Employer Tax Benefits of a 401k

Employer Tax Benefits of a 401k

The 401k plan is among the most popular employer-sponsored retirement benefits plans in the United States. Data indicates that there were approximately 600,000 401k plans in 2020, with about 60 million active contributors.  In this article, we’ll discuss employer tax benefits of a 401k plan.

While the majority of employees are eligible to participate in a 401k plan, many employers are still hesitant to offer it. According to a 2020 J.P. Morgan survey, less than 50% of employers offer a retirement savings plan. Out of those who do not offer an employer-sponsored retirement savings plan, 63% said that they had no future plans of offering a 401k match program. 

Costs of a 401k

The most cited factor that impedes employers from offering a 401k or any other employee-sponsored retirement savings plan is the perception of cost. Generally, there are three basic costs of a 401k, which include the start up costs, administration costs, and the matching costs. 

The majority of the costs tend to be associated with the match.  However, many hesitate to even look into a 401k because of the perceived costs of the 401k.

Some of these costs can be offset with tax breaks.

employer tax benefits of a 401k

Employer Tax Benefits of a 401k:  The SECURE Act

Although sponsoring the 401k plan may seem too complex and cost-prohibitive for employers to consider, those who offer it clearly see the benefits, not just for their employees, but for their businesses as well. 

Since the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in 2019, employers have more than one reason to jump on board with this highly valued benefit offering.

In case you’re wondering what the SECURE Act is, it is a legislation that changes retirement plan design, administration, and compliance requirements. 

Among the provisions to persuade employers to offer the 401k plan, the SECURE act guarantees several benefits, including:

1. Tax Credits of Plan Startup Costs

The SECURE Act makes setting up a 401k plan more affordable for employers, especially those running small businesses. Employers may be able to claim a tax credit up to $5,000 to cater for setting up the plan.  Employers are entitled to the tax credit for the first three years of the plan.

To qualify for the retirement startup costs tax credit, a small business must have 100 or fewer employees who receive at least $5,000 in compensation in the previous year. The small business must also have at least one 401k plan participant who’s not a non-highly compensated employee. 

2. Tax Credits of Administration Costs

After setting up a 401k plan, an employer incurs administrative costs of maintaining the plan. The day-to-day operation of a 401k plan involves costs for basic and essential administrative services, like plan recordkeeping, accounting, trustee, and legal services. 

With the SECURE Act in place, small business employers who meet eligibility requirements can claim tax credits of administrative costs. The tax credit is available to cover 50% of the administrative costs of implementing the 401k plan.

    3. Tax Benefits of Contributions

    One of the frequently asked questions about retirement plans is: are 401k contributions tax deductible for employer? The answer is yes. Since 401k plan contributions reduce an employer’s taxable income, employers can deduct contributions on the company’s federal income tax return to the point that the contributions don’t go beyond certain limitations. 

    The taxes for the year should be reduced by the contribution amount multiplied by the marginal tax rate, as per the employer’s tax bracket. The more income, and thus the tax bracket, the more the tax savings from contributing to the 401k plan. 

    4. Tax Credits of Establishing Automatic Enrollment Plans

    In addition to the tax credit for startup costs, the SECURE Act proposed a new tax credit known as the Small Employer Automatic Enrollment Tax Credit. Eligible employers that add an automatic-enrollment feature to their retirement plan can claim a tax credit of $500 per year for a three-year taxable period, starting with the first taxable year the employer adds the auto-enrollment feature. 

    Like other tax credits, the Small Employer Automatic Enrollment Tax Credit is pretty much for small businesses for a very small action. The automatic enrolment tax credit is also available to small business employers that convert an existing retirement plan to an automatic enrollment design.

     

    employer tax benefits of a 401k

    mployer Non-Tax Benefits of a 401k

    In addition to the above tax benefits of a 401k, employers get to enjoy other benefits. For instance, offering a 401k helps with employee acquisition, boosts employee satisfaction and increases employee retention.

    According to research by PR Newswire, four in five employees prefer new or additional employee benefits or perks to more money in their pay check, citing that benefits provide better experiences and increase satisfaction. Defined contribution plans, such as the 401k are ranked among the top benefits that employees would prefer over a pay rise.  

