401(k)s are a retirement benefit for employees, but employers can also experience significant benefits by establishing a plan.
And for business owners debating whether or not to offer their employees a 401(k), it’s essential to weigh the pros and cons. But understanding the tradeoffs isn’t always straightforward. Because while many employers recognize the apparent costs and benefits that impact their bottom line, like tax credits, business deductions, and plan fees, some of the other impacts aren’t as easy to measure.
These intangible benefits of a 401(k) include improved morale, culture and retention, the ability to attract better talent, and creating a feeling of shared ownership. And while they may not be as easy to measure, weighing their impact when making your decision is essential.
Consider the following benefits:
Whether you offer them or not, retirement benefits are critically important to your employees. And as all good leaders know, if it’s essential to your employees, it’s crucial to the success of your business.
Offering a 401(k) is an effective way to attract and retain talented employees. It clearly communicates that you value your employees’ future and offers prospective candidates a tangible incentive to join the team. Not only does this make recruitment of top talent easier, but it also encourages existing staff to stay with the company for longer. In addition, a 401(k) plan demonstrates that an employer is invested in their workers, providing them with the opportunity to build financial security and get on track for retirement. This can be an incredibly attractive benefit for job-seekers and provides extra motivation for staff to stay with the organization for extended periods.
While tax write-offs or “tax deductions” aren’t as valuable as dollar-for-dollar credits, they still add value for employers.
Fortunately, all your 401(k) costs are tax-deductible as business expenses. These include:
This can be a huge benefit to employers, allowing them to lower the taxable net profit of their business.
In addition, employers who choose to participate in their retirement plan can create significant savings on their personal tax return.
For example, an employer age 50 or older can personally contribute $30,000 per year to their 401(k) account in 2023. And if they choose to contribute the full $30,000 to a Traditional 401(k) (not a Roth), then that $30,000 reduces their personal taxable income for the year. For a high-earning employer in the 32% tax bracket, that could mean a federal tax savings of $9,600 (32% x $30,000).
This can be a powerful way for employers to secure their retirement while lowering their personal tax liability.
The passage of the SECURE Act in 2019 and SECURE 2.0 in 2022 (Setting Every Community Up for Retirement Enhancement) offers small businesses different tax credits for 401(k) plans. These are valuable dollar-for-dollar credits for eligible small businesses.
The first is a credit for qualified startup costs. This credit allows small businesses to claim a tax credit for a portion of their startup costs. The startup credit covers 100% of the costs of setting up a new 401(k) plan. This is capped at $5,000 per employer, and specific rules apply, so check the IRS website for eligibility details.
The second tax credit is available for retirement plans with an automatic enrollment feature. Studies show that automatic enrollment increases employee participation, leading to better retirement savings and outcomes. So, to encourage employers to add an auto-enrollment feature to their 401(k), the tax code offers an additional $500 tax credit for each of the first three years. This credit is available to new or existing 401(k)s that add this feature.
Lastly, SECURE 2.0 offers a new credit for employer-matching contributions. This is a tax credit of up to $1,000 per employee for employer contributions in the first year of the 401(k) plan. But, the $1,000 credit does not apply to employees making more than $100,000, it phases out each year by 25%, and it only applies to businesses with less than 100 employees.
At 401GO, we provide small business 401(k) plans powered by an easy-to-use platform. Our streamlined approach allows you to get up and running in just minutes with simple and affordable pricing to fit your unique business.
Talk to us about how much a 401(k) plan could save you in taxes and recruitment costs.
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