Year-end small business tax benefits of sponsoring a 401(k) plan
As year-end approaches, many business owners begin scrambling to find ways to maximize potential tax benefits for the year. Perhaps your financial advisor suggested saving any expensive company purchases for the end of the year in a last-ditch effort to lower your profit margins and drop your business into a lower tax bracket. Or maybe you instead decided to ramp up your employees’ year-end holiday bonuses to lower your tax rate. But if you’re looking for the best way to maximize your business’s tax benefits for the year—while also making a tangible difference in your employees’ financial future—starting a 401(k) or similar retirement plan should be front and center in your mind.
What are the tax benefits of offering a 401(k) plan to employees?
We often hear business owners talk about the reasons they don’t already offer a 401(k) plan. At the top of the list are reasons like “it’s too expensive” and “my employees aren’t interested,” but in reality, affordable options are available for businesses of all sizes and most employees are interested. In fact, many employees say a retirement plan offering is a must-have benefit and would think twice about taking a job that didn’t offer one.
Plus, small businesses that are starting a plan can receive tax credits to help offset costs associated with the plan. If you start a 401(k) plan for the first time or haven’t maintained any type of retirement plan for the last three years, your business may be eligible to receive a tax credit to cover 50 percent of the startup costs—up to $5,000 per year—for the first three years you sponsor the plan*. The credit is designed to help cover setup and administrative fees—making offering a plan that much more affordable.
And the tax benefits don’t end there. Many small business owners are surprised to learn that they can deduct employer contributions to the plan, up to 25 percent of total participant compensation, when filing their business taxes. The deduction is allowed for both matching contributions and profit sharing options, which again can help small business owners save at year-end come tax time.
Offering a 401(k) plan can also provide several indirect financial benefits that business owners may not think about at first glance. Offering a 401(k) or similar retirement plan can help lower recruiting costs, increase employee productivity, and lower employee turnover by boosting employee engagement and morale. But what should you look for in a provider?
Three things to look for in a 401(k) provider
There are so many positives to sponsoring a retirement plan—for your business and your employees. It also comes with significant obligations and requirements. You’re a business owner, not a financial expert, so you’ll likely need a little bit of help and guidance with your plan. Make sure your 401(k) provider has the expertise, resources, and support to help ensure your plan’s success.
A fiduciary is defined as someone who acts on behalf of another person to manage assets, and is ethically bound to act in the best interest of that person. While many plan sponsor don’t consider themselves to be a fiduciary in their 401(k) plan, in reality, every plan sponsor is a fiduciary. This comes with a lot of responsibility—much of which is probably outside the average business owner’s wheelhouse. Luckily, you don’t have to navigate those waters all by yourself.
Consider hiring a service provider that includes a 3(38) investment manager to help limit your personal investment fiduciary responsibility. A 3(38) investment manager can take on investment selection monitoring, relieving you of that highly-regulated duty.
- Transparent fees
Retirement regulations require that fees charged to the plan be “reasonable,” but ERISA (the Employee Retirement Income Security Act of 1974, which is a federal tax and labor law that establishes minimum standards for the industry), doesn’t provide any specific guidance on how to ensure fees are reasonable.
Because there are no specific rules and regulations related to plan fees, it’s vitally important to be aware of the fees that are charged to your plan. Your plan provider should be able to help by disclosing any and all plan fees to ensure they are reasonable relative to the service and investment selections that are provided.
- Payroll integration and automatic features
Small business owners like you have a lot on their plates. They often wear many hats in one day, and likely don’t have time to do maintenance on a retirement plan every pay cycle or whenever a new employee comes on board. But choosing a 401(k) provider that offers payroll integration can help minimize your administrative duties and save valuable time.
Integrating your 401(k) with your current payroll provider offers an attractive bundle to business owners: a simple solution that can process and update records, handle participant contributions deducted right from the employee’s paycheck, and stay compliant with ever-changing rules and regulations. And features like automatic enrollment and automatic increase make it easy for employees to overcome inertia, start saving, and increase their contributions over time.
Providers that offer payroll integration and automatic features give you more time to focus on the things that are most important to you—running your business.
Before year-end arrives, now is the time to jump on board the 401(k) bandwagon. Starting a plan can help you save on taxes, improve employee satisfaction, and even compete more effectively for top talent.
To learn more about starting a 401(k) plan for your business before year-end arrives, contact a member of our team today: 833-893-3233, option 1.
* Requirements for this credit include:
- Has less than 100 employees
- At least one non-highly compensated employee must be participating
- Employer must not have sponsored a qualified plan in the last three years
Ascensus recommends consulting with your accountant to discuss eligible tax credits available to your business. Credits outlined not applicable to Individual(k) plans.