Retirement Plan Tax Credit for Small Businesses
By: Quinton Taylor | Featured | September 24, 2025When most small business owners think about starting a retirement plan for their employees, two concerns usually come up:
- It’s expensive – setup fees, administrative costs, and employer contributions add up.
- It’s complicated – choosing the right plan and staying compliant feels overwhelming.
What many don’t realize is that Congress anticipated this problem and built in generous tax incentives for small businesses to take action. That’s where Internal Revenue Code Section 45E — and related credits — come in.
What is Section 45E?
Section 45E provides start-up and employer contribution tax credits to small businesses that establish new retirement plans. Originally created under the SECURE Act and expanded by the SECURE Act 2.0, these credits dramatically reduce the cost of offering a retirement plan.
It applies to popular plan types such as:
- 401(k) plans (including Safe Harbor)
- SIMPLE IRA plans
- SEP IRAs
- Other qualified defined contribution arrangements
Who Qualifies?
To claim Section 45E credits, your business must generally:
- Have 100 or fewer employees who each earned at least $5,000 in the prior year, and
- Not have maintained a retirement plan during the three preceding tax years for substantially the same employees.
This makes the benefit targeted at true first-time adopters.
Three Major Credits Available
- Start-Up Credit (Section 45E)
- Up to $5,000 per year for the first three years
- Covers qualified start-up and administrative costs (plan setup fees, payroll integration, employee education, plan documents, etc.)
- For employers with 1–50 employees: 100% of eligible costs (up to the cap)
- For employers with 51–100 employees: 50% of eligible costs (up to the cap)
💡 Example: If your plan costs $4,000 in year one, you can claim the full $4,000 credit. If it costs $12,000, you’ll max out the $5,000 credit.
- Employer Contribution Credit (Section 45E, added by SECURE 2.0)
- Up to $1,000 per employee per year (excluding highly compensated employees, generally those earning over $100,000)
- Applies to employer matching or nonelective contributions (not employee deferrals)
- Available for five years, with the credit percentage decreasing over time:
- Years 1–2: 100% of contributions
- Year 3: 75%
- Year 4: 50%
- Year 5: 25%
- Phases out gradually for employers with 51–100 employees
💡 Example: If you have 10 employees and contribute $500 each in year one, you can claim $5,000 in credits.
- Auto-Enrollment Credit (Section 45T, not 45E)
- Flat $500 per year
- Available for three years
- Applies to employers that add an automatic enrollment feature to their plan
🔎 Important: The auto-enrollment credit is actually authorized under IRC Section 45T, not Section 45E. However, because it was created under the same legislation (SECURE Act) and applies to new retirement plans, it’s often discussed alongside the Section 45E credits.
Auto-enrollment is proven to boost employee participation rates. With this credit, you’re rewarded not just for offering a plan — but for designing it in a way that gets your team saving.
How Long Can You Claim These Credits?
- Start-Up Credit (45E): Up to 3 years
- Employer Contribution Credit (45E): Up to 5 years
- Auto-Enrollment Credit (45T): Up to 3 years
And yes — these credits can stack together, creating thousands in potential tax savings.
Why This Matters
Too often, small businesses avoid offering retirement plans because of the perceived cost. Section 45E and related SECURE 2.0 credits effectively remove that barrier, allowing you to:
- Lower your tax bill while investing in your employees’ future
- Offer a benefit your team actually values
- Compete with larger employers for talent
- Encourage real participation through auto-enrollment
The Bottom Line
If you’ve been waiting to start a retirement plan, now is the time to act. Between the start-up, employer contribution, and auto-enrollment credits, the government will offset most (and sometimes all) of the costs of offering a plan.
But remember: these incentives are only available to new plans. Once the window closes, it’s gone for good.
