Why Do Small Businesses Rarely Claim Tax Credits for Offering Retirement Plans?

By Adam Bloomfield, Shanthi Ramnath, and Sita Slavov

In recent decades, U.S. policymakers have introduced a variety of incentives to expand retirement plan coverage in the private sector, particularly among small businesses. A key policy tool in this effort is the Section 45E tax credit, which subsidizes the costs of starting and administering employer-sponsored retirement plans (ESRPs), such as 401(k)s. Originally enacted in the early 2000s and substantially expanded through the SECURE Acts of 2019 and 2022, this credit aims to lower cost barriers that might discourage plan formation among smaller firms.

However, despite these expansions, take-up of the credit remains strikingly low. In our new study, published as a CRI Working Paper and by NBER (Bloomfield, et. al., 2025), we use detailed data from the IRS and other sources to examine how firms respond to these tax incentives. We find that even in the most recent years, fewer than 6 percent of eligible firms claim the credit. Credit take-up appears to depend heavily on the characteristics of firm owners and their tax preparers, highlighting the potential role of informational and behavioral frictions.

The Policy Background: A Generous but Underused Incentive

Section 45E offers small businesses a tax credit for up to three years to offset startup and administrative costs of setting up an ESRP. Initially, the credit covered 50 percent of eligible costs and was capped at $500 per year. The 2019 SECURE Act increased the maximum to $5,000 per year and added a bonus for auto-enrollment features. In 2022, the SECURE 2.0 Act further expanded the credit to cover 100 percent of startup costs for firms with 50 or fewer employees. It also introduced a new component subsidizing employer contributions.

Taken together, these reforms have made the credit substantially more generous, but whether such generosity translates into widespread use—and ultimately, into more workers gaining access to retirement plans—remains an open empirical question.

Data and Measurement

To assess firm behavior, we use several sources of data, including federal tax data (Forms 1120, 1120S, 1065, 8881, W-2, and 1098-T) and Census survey data about firm characteristics. We define “apparently eligible” firms as those that start a new plan and meet specific statutory thresholds: 100 or fewer employees earning at least $5,000 annually and at least one contributing non-highly compensated employee (non-HCE). We observe credit use and employer attributes from 2014 through 2023.

To further explore variation in take-up, we link firms to characteristics of their owners and, if present, their tax preparers, such as the owner’s level of education and the tax preparer’s level of qualification.

Findings: Persistently Low Take-Up

Despite expansions in credit generosity, take-up remains low. In 2017 and 2018, only about 1 percent of eligible firms claimed the credit. By 2023, the year of the implementation of the SECURE 2.0 expansion, the rate had risen to just 5.5 percent. This increase suggests that changes in statutory generosity have only modestly increased take-up.

We find substantial heterogeneity in take-up across firms. Firms with CPAs or credentialed tax preparers are more likely to claim the credit than those with uncredentialed preparers. In 2023, having a preparer with prior experience filing the credit for other clients increased the probability of claiming the credit by 11 percentage points. Firms in industries with higher levels of owner education, and those whose owners are college- or graduate-educated, are also more likely to take up the credit.

The Role of Tax Preparers and Learning

We find that many firms that meet all observable eligibility criteria do not claim the credit. Moreover, even among tax preparers with eligible clients, most do not file for the credit at all. Awareness of the credit appears to be one key bottleneck.

We document a form of “preparer learning”: When a tax preparer claims the credit for one client, the likelihood increases that their other clients will claim the credit. This pattern suggests that preparer-level experience helps overcome informational frictions. However, learning diffusion is slow. In 2023, only 13 percent of eligible firms used a preparer who had previously filed for the credit. Most preparers had only a handful of prior eligible clients, potentially limiting the speed at which this knowledge spreads.

These findings reinforce the importance of business intermediaries in small firm decision-making and point to the persistence of salience and awareness problems in tax policy.

Limited Use Across the Full Eligibility Window

Firms are eligible to claim the startup credit for up to three years, but most claim it only once. Among those that claim the credit in year one, fewer than half do so again in year two, and the share drops further in year three.

There are several potential explanations for this pattern. Firms and preparers may not be aware that the credit can be used for multiple years. Alternatively, the administrative burden of repeated claiming may outweigh perceived benefits. In some cases, late awareness of the credit may lead to retroactive claiming for only the earliest available year. Whatever the reason, the fact that most firms that do claim the credit fail to maximize the credit duration underscores the limits of its effectiveness.

Interpreting the Results

While some firms that take the credit may have adopted a retirement plan even in its absence (“always-takers”), the low take-up overall suggests that few firms are induced to offer plans because of the tax credit. Even if we assume that all credit claimants were induced to offer a retirement benefit in response to the tax credit, a take-up rate below 6 percent would imply a modest impact on aggregate plan formation.

Instead, the evidence points to important roles for behavioral or administrative frictions, including:

• Inattention to or unawareness of the credit
• Reliance on intermediaries who themselves may lack awareness
• Procedural burdens that inhibit follow-through

This is consistent with a growing literature about the incomplete take-up of business and individual tax incentives, and the limits of informational access in shaping firm and consumer behavior.

Potential Implications

Our findings suggest that increasing the generosity of tax credits may be insufficient to substantially change employer behavior if awareness and salience remain low and procedural frictions continue to exist.

As both states and the federal government continue to explore policy tools to boost retirement savings opportunities, especially for workers in small firms, it is essential to understand not just the incentives to offer workplace benefits but also how these incentives are perceived and whether they are used by their intended beneficiaries.

2025-03

Adam Bloomfield, Ph.D., is a Non-Resident Scholar, Center for Retirement Initiatives at Georgetown University’s McCourt School of Public Policy.

Shanthi Ramnath, Ph.D., is Senior Advisor and Economic Advisor, Federal Reserve Bank of Chicago.

Sita Slavov, Ph.D., is a Professor of Public Policy, Schar School of Policy and Government at George Mason University.