The bill amends the Internal Revenue Code to make two existing retirement credits available to tax-exempt eligible small employers. Specifically, it extends the startup-cost credit under Section 45E and the retirement auto-enrollment credit under Section 45T to 501(c) organizations that are otherwise eligible for the credits.
In both cases, the credits are treated as payroll tax credits under Section 3111(g) and are capped at the lesser of the credit amount or the employer’s payroll tax paid in the calendar year. The act also includes funding offsets to protect Trust Funds.
At a Glance
What It Does
Adds new sub-sections to 45E and 45T to allow tax-exempt eligible employers to claim startup-cost and auto-enrollment credits. These credits are treated as payroll tax credits under 3111(g) and are capped by the calendar year’s payroll tax paid.
Who It Affects
Tax-exempt eligible employers described in 501(c) and paying payroll tax (i.e., nonprofit employers with employees).
Why It Matters
Expands retirement-savings incentives to nonprofits, potentially increasing plan adoption and auto-enrollment for nonprofit employees while tying credits to payroll tax remittances.
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What This Bill Actually Does
The bill makes two existing retirement credits available to tax-exempt eligible employers—nonprofits that pay payroll tax and fit within the 501(c) framework. It adds new rules so that the startup-cost credit (Section 45E(g)) and the auto-enrollment credit (Section 45T(d)) can be claimed by these employers, but only to the extent they are treated as payroll tax credits under Section 3111(g).
The credit equals the lesser of the existing credit amount or the employer’s payroll tax paid during the calendar year. Definitions ensure that “tax-exempt eligible employer” means a 501(c) organization exempt under 501(a), and “payroll tax” is the tax under Section 3111(a), with a special rule mirroring Section 24(d)(2)(C) for calculating it.
The amendments apply to taxable years beginning after December 31, 2024, and the bill provides appropriations transfers to the Social Security and Disability Insurance Trust Funds to offset the revenue reductions, aiming to replicate the transfers that would have occurred absent the changes.
The Five Things You Need to Know
The startup-cost credit under 45E is extended to tax-exempt eligible employers (501(c)).
The auto-enrollment credit under 45T is extended to tax-exempt eligible employers (501(c)).
Credits for nonprofits are treated as payroll tax credits under 3111(g).
The annual credit is capped at the lesser of the existing credit or payroll tax paid.
Revenue reductions are offset by transfers to the Social Security and Disability Trust Funds.
Section-by-Section Breakdown
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Credit for Small Employer Pension Plan Startup Costs Made Available to Tax-Exempt Eligible Employers
Section 45E is amended to include new subsection (g), which allows tax-exempt eligible employers (501(c) organizations) to receive the startup-cost credit. The credit is treated as a payroll tax credit under 3111(g), limited to the lesser of the traditional credit or the employer’s payroll tax paid in the calendar year. It defines tax-exempt eligible employer and payroll tax, and references a mechanism similar to the Section 24(d)(2)(C) rule for calculating payroll tax paid.
Retirement Auto-Enrollment Credit for Tax-Exempt Eligible Employers
Section 45T is amended to include new subsection (d), which allows tax-exempt eligible employers to claim the auto-enrollment credit. Like 2(a), the credit is treated as a payroll tax credit under 3111(g) and is capped at the lesser of the existing credit or payroll tax paid for the calendar year. The definitions mirror those in 2(a), ensuring consistency across credits.
Payroll Credit for Certain Plans of Tax-Exempt Employers
Section 3111 is amended to add subsection (g), creating a payroll-credit mechanism for tax-exempt eligible employers to which 45E(g) or 45T(d) applies. The credit equals the amount determined under the relevant subsection (45E(g)(1) or 45T(d)(1)) with a cap tied to wages subject to payroll tax, calculated under rules similar to Section 24(d)(2)(C). The subsection also provides definitions for “tax-exempt eligible employer” and “applicable year.”
Effective Date
The amendments apply to taxable years beginning after December 31, 2024. This provision ensures the nonprofit credits are available to qualifying employers for the 2025 tax year and beyond, aligning the nonprofit credits with the existing corporate credits.
Transfers to Trust Funds
Amounts equal to the revenue reductions from the amendments are appropriated to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund. The transfers replicate the transfers that would have occurred if the amendments had not been enacted, ensuring the funding side remains balanced to the extent possible.
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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
- Small nonprofit employers (501(c) organizations) that sponsor retirement plans and meet eligibility.
- Nonprofit employees who gain access to employer-sponsored retirement plans and auto-enrollment.
- HR/finance teams at nonprofits who will administer the credits within the payroll tax framework.
- Third-party administrators and plan sponsors serving nonprofit employers who can leverage the expanded credits.
Who Bears the Cost
- Federal Treasury faces reduced receipts due to the credits.
- Payroll tax revenues paid by covered nonprofit employers are reduced relative to baseline.
- General taxpayers bear some offset burden through funding transfers to the Social Security and Disability Insurance Trust Funds, intended to offset revenue losses.
Key Issues
The Core Tension
Balancing more robust nonprofit retirement benefits through credits against the resulting reduction in federal payroll tax receipts and the complexity of integrating nonprofit payrolls into a payroll-tax credit framework.
The bill expands retirement incentives for nonprofits, but it introduces revenue-reduction consequences that hinge on payroll tax receipts. The offset transfers to the OASDI and DI Trust Funds are designed to replicate foregone transfers, but the D.C. baseline and timing of receipts could create implementation complexity for nonprofit payroll systems.
Additionally, tying nonprofit credits to a payroll-tax-based framework may require nonprofit payroll teams to align with the 24(d)(2)(C)-style calculation for payroll tax when determining the available credit, which could raise administrative questions for smaller nonprofits with limited tax staff.
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