Five Reasons Small Business Owners Should Establish a New 401(k) Plan
- Employee Benefits
6 min. Read
Last Updated: 01/05/2023
Table of Contents
When it comes to offering benefits to employees, small businesses have traditionally been at a disadvantage as compared to large corporations. Thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the playing field is leveling out.
Owners of small businesses with less than 100 employees who start a new 401(k) plan might be eligible to claim a federal tax credit of up to $5,500 per year for the first three years of the plan, which includes a $500 per year for implementing a plan with auto-enrollment. According to Forbes.com, 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.
Under SECURE Act 2.0 that passed in December 2022, certain businesses are eligible for the employer contribution credit. This credit is generally a percentage of the amount contributed by the employer, up to $1,000 per employee. It is limited to employers with 50 or fewer employees and reduced for employers with between 51 and 100 employees
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 $22,500 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.
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 these federal tax credits that dream has become a reality. Why not get started right away and establish a 401(k) plan?