Retirement plan coverage in the United States has lagged for years, despite repeated federal efforts to expand it. Small business owners and self-employed Americans remain among the least covered, with many operating without any 401(k) plan in place.
Solo 401(k) holders, the group that includes most one-person businesses and spouse-run operations, have historically been left out of certain tax incentives traditional 401(k) sponsors receive. The startup cost credit that helps offset the expense of launching a workplace retirement plan, for example, was not always available to solo 401(k) plans.
A tax credit tied to the SECURE Act has been available since 2020, but it became newly relevant to a much larger group of small business owners after a SECURE 2.0 provision took effect on January 1, 2025. The IRS allows businesses that include an auto-enrollment feature in their 401(k) plan to claim $500 in tax credits annually over a three-year window, totaling $1,500.
In a new video on Monday, Toby Mathis of Anderson Business Advisors broke down how the credit works alongside tax attorney Savannah Wallace. Both emphasized this is an opportunity many Americans are missing.
“A lot of you guys don’t realize that you have this available to you,” Mathis said. “And by the way, when I say tax credit, that means dollars in your pocket. That’s not a deduction. That means money that you actually get to receive.”
What the EACA tax credit offers small businesses
The credit centers on a feature called an Eligible Automatic Contribution Arrangement, or EACA. Per IRS guidance, businesses that incorporate an auto-enrollment feature meeting EACA standards into a 401(k) plan are eligible to receive a $500 annual credit during a three-year window starting in the first tax year the feature is operational. The credit is filed on Form 8881.
The credit itself dates to the original SECURE Act of 2019, but it became newly relevant on January 1, 2025, when a SECURE 2.0 mandate took effect. Under that law, signed by President Biden on December 29, 2022, any new 401(k) or 403(b) plan launched after the enactment date must include automatic enrollment for eligible workers.
Smaller employers, including businesses with 10 or fewer employees and those in operation for under three years, are exempt from the mandate but can still voluntarily add EACA language to qualify for the credit.
Wallace described the credit as a deliberate carve-out for solo 401(k) sponsors, who have historically been excluded from the more familiar startup cost credit available to traditional 401(k) plans.
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“This is really the only tax credit that’s going to be available to you as a solo 401(k), because what you might be familiar with and what other CPAs may know about is that startup cost credits, but that’s only available to your traditional 401(k) plan,” Wallace said. “It’s not something that solo 401(k)s can take. So this is a really nice carve out that the government gave us through the SECURE 2.0 Act, to give us a little bit of a benefit and incentive to have those retirement plans in place.”
The credit is non-refundable and does not carry forward, according to Wallace, meaning it can only offset existing tax liability in the years it is claimed. A business that owes no taxes in a given year cannot use that year’s credit toward a future return.
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What Americans need to do to claim the credit
Wallace clarified that the credit goes to the business sponsoring the plan, not the individual filer.
“I say, ‘You’ — I mean your sponsoring entity,” she clarified. “So if this is your construction business or maybe this is your real estate development business, whatever that sponsoring entity that you have in place that sponsors that solo 401(k) plan, it gets to claim that $500 tax credit.”
A solo 401(k) is a retirement plan sponsored by a business owned by an individual or by spouses, with no other employees. Business owners with employees typically have a traditional 401(k) instead, which qualifies for the same credit but follows different participation rules.
The bar to qualify is lower than some might assume, particularly for those considering starting a business specifically to access the credit.
“Maybe I won’t be making money. So I’m not going to be taking a salary quite yet. So you’re thinking, ‘Am I out of luck? I’m not going to make that 3% contribution.’ You’re not,” she emphasized. “You just need to have that language in there. And then you can opt out of those automatic contributions. The key is just having that language in there. You don’t have to make that contribution to be eligible for that EACA tax credit.”
Key takeaways on 401(k) auto-enrollment tax credit
- The credit is worth up to $1,500 over three years: Per IRS guidance, businesses that incorporate an auto-enrollment feature into a 401(k) plan can receive $500 annually over three consecutive tax years, filed via Form 8881.
- It is a credit, not a deduction: Mathis emphasized the distinction in the breakdown. A tax credit cuts a business’s actual tax bill by the credit amount, while a deduction only reduces the income subject to tax before the rate is applied.
- Solo 401(k) holders have been excluded from similar credits: According to Wallace, the more familiar startup cost credit is unavailable to solo 401(k) plans, making the EACA credit the only one this group can claim.
- You do not have to make the 3% contribution to qualify: Wallace said the plan only needs the EACA language specifying automatic enrollment at 3% of compensation. Participants can opt out of the contribution and still claim the credit.
- The credit is non-refundable and does not carry forward: According to Wallace, the credit only offsets existing tax liability in the year it is claimed. A business that owes no taxes in a given year cannot apply that year’s credit to a future return.
Related: Dave Ramsey, AARP raise red flags on 401(k)s, IRAs
