Article

Navigating state mandates and tax credits for retirement plans

March 6, 2025 · Authored by Renea Gaus

As you are planning your benefits programs for the year, it’s crucial to consider any state mandates or regulations that may have passed recently.

Many states have implemented, authorized or are considering state-sponsored retirement programs to promote savings by workers without access to workplace retirement plans. Although the rules differ by state, these programs generally require employers to automatically enroll employees in a ROTH IRA through payroll deduction. They are basic and tend to lack the benefits and flexibility of employer-sponsored retirement plans, such as 401(k) plans.

Of the 16 states with active programs, most require mandatory participation, unless the employer sponsors its own retirement plan or meets another exception. As a result, it is a good time for employers to evaluate their options if they currently do not sponsor a workplace retirement plan. This is especially true for small employers (employers with 100 or fewer employees), given the available tax credits.

Retirement plan tax credits

In December 2022, the SECURE 2.0 Act greatly expanded the tax credits available to eligible employers related to the costs associated with establishing and maintaining an employer-sponsored retirement plan, as well as adding new tax credits for employer contributions.

Eligible employers generally include employers who have not previously sponsored a retirement plan in last three years, and who have 100 or fewer employees. The tax credits are generally not available; however, for retirement plans that do not cover employees other than the business owners. Two specific tax credits to consider are:

Start-up tax credits:

The start-up tax credit is available to eligible employers for the first three years and is based on the costs associated with establishing the plan, on-going plan administration and employee educational expenses. The credit is determined based on actual plan expenses, subject to a minimum of $500 and a maximum of $5,000 per year. Eligible employers with 50 or fewer employees can receive a credit of up to 100% of eligible start-up costs. Eligible employers with 51 to 100 employees can receive a tax credit of up to 50% of eligible start-up costs.

Employer contribution tax credits:

Eligible employers, as described above can also claim a tax credit for employer contributions made to a new retirement plan, (e.g., 401(k) plan), for the first five years. For employers with 50 or few employees, the maximum credit is the lesser of the actual contribution or $1,000 per employee (making $100,000 or less in wages). The credit decreases from 100% for the first year to 25% for the fifth year. For employers with 51 to 100 employees, a reduced credit is available.