Retirement Plan Tax Credit for 51 to 100 Employees: What Changes
Past 50 employees the startup credit drops from 100% to 50%, and the contribution credit is cut by 2% for every employee over 50. Here is the arithmetic.
Short answer: employers with 51 to 100 employees still qualify. The startup credit is 50% of costs instead of 100%. The contribution credit is cut by 2% for every employee over 50, and reaches zero at 100.
Who still qualifies
The credit is open to an employer with 100 or fewer employees who earned at least $5,000 in the prior year. That test comes from 26 USC 45E(c)(1), which points to section 408(p)(2)(C)(i). The employer also cannot have had a qualified plan for substantially the same employees in the prior three years. Our article on state auto-IRAs and the lookback covers that test.
Change 1: the startup credit is 50%
Under section 45E(a), the startup credit is 50% of qualified startup costs. Section 45E(e)(4) raises that to 100% for employers with 50 or fewer employees. Employers with 51 to 100 employees get the 50% rate. The Form 8881 instructions carry the same split.
The yearly limit does not change. Under section 45E(b), it is the greater of $500 or the lesser of two numbers: $250 times the number of eligible employees who are not highly compensated, or $5,000. The credit runs for three years.
Change 2: the contribution credit shrinks
Section 45E(f) adds a second credit for employer contributions. It is up to $1,000 per employee. The percentage is 100% in years one and two, then 75%, 50% and 25%, and then nothing. Employees whose FICA wages for the year are above the wage limit do not count. For tax year 2026 that limit is $110,000, per IRS Notice 2025-67.
Section 45E(f)(2)(B) then cuts the credit for larger employers. If you had more than 50 employees in the preceding year, the credit amount is reduced by 2% for each employee over 50. At 100 employees the reduction is 100%, so the credit is gone.
The list shows how much of the year-one credit survives at several headcounts:
- 50 employees: no reduction, 100% survives
- 60 employees: 20% reduction, 80% survives
- 75 employees: 50% reduction, 50% survives
- 90 employees: 80% reduction, 20% survives
- 100 employees: 100% reduction, nothing survives
The cut is a reduction of the credit amount, not a subtraction from the percentage. A 75-employee company keeps half of each year's credit: 37.5% of contributions in year three, 25% in year four and 12.5% in year five.
A worked example
This is an illustration for a fictional company, not a promise. A company has 75 employees. Five are highly compensated, so 70 are eligible non-highly compensated employees. It sets up a 401(k) in year one. Plan setup and administration cost $6,000. It contributes $1,000 for each of 60 employees who earn $110,000 or less. That is $60,000.
Startup credit, year one:
- Rate: 50%
- Cost times rate: $6,000 x 50% = $3,000
- Yearly limit: the lesser of $250 x 70 = $17,500 or $5,000 is $5,000
- Credit: $3,000, because it is under the limit
Contribution credit, year one:
- Reduction: 2% x 25 employees over 50 = 50%, so $60,000 x 50% = $30,000 counts
- Applicable percentage in year one: 100%
- Credit: $30,000 x 100% = $30,000
Total year-one credit: $3,000 + $30,000 = $33,000.
Contribution credit in later years, with the same $60,000 of contributions:
- Year two: $30,000 x 100% = $30,000
- Year three: $30,000 x 75% = $22,500
- Year four: $30,000 x 50% = $15,000
- Year five: $30,000 x 25% = $7,500
Over five years the contribution credit adds up to $30,000 + $30,000 + $22,500 + $15,000 + $7,500 = $105,000.
A company with 50 employees and the same facts would get 100% in years one and two, which is $60,000 each year. Each employee over 50 matters.
What else to know
Section 45E(e)(2) removes the deduction for costs and contributions that the credit covers. In the example, $33,000 of year-one spending is credited, so it is not also deducted. Your CPA models the net effect.
The credit is nonrefundable. It reduces tax you owe. Unused credit can carry forward, and it flows to the owners of a pass-through business. An employer with little tax liability may use it slowly.
Headcount rules have detail. Who counts as an employee, and in which year, is a question for your CPA. If you are near 50, ask before you hire.
For the full picture, see the retirement credit overview and our Form 8881 guide.
Two more headcounts
These are illustrations for fictional companies.
A company with 55 employees contributes $1,000 for each of 40 eligible employees. That is $40,000. The reduction is 2% x 5 employees over 50 = 10%, so $40,000 x 90% = $36,000 counts. At the year-one percentage of 100%, the contribution credit is $36,000. The startup credit is 50% of costs, up to the limit.
A company with 100 employees has a reduction of 2% x 50 = 100%. The contribution credit is $0 in every year. Only the startup credit remains. With $8,000 of startup costs, it is $8,000 x 50% = $4,000, which is under the $5,000 limit, so the credit is $4,000.
How to test your own numbers
- Count your employees as of the preceding year, and ask your CPA how the count works for your business.
- Count the eligible employees who are not highly compensated. That sets the $250 per employee limit.
- List the employees who earn $110,000 or less. Only they count for the contribution credit.
- Decide how much you will contribute for each, up to $1,000.
- Reduce the counted contributions by 2% for each employee over 50, then apply the percentage for your plan year.
Our free Federal Money Check does a first pass of this for you.
This is general information, not tax advice. Your CPA confirms the numbers.