The $500 Auto-Enrollment Credit (Section 45T): Who Gets It and for How Long
Section 45T pays small employers $500 a year for three years when their retirement plan automatically enrolls employees. It is separate from the startup credit.
Short answer: section 45T is $500 a year for three years. It goes to an eligible small employer whose retirement plan includes an automatic contribution arrangement. You do not need to qualify for the startup credit to claim it.
What the credit is
26 USC 45T gives an eligible employer a retirement auto-enrollment credit of $500 for each taxable year in the credit period. Other years get zero. The amount is flat. It does not grow with your headcount or your costs.
How long it lasts
The credit period is three taxable years. It starts with the first year in which the employer includes an eligible automatic contribution arrangement in a qualified employer plan. The arrangement must be included in the plan during that year for the year to count. The arrangement is defined in section 414(w)(3). Your plan provider can tell you whether your plan's feature meets that definition.
The most you can claim is $500 x 3 = $1,500.
Suppose a plan adds automatic enrollment in 2026 and removes it in 2027. Only 2026 is in the credit period. Keep the feature in place for the full three years if you want the full credit.
Who is an eligible employer
Section 45T(c) gives "eligible employer" the meaning in section 408(p)(2)(C)(i). That is the same size test the startup credit uses. It covers an employer with 100 or fewer employees who earned at least $5,000 in the prior year.
Why it is not tied to the startup credit
The startup credit, section 45E, has a lookback. It bars an employer that had a qualified plan for substantially the same employees in the prior three years. Section 45T has no such clause. It uses the size test only.
That difference matters. An employer with a 401(k) from 2018 cannot claim the startup credit for it. That employer can still add automatic enrollment and claim section 45T.
Here are three cases, each a fictional illustration:
- A 30-person company with a 2018 401(k) adds automatic enrollment in 2026. The startup credit is closed. Section 45T pays $500 in each of 2026, 2027 and 2028, a total of $1,500.
- A 20-person company sets up a new 401(k) with automatic enrollment in 2026. It may qualify for both credits. The startup credit has its own limits, which the retirement credit overview explains.
- A 120-person company is over the size limit. Neither credit applies.
A difference in how the credits treat deductions
Section 45E(e)(2) removes the deduction for costs and contributions that the startup credit and contribution credit cover. Section 45T has no matching clause, so the $500 does not reduce a deduction. Your CPA confirms how that works in your return.
How it is claimed
The credit is part of the general business credit. It is nonrefundable, so it reduces tax you owe. Unused credit can carry forward. For a pass-through business, it flows to the owners.
Employers claim the retirement plan credits on Form 8881. The IRS instructions explain the form, and our Form 8881 guide is a plainer walkthrough.
Is it worth the effort
For many plans, automatic enrollment is a setting your plan provider turns on. The credit then costs little to claim. But $500 is a small amount. It will not decide whether you adopt the feature. It is a bonus, not a reason.
The section took effect for taxable years beginning after December 31, 2019, under section 105 of Pub. L. 116-94, so it has been available for several years. Plans that added automatic enrollment years ago may already have used up their three years.
Where it fits with the other credits
The retirement plan credits come in three pieces. The startup credit in section 45E pays part or all of your setup and administration costs. The contribution credit, also in section 45E, pays part of what you put into employee accounts. Section 45T is the third piece. It is the smallest, and it is the only one that does not depend on your plan history.
Because it is flat, the credit is worth the most to a very small employer with a low-cost plan. It matters less to an employer whose other credits are large. Either way, the cost of claiming it is low. It is one more line on a form you may already be filing.
Questions we hear
My plan already has automatic enrollment. Can I still claim? Only if the credit period still covers the current year. The period starts with the first year the arrangement is in the plan and lasts three years. A plan that added it in 2022 has a period of 2022 to 2024. That period is over.
Can I claim 45T in the same year as the startup credit? Nothing in section 45T ties it to section 45E. Each credit has its own rules and its own computation. Your CPA coordinates them on the return.
Is the arrangement the same as any default deferral? Not necessarily. The statute points to the definition in section 414(w)(3). A plan provider can tell you whether the feature in your plan meets that definition. Ask for it in writing.
What if I have more than 100 employees? Section 45T uses the size test in section 408(p)(2)(C)(i). If you are over it, you are not an eligible employer.
If you are also weighing a state program, see our look at a state mandate versus your own 401(k).
This is general information, not tax advice. Your CPA confirms the numbers.