The New Tax Credit for Solo 401k Plans
The SECURE 2.0 Act introduced a new tax credit designed to encourage automatic enrollment in retirement plans. While this credit was originally intended for traditional employer 401(k) plans, it also applies to Solo 401(k) plans (both newly established plans and existing plans) that add an Eligible Automatic Contribution Arrangement (EACA).
As a result, Solo 401(k) owners qualify for a new tax credit worth up to $1,500, even if they are the only employee participating in the plan.
What the Credit Is
If you add an Eligible Automatic Contribution Arrangement (EACA) to your Solo 401(k) plan, you qualify for an automatic enrollment tax credit of:
- $500 per year
- For up to three years
- Maximum total credit: $1,500
This credit is authorized under Internal Revenue Code §45T and is intended to encourage greater retirement savings by promoting automatic enrollment features in 401(k) plans.
The policy objective behind the credit was to increase participation and contributions by automatically enrolling employees once they become eligible for a plan, rather than requiring them to opt in. Although employers with more than 100 employees are excluded from this credit, the statute does not exclude Solo 401(k) plans. As a result, Solo 401(k) owners can qualify for the credit even when they are the only participating employee.
Who Can Qualify?
This credit is available to both new and existing Solo 401(k) plan owners. It applies when an eligible employer includes an EACA in its plan, making it relevant for:
- New Solo 401(k) plans that add automatic enrollment from the start
- Existing Solo 401(k) plans that add the EACA feature and begin the credit period now
Important Clarification: This Is Not the Startup Costs Credit
There is a separate retirement plan startup costs tax credit—often discussed alongside SECURE and SECURE 2.0 changes—that can provide up to $5,000 over three years. However, Solo 401(k) plans generally do not qualify for that startup credit because they do not meet the employee participation requirements.
The automatic enrollment tax credit, on the other hand, has different eligibility rules. Under those rules, Solo 401(k) plans are eligible when an EACA is adopted.
What You Actually Have to Do
Despite the intimidating terminology, the compliance requirements are relatively straightforward.
1. Provide the Required Annual EACA Notice
Plans with an EACA must provide participants with an annual notice explaining:
- The automatic enrollment feature
- The default contribution rate
- The participant’s right to opt out
If you plan to claim the credit for 2025, the notice must be issued to yourself (and any employees, if applicable) by December 31, 2025.
For Solo 401(k) plans, this is typically an internal compliance step. Since you are both the plan trustee and the participant, the notice is kept in your plan records and does not need to be filed with the IRS.
Directed IRA account holders may request a copy of the notice by emailing [email protected].
2. Plan Amendments (Timing Matters)
The tax credit is tied to having an EACA included in the plan terms. However, under SECURE 2.0, required plan document amendments are not due until December 31, 2026.
Until that deadline, plans operate based on current law. For clients using Directed IRA or KKOS Lawyers IRS-preapproved Solo 401(k) plans, required plan amendments will be issued in summer 2026, well ahead of the deadline.
Importantly, you can adopt an EACA and claim the credit in 2025 even though the formal plan amendments will be finalized later.
3. Claiming the Credit on Your Tax Return
The automatic enrollment tax credit is claimed using IRS Form 8881 (Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment).
- For S corporations and partnerships, the credit generally flows through to owners via Schedule K-1
- For sole proprietors, the credit is claimed on Form 3800, Part III, line 1dd
This is a tax credit, not a deduction—meaning it reduces your tax liability dollar for dollar.
FAQ’s
Do I actually have to contribute annually and follow the minimum 3% contribution under the EACA to take the tax credit? No, the plan automatically adopts this and notifies each employee but every employee can opt out. So, in order to qualify and take the credit you need to issue the annual notice but you can opt out.
How Do I Opt Out of Automatic Contributions? The tax code does not specify the exact requirements but in a solo 401k where you are the plan trustee/plan administrator and where you are also the employee contributing, you essentially put yourself on notice and then opt out to yourself. It sounds confusing but the rules usually operate for an employer and a third party employee. You can document your opt out by writing on the notice your election to opt out and by keeping that in your records.
What do I need to do to get the $1,500 tax credit? You need to issue the notice (for Directed IRA customers e-mail [email protected] for the notice form) of adoption of the EACA, then you need to update you plan docs (these plan amendments are due by 12/31/26 and aren’t available until summer of 26’), then you claim the tax credit using the appropriate tax forms (Form 8881). This is claimed in increments of $500 each year for three years.