    Get Professional Help in Implementing 401k Employer Tax Benefits 

    The overall goal of the SECURE Act is to simplify the 401k implementation process and offer benefits to employees. Nevertheless, it doesn’t necessarily mean that employers should try to tackle setting up a 401k plan without some form of guidance.

    Would you like to enjoy the employer tax benefits of a 401k plan but don’t know where to start? 

    Life, Inc. Retirement Services can help. We are a 401k provider dedicated to simplifying the 401k implementation process to make it as seamless and easy for employers. 

    Whether you’re a startup, solo entrepreneur, corporation, or financial advisor, we will offer a customized solution that is right for your business.

     

    If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

    Simple IRA vs. 401k | The Pitfalls of a Simple IRA

    Simple IRA vs. 401k | The Pitfalls of a Simple IRA

    Choosing between a Simple IRA vs. a 401k can be overwhelming. After all, the plan that you choose will determine the trajectory of your small business going forward.

    Among other things, your decision for a retirement plan will determine your:

    • Own retirement prospects
    • Employees retirement prospects
    • Employee retention and turnover rates
    • The desirability of your business to talent

    When faced with this dilemma, many small business owners have a natural inclination to choose a Simple IRA. Well, why not? It requires fewer documents, is easy to implement, and even has “simple” in its name.

    However, there’s more to retirement plans than meets the eye, and this blog will help demystify the Simple IRA plan by comparing and contrasting it to its peer, the 401(k).

    simple ira vs. 401k

    Simple IRA vs. 401k

    Both the Simple IRA and 401(k) are retirement funds.  With a retirement fund, your employees contribute a percentage of their salaries called an elective deferral, which is then invested into a long-term retirement fund.

    Both the 401(k) and the Simple IRA allow the employer to participate by making contributions to the employee’s retirement funds.

    The similarities don’t end here. The Simple IRA and the 401(k) share the same tax benefits, which are:

    • Contributions are exempt from income taxes
    • The growth/ capital gains in your retirement funds are exempt from taxes
    • The government only taxes your funds at withdrawal 

    Simple IRA

    A Simple IRA is an acronym for Savings Investment Match Plan for Employees. Its name gives it away as one of the easiest paths to a retirement plan for your employees.

    The government designed Simple IRAs with small businesses in mind. That said, to benefit from this plan, your business should have 100 or fewer employees. As an employer in a Simple IRA, your contributions are either:

    • A non-elective contribution of at least 2% of the remuneration for all employees earning above $5,000
    • A matching contribution of 100% of the first 3% of an employees contribution

    Some of the benefits of using a Simple IRA for your business include:

    • Easy to set up and deploy
    • Relatively inexpensive
    • Has a low maintenance burden

    401(k)

    A traditional 401(k) is another popular retirement plan that your small business can offer your employees in place of a Simple IRA.

    By choosing this retirement plan, your business sacrifices simplicity for flexibility, more options, and customization.

    Any business, regardless of its size, can join the 401(k) retirement plan and start building the future of its employees.

     

    What Makes A 401(k) Better Than A Simple IRA

    Your decision will eventually come down to the unique circumstances of your business and your preferences as an employer.

     However, there are several pitfalls that should make a Simple IRA a less desirable option, even for a small business. 

    These pitfalls include:

    Lower Contribution Limits

    By choosing a Simple IRA over a 401(k), you automatically forgo the higher contribution limits that comes with the latter.

    A Simple IRA limits your contribution in three ways:

    • You get a yearly maximum of $13,500 which is $6,000 less than you would get in a 401(k) plan
    • Both you and your employees above 50 get a maximum of $16, 500 which is $9, 500 short of what you would get in a 401(k)
    • Your catch-up contributions at $3,000, are half what a 401(k) offers.

    With an average rate of 8% a year, a small difference of $ 6,000 each year will result in a massive $180,000 difference in 3 decades.

    Lack Of A Profit-sharing Option

    By opting for a Simple IRA, you miss out on the profit-sharing option a 401(k) offers. This option allows your business to write off taxes on the matching contributions you make to your employee’s retirement accounts.

