The Small Nonprofit Retirement Security Act of 2025 amends the Internal Revenue Code to make two existing retirement incentives available to tax-exempt eligible small employers (501(c) organizations). Specifically, the startup-cost credit (Section 45E) and the retirement auto-enrollment credit (Section 45T) are extended to nonprofits, with credits treated as payroll-tax credits under section 3111(g) rather than as traditional income-tax credits.
The bill also creates a payroll-credit framework for tax-exempt employers and defines key terms, including what counts as a tax-exempt eligible employer and what constitutes payroll tax.
To offset revenue effects, the bill provides funding transfers to the Social Security and Disability trust funds that mirror the reductions in revenue caused by the amendments. It also establishes the effective date as applying to taxable years beginning after December 31, 2024.
The overall design is to lower the upfront cost of offering retirement plans for nonprofits and to encourage automatic enrollment, while balancing budgetary implications through offset mechanisms.
At a Glance
What It Does
The bill extends startup-cost and auto-enrollment retirement credits to tax-exempt eligible small employers (501(c) organizations). It makes the credits available as payroll tax credits and ties their magnitude to the employer’s payroll tax paid in the relevant calendar year.
Who It Affects
Tax-exempt eligible employers with payroll responsibilities—primarily small nonprofit organizations—plus their payroll administrators and accountants who manage retirement-plan credits and payroll-tax reporting.
Why It Matters
Nonprofits can more readily adopt retirement plans and automatic enrollment, improving employee benefits without incurring fully funded upfront costs. The measure also tests how tax credits for nonprofits interact with payroll-tax mechanisms and federal trust-fund financing.
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What This Bill Actually Does
The bill amends the tax code to extend two retirement-savings incentives to tax-exempt eligible employers (501(c) organizations). First, the credit for small employer pension plan startup costs (the Section 45E startup-cost credit) can now be claimed by eligible nonprofits.
The credit is treated as a payroll tax credit under Section 3111(g) and is the lesser of the existing startup-cost credit (as calculated without the new nonprofit provision) or the employer’s payroll tax paid during the calendar year in which the taxable year begins.
Second, the retirement auto-enrollment credit (the Section 45T credit) is similarly extended to tax-exempt eligible employers. The credit is also treated as a payroll tax credit under Section 3111(g) and is capped by the payroll tax paid in the applicable year, with definitions mirroring those used for the startup-cost credit.
In both cases, a tax-exempt eligible employer is defined as a nonprofit described in section 501(c) and exempt from tax under section 501(a).The bill adds a payroll credit under Section 3111(g) for these nonprofits, allowing quarterly credits against payroll tax equal to the amount determined under the applicable nonprofit credit (45E(g) or 45T(d)(1)), subject to a cap tied to wages and with a mechanism to ensure the credit does not exceed tax owed on wages. The amendments also authorize transfers of funds to the Old-Age, Survivors, and Disability Insurance (OASDI) and Disability Insurance (DI) trust funds to reproduce the revenue offsets that would have occurred absent the amendments.
The effective date targets taxable years beginning after December 31, 2024.
The Five Things You Need to Know
The act extends the startup-cost credit under 45E to tax-exempt eligible employers (501(c) organizations).
The auto-enrollment credit under 45T is likewise extended to tax-exempt eligible employers.
Both nonprofit credits are treated as payroll tax credits under 3111(g) and are capped by the employer’s payroll tax paid in the calendar year.
A new subsection 3111(g) creates a quarterly nonprofit payroll credit equal to the applicable nonprofit credit amount, limited by tax owed on wages.
The bill funds the revenue impact with transfers to the OASDI and DI trust funds to replicate lost revenues.
Section-by-Section Breakdown
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Startup-cost credit extended to tax-exempt eligible employers
Section 45E is amended to add a new subsection (g) that makes the startup-cost credit available to tax-exempt eligible employers (501(c) entities). The credit is the lesser of the existing startup-cost credit (as calculated without regard to this subsection) or the employer’s payroll tax paid in the calendar year in which the taxable year begins. The definition of tax-exempt eligible employer is anchored to 501(c) status and ongoing exemption from tax under 501(a). This provision converts the startup credit into a payroll tax credit for nonprofits and ties it to actual payroll activity.
