Auto-enrollment tax credit

What the auto-enrollment credit is

Section 45T of the tax code provides a flat $500 credit for each of three tax years, starting with the first year the plan includes an eligible automatic contribution arrangement (EACA). The same small-employer test as the startup credit applies: 100 or fewer employees who earned at least $5,000 in the prior year.

The credit does not depend on what you spent. It is available for a new plan that starts with automatic enrollment and for an existing plan that adds it.

Why it matters to employers

On its own the credit is modest, $1,500 over three years. Its value is that it stacks with the startup costs credit. A new plan with automatic enrollment can qualify for up to $5,000 a year in startup credit plus $500 a year in auto-enrollment credit, or up to $16,500 over three years, before any credit for employer contributions.

Many new plans need automatic enrollment anyway. Under SECURE 2.0, most 401(k) plans established after December 29, 2022 must include it for plan years beginning in 2025 or later, with exceptions for very small and new businesses. A business that is exempt from the mandate can still choose automatic enrollment and claim the credit.

Example

A 35-employee company adds an EACA to its existing 401(k) on January 1, 2026. It claims $500 on its 2026, 2027 and 2028 returns. It gets no startup costs credit because the plan is not new.

Common mistakes

• Assuming any default enrollment counts. The feature must meet the EACA rules, including uniform defaults and annual notices.

• Dropping automatic enrollment during the three years, which ends the credit.

• Forgetting to claim it. Use Form 8881, the same form as the startup credit.

• Treating the credit as a refund. It reduces income tax owed and is part of the general business credit.