    Moreover, it allows you to make more generous contributions to yourself or, better yet, performing employees as a motivation.

    Lack Of Flexibility In Contribution

    A Simple IRA gives you little room when it comes to matching your employee’s contribution. First, unlike a 401(k), it is mandatory that you match your employee’s contribution.

    In a 401(k), however, you get to choose whether you want to match your employee’s contribution. Moreover, you have the freedom of matching from 0-25% of your employee’s contribution.

     If that’s not enough, you don’t have to match your contributions dollar-for-dollar as you have to in a Simple IRA.

     

    How To Grow The Family Business

    Vesting 

    Not only does a Simple IRA mandate that you make contributions, but it also makes 100% of all contributions you make vested.

    Vesting means that your employee can withdraw your contributions at any time without needing prior permission.

    A non-vested retirement fund like a 401(k), on the other hand, comes with its fair share of benefits. For example, by mandating that your employees can’t withdraw your matching contributions until the 2nd year, you can retain employees and reduce turnover.

    Less Control Over Who Joins

    In a Simple IRA, you have extremely limited control over the employees who can enroll in your firm’s retirement plan.

    The law strictly mandates that all employees who have earned $5,000 in any two prior years and are expected to earn the same in the current year should be in your Simple IRA.

    In a 401(k), however, you have more control over who joins. The employees who join your 401(k) must be:

    • 21 years old and above
    • Have more than a year’s experience

    The Loan Option

    A Simple IRA plan significantly inconveniences you or your employees early or premature access to your retirement savings. It has no loan option and fines all early withdrawals at 25%.

    However, with a 401(k), your employees can tap into their retirement savings during emergencies through a loan.

    No Roth Option

    The most significant deal-breaker for Simple IRA accounts is the lack of a Roth Option. Like you saw above, retirement plans are exempt from taxes right until the point of withdrawal.

    Well, the Roth Option offers a way around this eventual tax. With this in your 401(k) plan, your employees make after-tax contributions to a Roth account, and then have their eventual withdrawal tax free.

    Every business, just as every retirement plan, is unique.  When determining a Simple IRA vs. a 401k, you’ll need to take all aspects into consideration.

    Taking the time to do research on which retirement plan is key to a successful benefits program and environment for your employees.

     

    If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

    The “New” Work Environment: How to Attract Employees After COVID-19

    The “New” Work Environment: How to Attract Employees After COVID-19

    No one outside the scientific community may have seen the coming of the COVID-19 pandemic. But come it did, and with it came significant shifts in various aspects of our life, including changes in the labor market. 

    The last thing that employers would have thought of when working on their 2020 human resource strategy is that a pandemic would emerge and force them into laying off or furloughing employees. As such, most employers were caught off guard. Many of them were forced to reduce their employee pool to remain afloat. 

    However, things are starting to look up again. Movement restrictions have been lifted in many places. Businesses have begun seeing an upward trend in their productivity and require more employees to uphold this trend.

    But the pandemic has changed the workforce dynamics. Candidate experience is now radically different. Employers looking to attract top talent post-Covid need to ensure that what they are offering is in line with people’s needs. Incentives such as coffee and pool tables that were game-changers previously will no longer cut the chase.  Below are some pointers on how to attract the best employees after COVID-19.

    Offering hyper-competitive pay and benefits

    Let’s be honest; nobody fancies working in a place where they are paid peanuts. If you want to get the best employees, you must be willing to offer them attractive salaries and other benefits such as bonuses. 

    Recently, it seems like many businesses are adopting this tact even as they recover from the effects of COVID-19. For instance, Chipotle just raised its average hourly wage rate to $15. McDonald’s has also given its employees a raise. Employees working in restaurants owned by this burger chain will also have their salaries increased by 10%. 

    Offering employees hyper-competitive pay and benefits such as medical insurance and bonuses seems to be the way to go. You will not only be able to attract the best employees, but you’ll also retain your best employees. 

    Flexibility: Allowing employees to work virtually or in-person

    According to the Lead Data Journalist of YouGov, Matthew Smith, 57% of people who were working before the pandemic began and intend to continue being a part of the workforce say they prefer working from home even when the crisis is over. 

