Nonprofits Get Payroll Tax Break to Offer Retirement Plans Starting in 2025

The Small Nonprofit Retirement Security Act of 2025 aims to close a major gap in how smaller tax-exempt organizations handle employee retirement. Currently, federal law offers tax credits to small businesses to help cover the costs of setting up a retirement plan (like a 401k) and for automatically enrolling employees. The problem is that most non-profits don't pay income tax, so those credits—which reduce income tax liability—were basically useless to them. This bill fixes that by allowing qualifying non-profits to apply the value of those retirement startup and auto-enrollment credits directly against their federal payroll tax liability (specifically, the employer portion of Social Security tax under Section 3111(a)).

Leveling the Retirement Playing Field

This change is huge for the non-profit sector, which employs millions of people, often at small organizations like local food banks, community centers, or small arts organizations. Before this bill, a small for-profit business might get a credit covering up to 50% of their plan startup costs (up to $5,000 annually for three years), making offering a retirement plan much more feasible. This legislation extends that same financial incentive to small non-profits starting in 2025. This means that if a small non-profit spends $4,000 setting up a retirement plan, they can now use the credit to reduce the amount of payroll tax they owe the government, making the net cost of offering a plan significantly lower.

The Payroll Tax Offset: How It Works

Instead of a tax refund, the credit becomes an offset against the payroll tax. Think of it like a coupon you can only use at one specific store (the IRS) to pay for one specific bill (your employer's Social Security tax contribution). The bill is very clear: the amount of the credit you claim cannot exceed the total payroll tax you owe for that year. For most organizations, this is a straightforward benefit, but it does mean that a tiny non-profit with very few employees and a low payroll tax burden might not be able to use the full credit amount in a single year. They’d have to carry the benefit over, which is a minor administrative limitation, but the core benefit remains.

Securing the Trust Fund

Because these credits reduce the amount of payroll tax revenue flowing into the Social Security Trust Funds, the bill includes a critical safeguard. Section 2 mandates that the Treasury Department must transfer money from the general fund—the government’s main checking account—into the Social Security Trust Funds to make up for any revenue loss caused by these new credits. This ensures that while we’re making it easier for non-profits to offer retirement plans, the financial stability of Social Security itself is not negatively impacted. It’s a clean accounting measure designed to keep the Social Security system whole while providing this specific financial break to non-profits.