Helping employees save for retirement is the obvious reason to start a 401(k) plan. But 401(k) plans can also help your business save money and attract and retain talent. And thanks to new tax incentives and modern technology, 401(k) plans are becoming easier and more affordable for small businesses to offer.
Thinking of offering retirement benefits for your employees? Here’s why 2020 is the year your small business should introduce a 401(k) plan.
1. Tax Credits
The cost of starting a new 401(k) plan can add up. In an effort to make them more affordable for small businesses, Congress recently passed the SECURE Act. This law increased an existing tax credit for starting a new 401(k) from a maximum of $500, to $5,000, per year for up to three years—up to $15,000 in total if eligibility requirements are met! The credit is limited to 50% of eligible startup costs required to set up a plan, administer it, and educate employees.
The SECURE Act also added a new $500 credit (per year for three years) for setting up a plan with automatic enrollment—giving employers an additional $1,500 to offset plan costs. While auto-enrollment boosts plan participation rates, it can also increase costs if your company has a match or profit share program. Employees can opt-out or unenroll from the plan at any time. Read the requirements to see if your small business is eligible for these credits.
2. Tax Deductions
While employers are not required to match employees’ 401(k) contributions, many choose to do so for their employees and their bottom line. Employer contributions are tax-deductible and are not subject to Social Security or Medicare taxes. With 401(k) matching or profit sharing, your company can save money on taxes and reward your employees’ hard work. How much your company chooses to contribute is completely up to you, but here are a few common ways employers determine their 401(k) matching plans:
- Partial match: An employer contributes a percentage of an employee’s 401(k), up to a certain limit. The most common employer match is 50 percent of employee contributions up to 6 percent of an employee’s salary.
- Full match: With a full match, or “dollar-for-dollar” match, an employer matches 100 percent of employee contributions up to a certain limit.
Some companies also choose to use profit sharing, or an annual pre-tax distribution, to contribute to employee retirement accounts. Profit sharing lets employers assess their finances at the end of a year before deciding if and how much they want to contribute to employee accounts. Like matching, there are a few options employers have when it comes to profit sharing:
- Same dollar amount method: An employer contributes the exact same dollar amount to employees regardless of age, tenure, seniority, compensation, etc.
- The comp-to-comp method: Also known as the “pro rata method,” this method distributes the profit sharing pool based on a percentage of an employee’s salary.
- New comparability method: This method allows employers to segment employees into different groups and determine contribution amounts by group. While this gives a business the flexibility to distribute funds across its workforce, the plan must also pass the IRS “general test” to prove the plan doesn’t discriminate against non-highly compensated employees.
3. Tax Acquisition and Retention
Gone are the days when employers could entice job seekers with free snacks and ping-pong tables. A 2016 Glassdoor study shows that today’s candidates are more focused on benefits that can help improve their everyday lives like medical benefits, PTO, and retirement plans. Offering a 401(k) plan at your company could help you stand out from your competition and increase the number of job applicants you receive.
Aside from helping companies attract talent, 401(k) plans can engage your existing employees by easing the financial and emotional burden that comes with saving for retirement. Just as companies’ 401(k) contributions are tax-deductible, so are employees’. Employee 401(k) contributions are pulled directly from employee paychecks and pre-tax income—lowering their taxable income while allowing them to put money towards their future.
Lastly, 401(k) plans can help you retain top performers as well. Most companies that offer matching or profit sharing also implement a vesting schedule for these funds. A vesting schedule not only helps your company minimize losses if an employee leaves your company, but also incentivizes employees to stay at your company longer while your employer contributions fully vest.
4. Easy and Affordable
Historically, 401(k) providers catered to large, wealthy corporations. Exorbitant fees and administration headaches made offering 401(k) plans impossible for many small companies.
Modern 401(k) providers, like Guideline, make 401(k) plans specifically for small businesses— covering almost all of the administrative work for one flat fee.* Coupled with the SECURE Act’s new tax incentives, the right 401(k) provider can save your business money while allowing you to help your employees plan for a better retirement.
*Full disclosure can be viewed at my.guideline.com/agreements/fees