    This underscores the fact that virtual work is here to stay past the COVID-19 period. More people are advocating for either part-time or full-time remote working via social media platforms such as LinkedIn. 

    However, despite the increasing popularity of remote work, there are those employees who can’t wait to be back in the office. If you want to get yourself the best talent, you should be flexible to allow both virtual and in-person workers when the world regains some normalcy.

    Creating stability in the workplace

    Would you rather work in a stable or an unstable workplace environment? Most people would choose the former, and rightly so. A stable workplace ensures that employees can perform their tasks efficiently. As a consequence, their productivity increases. 

    Employers should demonstrate stability in two ways 

    Firstly, when looking to attract new employees to your firm, ensure that you showcase the stability of your business. Given the rate at which many employers have closed their doors in the last two years, it is understandable that jobseekers may be wary of the longevity of the firms they want to work with.  Be sure to demonstrate the dominance you have in your industry and that you have a sound vision for the foreseeable future. 

    Secondly, show those employees wanting to join your business that their job is secure. With the unemployment rates off the roof, the fear of a department downsizing or a business being dissolved is very real. Ensure that you give employees a sense of their jobs being available in the long term. Show the potential employees that this isn’t a quick short-term job but rather a career they can grow in. 

    Be Transparent 

    According to Tiny Pulse, transparency is the main factor that contributes to employee happiness. Whether someone is unemployed or leaving their current position to join your firm, these individuals put a lot of trust in you. 

    It is only fair that their trust is rewarded with complete transparency on your part. Don’t sugarcoat your business position. For instance, if you’ve faced some bottlenecks, you should be upfront with the potential candidates so that they know what they are getting into. Being honest will go a long way to uphold the reputation of your business. 

    Add a social place to your office setting 

    You can set a social place where employees can socialize. The post-Covid working environment will have some aspects of guidance, policies, and signposting. Create clear symbols and signs to show places that are out of bounds. For instance, you can mark places where people shouldn’t sit. 

    Apart from the social place having games, it can also have magazines, newspapers, and other reading materials to help with social work conversations, more so materials that are specific to a certain industry. 

    Think about your employees’ future

    Another way of attracting and retaining the best employees post-Covid is by thinking about their future. There are many ways you can do this. For starters, you can periodically offer them training opportunities to help them become more skilled. But more importantly, you should think of their future past their employment period. You can accomplish this by developing an employer-sponsored retirement plan for them. Ensure that your employees actively participate in these retirement contributions. 

    Make it known to them the benefits that they can accrue from these plans, such as reducing taxable income, growth of deferred tax, and getting “free” money at the end of their employment period. If you develop a lucrative employer-sponsored retirement plan, you are guaranteed to get the best employees because they know that you care about their future. 

    Your business is important to you. Your employees are equally important to you. Having happy employees will ensure that the productivity of your business increases. Use our Retirement Plan Evaluator to learn which retirement plan is best for your business and employees. 

    If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

    How To Get Your Employer To Add A 401k Plan

    How To Get Your Employer To Add A 401k Plan

    Once upon a time, many employees working at private companies depended on a traditional, defined-based pension from their employer.  These days, many are pondering how to get their employer to offer a 401k plan.

    In 1978, 401(k) plans were created as a supplement to pension plans that were offered to employees. Today, 401(k) plans are how millions of Americans save for retirement.

    Regrettably, 53 percent of small businesses do not offer a retirement savings plan. Some think that a retirement plan such as the 401(k) is too hard or too expensive to manage. Other employers believe that they do not have the time or experience to create an independently designed plan. 

    If you’re working for a company that doesn’t offer the 401(k), you are missing out on many benefits. Your employer is too. So, how do change your employer’s perspective about this highly beneficial plan and actually consider it?

    Here are some helpful tips on how to get your employer to add a 401(k) plan:

    The 401(k) Program As Retirement Vehicle  

    The 401(k) as the primary vehicle that most Americans use to save and plan for their retirement is a relatively new concept. CNBC explains that the 401(k) really got kick-started as a means of retirement planning when rule changes allowed for employees to contribute via payroll deductions: 

    The IRS issued rules that allowed employees to contribute to their 401(k) plans through salary deductions, which jump-started the widespread roll-out of 401(k) plans in the early 1980s.

