What a 401(k) Actually Costs After the Tax Credits
Most owners assume a 401(k) is an expense. For small businesses, federal law (SECURE 2.0) now covers most — sometimes all — of the cost for the first several years, through three credits that stack:
1. Your setup and admin costs — up to 100% back
Businesses with 50 or fewer employees get a credit for 100% of plan startup and administration costs, up to $5,000 per year for the first three years (up to $15,000 total). Businesses with 51–100 employees get 50%. The annual cap is the greater of $500 or $250 per eligible non-highly-compensated employee.
2. The money you contribute for employees — credited too
Up to $1,000 per employee (counting employees earning under roughly $105,000, indexed) comes back as a credit: 100% in years one and two, then 75%, 50%, and 25% in years three through five. Available up to 100 employees, at full strength up to 50.
3. Auto-enrollment — $500 a year for three years
New 401(k) plans are required to include automatic enrollment anyway — and the law pays you $500 a year for three years for having it. $1,500 for complying with the rules.
Worked example: a 10-employee business contributing $1,000 per employee
| Credit | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| Startup & admin costs | $5,000 | $5,000 | $5,000 | — | — |
| Employer contributions | $10,000 | $10,000 | $7,500 | $5,000 | $2,500 |
| Auto-enrollment | $500 | $500 | $500 | — | — |
| Total credits | $15,500 | $15,500 | $13,000 | $5,000 | $2,500 |
Five-year potential: about $51,500 in federal credits — in many cases more than the plan costs to run.
Why owners do it (beyond the credits)
Keeping good people in a market where every employer is competing for them; a retirement plan of your own with contribution room far beyond an IRA; and employer contributions are deductible where not credited. Your CPA claims the credits on IRS Form 8881 — we coordinate with them, not around them.
Thinking about a plan for 2027? The design decisions (match formula, vesting, eligibility) are worth an hour before you commit. Free conversation, no obligation:
calendly.com/savannah-wealth-group/consultation · (912) 999-1805 · Savannah & Statesboro
Educational only — not individualized investment, tax, or legal advice. Savannah Wealth Group does not provide tax preparation or legal services; credit amounts, wage thresholds, and eligibility (including the requirement of at least one non-highly-compensated participant — owner-only plans generally do not qualify for the startup credit) should be confirmed with your tax professional. Credits cannot exceed actual eligible costs or contributions. Source: IRS Form 8881 instructions.
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