Unlocking Tax Credits: How the SECURE 2.0 Mandate Benefits Small Business Owners and Solo 401(k) Holders
Retirement plan coverage in the United States has been lacking, especially for small business owners and self-employed individuals who often do not have a 401(k) plan. Solo 401(k) holders, which include one-person businesses and spouse-run operations, have historically not received certain tax incentives available to traditional 401(k) sponsors. However, a tax credit tied to the SECURE Act has become more relevant to small business owners, thanks to a SECURE 2.0 provision that took effect on January 1, 2025. This credit allows businesses with an auto-enrollment feature in their 401(k) plan to claim $500 in tax credits annually over a three-year period, totaling $1,500.
In a recent video, Toby Mathis and tax attorney Savannah Wallace explained how the tax credit works and highlighted the opportunity it presents for many Americans. The credit is based on an Eligible Automatic Contribution Arrangement (EACA), which allows businesses to receive a $500 annual credit for three years if they incorporate an auto-enrollment feature meeting EACA standards into their 401(k) plan. This credit, filed on Form 8881, was established under the original SECURE Act of 2019 but gained new relevance with the SECURE 2.0 mandate.
The SECURE 2.0 mandate, signed into law by President Biden, requires new 401(k) or 403(b) plans launched after January 1, 2025, to include automatic enrollment for eligible workers. While smaller employers are exempt from this mandate, they can still voluntarily add EACA language to qualify for the tax credit. Wallace described this credit as a significant benefit for solo 401(k) sponsors who were previously excluded from other startup cost credits available to traditional 401(k) plans.
The tax credit is non-refundable and cannot be carried forward, meaning it can only offset existing tax liability in the years it is claimed. It is important to note that the credit goes to the business sponsoring the plan, not the individual filer. A solo 401(k) is a retirement plan for businesses owned by individuals or spouses without other employees. Business owners with employees typically have a traditional 401(k) plan, which also qualifies for the credit but has different participation rules.
The eligibility requirements for the tax credit are more accessible than some may think, especially for those considering starting a business to access the credit. Even if a business is not yet generating income or the owner is not taking a salary, they can still qualify for the credit by including the necessary language in their plan. Opting out of automatic contributions is possible, as long as the EACA language is present in the plan.