    Allowing employees to add to their retirement savings via automatic deductions from their pay meant that those employees could simply set up the deduction once and then not have to put too much thought into it after that. The money would continue to be added over time, but the employee did not have to concentrate so hard on how they would contribute to the plan.

    This “set it and forget it” mentality allowed for many more employees to contribute a lot more towards their retirement. Today, new hires largely expect that most jobs will offer a 401(k) program of some kind. Even low-wage jobs tend to have some kind of offering on this front as they know that it is an enticing benefit to offer to new employees.

    One of the dangers of not starting a 401(k) plan is that the competition will scoop up all the talent from the hiring pool, but there are far more dangers than just that. 

     

    Explain the Tax Benefits to the Employer

    While the 401(k) can help employees prepare for their future, employers should also understand that it presents notable benefits to them as well. For instance, employers get to enjoy various tax benefits for contributing to 401(k) plans, including:

    • $15,000 startup costs tax credit

    The first tax benefit that your employer can receive is the startup costs tax credit. If your employer is eligible, they may be able to claim a tax credit of up to $5,000 for three years. The tax credit minimizes the amount in taxes an employer may owe on the dollar-for-dollar basis. 

    If your employer is eligible, they may claim the credit for ordinary and necessary costs to start and administer the 401(k) plan and educate all employees about the retirement plan.

    An eligible employer can also add an auto-enrollment feature to their 401(k) plan. With this feature, the employer can claim a tax credit of $500 annually for a three-year taxable period.

    • Ongoing 401(k) tax breaks

    Employers who have a 401(k) plan in place are allowed to deduct contributions on their company’s federal income tax return to the extent that the contributions don’t exceed certain limitations. For instance, the deduction should not be greater than 20 percent of total compensation paid during the year to participants in the 401(k) plan. 

    Your employer should note that total compensation includes elective deferrals, but deferrals aren’t counted against the limit. For 2021, the highest amount in compensation that can be taken into account for each employee is $290, 000. 

    Small companies are always looking for ways to cut costs and maximize profits. If you can inform your employer about the tax benefits they stand to enjoy by starting a retirement plan for their employees, the odds are that they will seriously consider adding a 401(k) plan.

     

    Know Who to Approach

    High-performing organizations understand that effective communication is a building block of successful companies. In the traditional setup, the hierarchical model of communication is the most popular organizational chart type, whereby the information flows from the boss on top, managers  below, and employees at the bottom, and vice versa. 

    If your employer has made employee communications a priority, it becomes easy for you to know who to approach whenever you have an issue. For instance, you can approach your manager or an HR representative, if your company has one. Instead of reaching out to a random company executive, it’s wise to approach someone you have already built rapport with. 

    As you explain why your company needs to add a 401(k) plan, you should keep your audience and impact in mind. The last thing you want is to come off as a whiner who doesn’t understand the costs of the retirement plan. Before having this important conversation, ensure that you are conversant with the 401(k) and how it works. 

    Be sure to present all the positive outcomes the plan could have for both the employer and the employees. If your employer is still opposed to the idea of adding a 401(k) plan, you can inquire (politely) why and seek to know how your company can make room for the plan in the future. 

    Offer to Do the Research and Legwork 

    It’s one thing to simply suggest the 401(k) plan and another to help set it in motion. After discussing the benefits of a 401(k) plan to the employer, you should express your commitment to ensuring success by taking the necessary steps to get the ball rolling. 

    If your employer lacks the time needed to compare different retirement plans, you can offer to research available 401(k) plans on their behalf. Giving an assurance that you will look into the options for your employer could be the tipping point that convinces them to jump on the 401(k) Bandwagon.  

    Send Useful Information and Tools (like our Evaluator)

    When researching about 401(k) plans, you’re likely to come across valuable information about 401(k) plan administrators. These are service providers who ensure that retirement plans follow the rules and help employees save for their retirements. They work with legal documents, carry out tests and analysis, and monitor retirement plan operations.  

