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Five Reasons Small Business Owners Should Establish a New 401(k) Plan

Did you know that business owners with fewer than 100 employees who start a new 401(k) plan can claim a federal tax credit of up to $500 per year for the first three years? Learn five more reasons why now is the best time to start a 401(k).
Benefits of 401(k) Plan

When it comes to offering benefits to employees, small businesses have traditionally been at a disadvantage as compared to large corporations. Thanks to a recently initiated federal tax break for 401(k) plan startups, however, the playing field is leveling out.

Owners of small businesses with less than 100 employees who start a new 401(k) plan can claim a federal tax credit of up to $500 per year for the first three years of the plan. According to, annual 401(k) plan administration costs typically range from $1000 to $2000 per year, which means that the credit covers up to 50% of those costs.

Here are five more reasons why there has never been a better time to start your small business 401(k) plan.

It helps you recruit more qualified employees

The most qualified job candidates are in high demand – they typically entertain interest from several companies when searching for a new position. And when they're considering multiple job offers, they'll compare those offers based on corporate culture, growth opportunities, and benefits packages. Help your small business attract the best employees by offering a 401(k) plan with a matching employer contribution. If potential employees know that you're committed to helping them save for retirement, they'll be much more likely to accept your job offer.

It offers you additional opportunities for tax savings

If you offer a company match to employees who contribute to the 401(k) plan, all of your matching contributions (up to applicable limits) are tax deductible. Not only will you make your employees happy by helping them save for retirement, you’ll also save money on your next tax return.

It helps you retain valuable employees

At some point, nearly every valuable employee considers looking for a new career opportunity. Give your employees an extra reason to stay committed to your company by offering an additional match contribution after a vesting period. When your people know you'll reward their loyalty with additional retirement savings, they’ll be more likely to stay with you.

You can also participate

You are eligible to participate if you are an owner or an employee of the company that sponsor's the 401(k) plan. Current regulations allow plan participants to contribute up to $17,500 of their income on a pre-tax basis each year. That means that in addition to your tax savings for offering the plan and providing matching contributions, you'll receive yet another tax savings for participating in the plan. This savings can be substantial – an owner in the 25% tax bracket who made the maximum contribution would have saved $4,250 in taxes in 2012.

Under current rules, your earnings aren't taxed until you take distributions

Although you'll yield earnings on your 401(k) investment during most tax years, you won't pay taxes on that money until you withdraw it. This allows you to grow your money without annual penalties. And when you start making withdrawals after age 59½, you'll pay income taxes on your funds instead of more costly capital gains taxes.

It has long been a pipe dream for small businesses to offer a retirement savings plan that can compete with giant corporations, but thanks to recent federal tax credits that dream has become a reality. You have until October 1 to establish a small business 401(k) plan if you want to claim the tax credit in that same year. Why not get started right away?

In addition to the federal tax break for 401(k) startup plans, there are many strategic benefits of offering a 401(k) plan for smaller business. Learn more here.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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