The government created both the auto enrollment tax credit and the start-up credit to increase participation in retirement plans. These credits incentivise small businesses to offer 401k plans by essentially paying very little or nothing to both start the plan and to operate the plan for the first few years by taking advantage of government credits.
What is the Auto-Enrollment Credit?
Created under SECURE Act, a solo 401k qualifies for the auto-enrollment credit. An eligible self-employed business that adds an auto-enrollment feature to their solo 401k plan can claim a tax credit of $500 per year for a 3-year taxable period beginning with the first taxable year the self-employed business includes the auto-enrollment feature in their solo 401k plan. To learn more, click here.
What is the Start-up Credit?
The plan start-up credit was modified under the SECURE 2.0 Act. A solo 401k does not qualify for the start-up credit because an employer must have at least one non-highly compensated employee to be able to claim the start-up credit. A solo 401k is only available to owner-only businesses with no common-law W-2 employees so by definition and the eligibility requirements it cannot employ non-HCE W-2 employees. To qualify for the start-up credit a small business must have no more than 50 employees—and have at least one non-highly compensated employee who is eligible to participate so that the business is eligible for the maximum credit of 100% of qualified start-up costs, up to $5,000.