    Life, Inc. Retirement Services is one of the 401(k) administrators that offer useful information and tools that your employer can use. We provide comprehensive and customized retirement solutions to corporations and companies of all sizes. To help your employer learn which retirement plan is right for the company, you can advise them to use our Evaluator

     

    If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

    The Pitfalls To NOT Having A 401k Offering

    The Pitfalls To NOT Having A 401k Offering

    In January 2021 it seemed that everyone you ran into on the street was discussing the latest developments in the stock market. The experience was rather jarring for some.

    There has always been a class of people that meddles in the stock market, but it seemed that interest in the market was at all-time highs. This was due to the stock market itself hitting some all-time highs, as well as some individual stock names being pushed to prices that people could not have fathomed, were possible in the past.

    Stocks such as GameStop captured the public’s attention after a group of Internet posters from Reddit decided to drive the price up to unbelievable highs. This ginned up the public to pay more attention than ever to what was going on. 

    All of this activity has been very exciting, but it is not the norm in the stock market. The reality is that fortunes in the market tend to be built up slowly over time. Some lucky investors were able to see their money increase tenfold or more in a very brief period of time with the GameStop mania, but there were plenty of bag holders who have lost a significant amount of money in the volatile moves in this stock as well.

    Most people are much happier to take on less risk and build their wealth more slowly over time. Thus, the 401(k) remains a great vehicle for retirement savings. 

    The 401(k) Program As Retirement Vehicle  

    The 401(k) as the primary vehicle that most Americans use to save and plan for their retirement is a relatively new concept. CNBC explains that the 401(k) really got kick-started as a means of retirement planning when rule changes allowed for employees to contribute via payroll deductions: 

    The IRS issued rules that allowed employees to contribute to their 401(k) plans through salary deductions, which jump-started the widespread roll-out of 401(k) plans in the early 1980s.

    Allowing employees to add to their retirement savings via automatic deductions from their pay meant that those employees could simply set up the deduction once and then not have to put too much thought into it after that. The money would continue to be added over time, but the employee did not have to concentrate so hard on how they would contribute to the plan.

    This “set it and forget it” mentality allowed for many more employees to contribute a lot more towards their retirement. Today, new hires largely expect that most jobs will offer a 401(k) program of some kind. Even low-wage jobs tend to have some kind of offering on this front as they know that it is an enticing benefit to offer to new employees. One of the dangers of not starting a 401(k) plan is that the competition will scoop up all the talent from the hiring pool, but there are far more dangers than just that. 

    The Pitfalls of NOT Having a 401k Plan

    There is simply no getting around the fact that not having a 401(k) plan offering in today’s world is unacceptable. There are a variety of reasons why all businesses should be wary of not having a 401(k) plan. A few of these are: 

    • High Employee Turnover 
    • Lower Job Satisfaction Among Employees 
    • Decreased Growth Due To Staffing Issues 

    All of these are troubling concerns that could unnecessarily hamper a company’s goals and ambitions. Not everyone realizes just how much a seemingly simple employee benefit can impact overall results. 

    People tend to move around from job to job frequently these days, but one of the known factors for helping to keep people in place for longer periods of time is to offer benefits. Workforce.com explains how benefits seem to matter to an even greater degree to the millennial generation: 

    Four in five employees indicate they want benefits and perks more than a pay raise, and a 401(k) ranks in the top five requested benefits, according to a recent Glassdoor survey. On top of that, when it comes to millennials, benefits are particularly appealing – 90 percent of employees 18 to 34 years old say they would prefer benefits over pay.

    Benefits provide a certain peace of mind that additional pay simply cannot cover. Besides that, there are often incentives to invest in a 401(k) such as a matching bonus from the employer that make this benefit more valuable than a small raise is.

    Those who are secure in the benefits that they receive from their employer can begin to plan their life out in a more long-term fashion, and that is worth a lot when it comes to employee retention. 

    The Value Of Educating Employees About Retirement 

    All companies should consider taking extra time to educate their employees both about the options that they have to invest in their 401(k) and the importance of doing so.

    The compound interest and capital gains that an employee can make over time are incredible, but it is vital that they begin the process as soon as possible. They should also be notified of any matching programs available within the fund, and of the various types of investment options available to them within the 401(k). 