Auto-enrollment credit extended to tax-exempt eligible employers
Section 45T is amended to add a new subsection (d) for tax-exempt eligible employers. The credit is treated as a payroll tax credit under section 3111(g) and is limited to the lesser of the existing auto-enrollment credit (as calculated without regard to this subsection) or the payroll tax paid during the calendar year in which the taxable year begins. This mirrors the nonprofit startup-cost treatment and reinforces the payroll-tax mechanics for nonprofits offering auto-enrollment retirement plans.
Payroll credit for certain plans of tax-exempt employers
Section 3111 is amended to add subsection (g), establishing a credit against the payroll tax for tax-exempt eligible employers to which 45E(g) or 45T(d) applies. The credit equals the amount determined under those subsections, with a cap tied to the total wages subject to payroll tax. The definitions clarify that the relevant employer is a 501(c) organization and that the payroll tax reference follows the rule for determining payroll tax payments, including a special rule analogous to 24(d)(2)(C).
Effective date
The amendments apply to taxable years beginning after December 31, 2024. This retroactive effectiveness is intended to bring nonprofit credits into play for the current tax calendar while preserving the statutory structure of the payroll-tax framework.
Transfers to trust funds to offset revenue effects
The bill appropriates amounts to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund to offset the reduced receipts from the nonprofit credits. Transfers are designed to replicate, to the extent possible, the transfers that would have occurred had these amendments not been enacted, ensuring budget neutrality in the near term while extending nonprofit retirement incentives.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- 501(c) nonprofit organizations with payroll—now able to claim startup-cost and auto-enrollment credits against payroll tax, reducing implementation costs for retirement plans.
- Nonprofit HR and payroll teams, who gain a clearer, tax-advantaged path to offering and maintaining employee retirement plans.
- Nonprofit CFOs and finance teams, who can leverage credits to improve retirement benefits while managing cash flow and payroll tax liabilities.
- Employees of small nonprofits, who gain access to retirement-savings mechanisms such as auto-enrollment plans facilitated by nonprofit employers.
Who Bears the Cost
- The federal government, via reduced payroll-tax receipts resulting from the credits.
- The general fund, as offsets are provided to support refundability offsets to trust funds, potentially affecting net federal revenues.
- The Social Security and Disability Insurance trust funds in the sense that the amendments alter the timing and magnitude of payroll-tax inflows, albeit offset by targeted transfers.
- Taxpayers generally, who bear the budgetary implications of revenue reductions that accompany expanded credits.
Key Issues
The Core Tension
Extending payroll-tax-based retirement credits to nonprofits improves employee benefits but reduces federal payroll-tax receipts, raising concerns about budget neutrality and long-term trust-fund health while seeking to boost nonprofit retirement security.
The expansion of nonprofit retirement credits relies on payroll-tax-based subsidies, which introduces complexity in measurement and compliance for nonprofits with varying payroll structures. Definitional alignment—specifically what constitutes a 'tax-exempt eligible employer' and the application of the 'payroll tax' rule similar to 24(d)(2)(C)—may require administrative guidance to avoid misapplication.
While the bill uses transfers to trust funds to offset revenue reductions, the longer-term budgetary impact remains uncertain, particularly if nonprofit opt-ins grow faster than anticipated.
Implementation will hinge on accurate calculation of quarterly credits under 3111(g) and the interaction between 45E(g)/45T(d) credits and existing employer credits for nonprofits. There is a potential for interaction with state-level nonprofit retirement initiatives and with nonprofit payroll vendors to ensure correct reporting and timing of credits.
Finally, because the effective date is after 2024, questions may arise about transitional guidance for employers whose taxable years straddle the date of enactment.
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