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: 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.
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.