A small employer starting a 401(k) can claim: (1) the §45E startup credit — 100% of eligible costs for employers with 50 or fewer employees, capped at the greater of $500 or the lesser of $250 × non-highly-compensated employees or $5,000, for three years; (2) the §45T auto-enrollment credit — $500 a year for three years; and (3) an employer contribution credit of up to $1,000 per employee. For very small employers the $250 × NHCE term usually binds first — which is why the flat “$5,000 a year” you read elsewhere is often wrong. CalSavers generates $0 of any of these.
§45E startup credit: the formula, not the headline
The startup costs credit (IRC § 45E, as amended by SECURE 2.0 § 102) reimburses the ordinary costs of setting up and administering a new plan and educating employees about it. Eligibility: 100 or fewer employees who earned at least $5,000 last year, at least one non-highly-compensated employee (NHCE) participating, and no substantially similar plan in the prior three years.
| Element | Rule |
|---|---|
| Rate, 50 or fewer employees | 100% of qualified startup costs |
| Rate, 51–100 employees | 50% of qualified startup costs |
| Annual cap | The greater of $500, or the lesser of ($250 × NHCEs) or $5,000 |
| Duration | 3 years — up to $15,000 total |
| Claimed on | IRS Form 8881 |
Read the cap line again, because it is where competitor pages go wrong. "$5,000 per year" is only the outer ceiling. For a small employer, $250 × NHCEs usually binds first — and for very small costs, the costs themselves bind, because the credit cannot exceed what you actually spent.
Worked examples: watch where the formula binds
4-person shop, 3 NHCEs, $2,000 costs
Cap = greater of $500 or lesser of (3 × $250 = $750) or $5,000 → $750. Credit = lesser of costs ($2,000) or cap ($750) = $750/yr — not $5,000. Three-year §45E total: $2,250.
12 employees, 10 NHCEs, $1,980 costs
Cap = lesser of (10 × $250 = $2,500) or $5,000 → $2,500. Credit = lesser of costs ($1,980) or cap = $1,980/yr — 100% of the cost. Here the plan's entire admin bill is reimbursed for three years.
30 employees, 25 NHCEs, $4,000 costs
Cap = lesser of (25 × $250 = $6,250) or $5,000 → $5,000. Credit = lesser of costs ($4,000) or cap = $4,000/yr. The $5,000 ceiling finally matters — and still isn't reached, because costs bind first.
Notice that in all three cases the credit lands below $5,000 — the flat number is a ceiling almost nobody hits. Run your own numbers with the real formula →
§45T auto-enrollment credit: the simple one
Add an eligible automatic contribution arrangement and IRC § 45T pays a flat $500 a year for three years — $1,500 total. It is available to employers with 100 or fewer employees, including employers with an existing plan who add auto-enrollment. It stacks on top of §45E.
The employer contribution credit
SECURE 2.0 § 102 also created a credit for the employer contributions themselves — up to $1,000 per employee, counting only employees who earned $100,000 or less in the prior year, for employers with 50 or fewer employees. It phases down by plan year:
| Plan year | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| % of contribution credited | 100% | 100% | 75% | 50% | 25% |
For employers with 51–100 employees, the credit is reduced by 2% for each employee over 50. Combined with §45E and §45T, a qualifying small employer can see up to $16,500 over three years before the contribution credit is even counted.
Two rules your CPA will raise — so we'll raise them first
- No double-dipping. You cannot both deduct the startup costs and claim the credit for the same expenses. The credit is usually worth more, but that is a return-by-return call for your CPA.
- CalSavers earns $0 of any of this. It is not an employer-sponsored plan, so there are no startup costs to credit, no auto-enrollment credit, and no employer contributions to credit — contributions are prohibited outright. An employer complying via CalSavers leaves the entire stack on the table. The full comparison →
Common questions
Are these credits still available in 2026?
Yes. All three are in effect for 2026 — Form 8881, where they are claimed, was revised as recently as December 2025. We found no 2026 legislation modifying or sunsetting them.
What counts as a non-highly-compensated employee?
Broadly, employees below the IRS highly-compensated threshold. For the credit's cap, what matters is the number of NHCEs eligible to participate — which is why the same plan cost produces different credits at different shops. The calculator asks for exactly this number →
I already have a plan. Is there anything here for me?
Possibly the §45T credit — $500 a year for three years for adding auto-enrollment — which is available even to employers with an existing plan. The §45E startup credit requires no substantially similar plan in the prior three years.
Do the credits really cover the whole cost of a small 401(k)?
Frequently most of it, for employers with 50 or fewer staff — see the 12-employee example above, where 100% of a $1,980 admin bill is reimbursed. Whether yours nets near zero depends on your NHCE count and actual costs. Estimate your net cost →
Can I claim the credits if I register with CalSavers?
No. CalSavers is not an employer-sponsored plan and generates no federal credits. The credits exist to offset the cost of starting your own plan — which is a large part of why a private plan often wins the comparison.
We'll run your actual credit number
Your NHCE count, your real plan costs, the formula applied properly — and a plain answer on whether the credits change your decision.