What are the Tax Advantages of Sponsoring a Retirement Plan?

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As a business owner, offering a company-sponsored 401(k) plan that your staff can contribute to kills two hypothetical birds with one stone; you're offering a high-value employee benefit that will help attract and retain talent and you're keeping business expenses relatively low. Plus, as you're probably already aware, implementing a company-sponsored retirement plan can help your business save on taxes. But how much, and for how long?

Do companies get tax breaks for offering a retirement plan?

It’s no secret that there are certain tax advantages for offering a 401(k) or similar retirement savings plan to employees, but many business owners aren’t aware of what the exact benefits are. For starters, small businesses that are establishing a 401(k) for the first time can receive a three-year tax credit. The credit covers 50 to 100 percent (depending on the size of the employer) of the plan’s startup cost—up to $5,000 per year.* This tax credit is designed to offset setup and administrative fees of the plan, which helps keep employer costs to a minimum.

Related: Year-End Tax Benefits of Offering a Small Business 401(k)

Many employers also offer a company match for employee contributions; for example, you may offer to match 50 percent of an employee's contributions up to six percent of their salary. But did you know that this common benefit also comes with tax incentives? Employers who make contributions to the plan on behalf of employees can deduct the contributions on the company’s federal income tax return, furthering tax benefits of the plan. A start-up may also be eligible for a tax credit on the contribution for employees who make $100,000 or less in FICA wages for the year for the first six years. Additionally, there are tax credits available for the first three years an employer includes an auto enrollment feature on their plan.

And since business owners are also employees and can participate in the plan as well, don’t forget that you’re opening the door to prepare for your own upcoming retirement. You’ll be able to also take advantage of the company’s retirement plan yourself, and you’ll get the personal benefits of tax-free contributions and tax-deferred account growth.

Offering a retirement plan to employees makes a lot of sense as a business owner; you’re telling employees that you’re invested in their future, you’re enhancing your benefits package to attract top talent, and you’re increasing your own retirement readiness as you contribute to the plan. These are some of the most important reasons for offering a company-sponsored retirement savings plan—the tax benefits are just the icing on the cake.

You might also be interested in: How to Evaluate a 401(k) Provider

At Ascensus, our main goal is helping retirement savers get there—however they choose to save. If you have any questions about the retirement plan options available through Ascensus or want to learn more about which may be the best fit for your business, give us a call at 800-345-6363.

*Requirements for this credit include: - Plan must have less than 100 employees who received at least $5,000 in compensation in the previous calendar year - At least one non-highly compensated employee must be participating - Employer must not have sponsored a qualified plan in the three years before the first year elgibile for the credit

Ascensus recommends consulting with your accountant to discuss eligible tax credits available to your business. Credits outlined not applicable to Individual(k) plans.