    Investment selection is important to long-term results in the 401(k), but the most essential thing is to simply get started. This is so important in fact that some companies have decided to make their 401(k) program an opt-out program rather than opt-in.

    This means that employees are automatically set up to send a certain percentage of their income into the fund unless they choose to opt out of the program.

    This small change massively boosts participation in the plan, and this ultimately leads to better results for the employees looking to plan for retirement. Some may resist this setup simply because they don’t like to be told what they ought to do with their pay, but they are always able to choose to not contribute to the 401(k) if they choose. 

    The 401(k) program may have once been introduced as a novelty of sorts in the past, but they are now a fully incorporated part of the work experience. There is a lot of upside to offering these retirement programs, and there are even more dangers to not offering them.

    If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

    Introducing the QACA Safe Harbor 401k

    Introducing the QACA Safe Harbor 401k

    As an employer, there are two general goals attempting to be met when starting a retirement plan.  Either to retain and recruit high quality employees, or to save money on taxes while saving for your own retirement.

    For most, the Safe Harbor 401k is an easy way to accomplish these goals simultaneously.

    It allows you to maximize your contributions while offering a robust retirement plan for your employees.

    There is one big flaw to the Safe Harbor, however.  The match is instantly vested, which means your employees could leave and take your match with them.

    Introducing the QACA Safe Harbor 401k

    QACA Safe Harbor 401k is actually two separate concepts. QACA is an acronym for Qualified Automatic Contribution Arrangement. As the title implies, the program automatically enrolls employees in a 401k plan. 

    The Standard Safe Harbor 401k, on the other hand, is essentially the 401k retirement plan with an automatic pass on the ADP, ACP, and top-heavy non-discrimination tests.

    A QACA Safe Harbor 401k, consequently, is a retirement plan into which employees are automatically enrolled. 

    It has great benefits for all parties involved – especially the employer!

    Standard Safe Harbor vs. QACA Safe Harbor 401k 

    A standard Safe Harbor 401k bears some similarities to a QACA, but there also exist some distinct differences in the number and types of requirements:

    Vesting Schedule

    As mentioned above, one downside to the standard Safe Harbor is that the employee could walk away with your match immediately after receiving it.

    The QACA is the solution to this problem.  It offers a 2 year “cliff” vesting schedule. 

    This means that the employee needs to stay with the company for 2 years before walking away from the company with your generous match.  This a great incentive to retain quality employees for a longer period of time.

    Matching Contribution 

    The standard Safe Harbor 401k plan offers employers two options for matching contributions. 

    1. The first is a basic match of 100% on the first 3% of the deferred compensation, plus a 50% match on subsequent deferrals totaling 4%. 
    2. The second option is an enhanced match of 100% on the first 4% of deferred compensation — the rule is that the enhanced match must be at least as generous as the basic match.

    The QACA Safe Harbor, on the other hand, requires a match of 100% on the first 1% of deferred compensation, followed by a subsequent 50% compensation deferrals totalling 3.5%.

    This difference also incentivizes the employee to contribute more towards the plan in order to get the match.

    Default Deferral Rate 

    While the standard SH 401k does not have deferral rate requirements, the QACA does.

    Due to the auto-enrollment, your employees will automatically be enrolled into the plan.  The minimum requirement is 3% and has a maximum of 10% for the first year of participation.

    If you have employees who don’t want to participate, they will simply need to opt-out of the plan.

    Benefits of a QACA Safe Harbor 401k

    A QACA SH 401k plan has benefits for all parties involved. Notable benefits include:

    • It bolsters participation in the retirement plan.
    • Allows the employer to maximize their contributions towards their own retirement.
    • Gives employees an incentive to stay with your company longer.
    • It protects businesses against anti-discrimination testing.
    • Employees can benefit from tax deferral.

    Another notable benefit of a QACA Safe Harbor 401k plan is that employers who implement a plan will receive an additional $500 in tax credits, alongside the $5,000 they receive for the first three years by implementing a plan. 

    This is guaranteed under the SECURE Act, which was enacted in late 2019.

    If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.