401(k) Benefits for Employers: What Your Business Gains

What does your business have to gain by offering a 401(k) plan? These popular retirement plans can help create long-term value for your company. Here’s what a 401(k) plan can do for your business.

401(k) plans have come a long way since they were first established in the 1970s. In the past, they were often perceived as being too expensive and complex to manage for small businesses. The reality is that today’s 401(k) plans offer more choice and affordability than ever before. Now, with SECURE Act¹ tax credits, pooled employer plan designs, and automated payroll administration, businesses of any size can sponsor a 401(k) plan.

Tax Benefits for Employers

Tax savings are a big plus for businesses. The Internal Revenue Service (IRS) highlights key 401(k) tax advantages that can help reduce your company’s tax liability.

Tax Deductions for Your Business

There are typically three ways companies can save on taxes with a 401(k) plan:

• Employer contributions. Employer and profit-sharing contributions can be deducted as business expenses, subject to limits.
• Plan costs. Routine administration, recordkeeping, and employee education can be deducted as business expenses. (Please note: you cannot claim the same plan expenses as both a tax credit and a business deduction.)
• FICA savings. Employer contributions generally aren’t subject to FICA taxes (Social Security and Medicare).

Lower Taxable Wages for Your Team

Depending on the type of 401(k), contributions are made on a pre-tax or after-tax basis. In a traditional 401(k) plan, they are taken out pre-tax which can lower that year’s tax bill. Taxes are then deferred until the employee withdraws funds from the plan.

Some employers prefer Roth 401(k) plans, which use after-tax dollars with no immediate tax break, but qualified withdrawals come out 100% tax-free. In either case, savings growth is compounded, making the plan more valuable to employees over time.

Federal Tax Credits for Eligible Employers

Another way businesses can save is through federal tax credits. Congress passed the SECURE Act of 2019 and the SECURE 2.0 Act of 2022 to help more American employees save for retirement. These laws offer incentives that make it easier for small businesses to offer workplace retirement plans. These include:

SECURE Act Tax Credits. If businesses have never offered a 401(k) plan, they may be eligible for startup tax credits of up to $5,000 per year for three years, with an additional yearly credit of $500 for automatic enrollment. In some cases, these credits can cover some or all of plan startup costs for the first three years. Eligibility rules apply. To see how if you’re eligible and how much you may qualify for, use the SECURE Act tax credit estimator.

Employer Contribution Credit. If you have 50 or fewer employees, you can receive a tax credit for the matching or profit-sharing contributions you make. For the first two years, you can claim up to $1,000 for each eligible employee making less than $110,000 annually (2026 limits). The credit then drops to 75%, 50%, and 25% in years three through five. Businesses with 51 to 100 employees receive a reduced credit. Businesses with more than 100 employees are not eligible.

Use a 401(k) to Attract, Retain, and Engage Employees

Offering a 401(k) plan can attract new hires and enhance employee retention. Matching contributions also gives employees a financial reason to stay.

Recruiting New Hires

In today’s competitive labor market, 401(k) plans are a sought-after benefit. According to a 2023 Transamerica retirement survey, 82% of workers say that retirement benefits are a major factor in their decision to accept an offer from an employer.² A 401(k) plan can help make you a preferred employer with job candidates and level the playing field when competing with larger businesses.

Retention vs. Replacement

The SHRM Executive Network notes that the cost of replacing an employee is widely reported to be anywhere from 50% to 200% of their annual salary.³ Compared to the thousands of dollars it costs to recruit and train a new hire, a 401(k) plan can be a minimal investment in your people that yields a high return. This is especially true if plan costs are reduced through tax credits.

Support Employee Morale and Productivity

According to the PwC 2026 Employee Financial Wellness Survey, 59% of employees are stressed about finances.⁴ By contributing to an employee’s financial wellness and peace of mind, a 401(k) plan may ease some of that stress and improve morale.

Meet State Retirement Requirements on Your Terms

Many states now mandate businesses to offer workplace retirement plans, by law. If a nonexempt business doesn’t currently offer a plan, they can comply with state law in one of two ways. They can enroll in a state-administered retirement program, usually an auto-IRA, or choose a 401(k) plan from a qualified retirement provider. 401(k) plans offer many advantages over state auto-IRA programs:

• Eligibility for SECURE Act tax credits. State-administered programs are NOT eligible.
• More than three times higher contribution limits than a state-administered IRA.
• Employer matching contributions, which state retirement programs do NOT offer.

How do 401(k) plans compare to State IRA programs? Because of their generous contribution limits, a 401(k) plan can be a more powerful way to accumulate retirement savings than a state retirement savings program. For example, the 2026 limit is more than three times that of an IRA: $24,500 versus only $7,500.

401(k)s Can Be Easy to Manage and Afford

A common misconception about 401(k) plans is that they are expensive and time-consuming to manage. With automated administration, payroll integration, and do-it-for-you 401(k) designs like the Pooled Employer Plan (PEP), plans are easier than ever to administer and fit into your business budget.

401(k) plans offer more choice and flexibility in terms of cost. Unlike benefits with fixed premiums, a 401(k) lets employers decide whether to contribute, how much, and in what form. And you don’t have to be locked in. You can revisit those choices over time.

Choose from plan options such as:

• No Required Contribution: Start with a plan funded by employee contributions and add employer contributions later. One note: new 401(k) plans with more than 10 employees automatically enroll eligible employees, though employees can opt out.
• Contributions Tied to Performance: Make profit-sharing contributions in years the business does well, in the amount of your choice within plan terms and IRS limits.
• Simpler Testing for Owners: A safe harbor design requires employer contributions but allows businesses to skip most annual nondiscrimination tests. This can save business owners the expense and risk often associated with testing failure.

And remember, tax credits can offset some of your startup costs in the early years, giving added value to your investment.

Retirement For Business Owners: Contributing to Your Own 401(k)

Just as employees should plan for their future, so should business owners. Generally, owners can participate in a 401(k) plan and save with the same contribution limits as employees, which are much higher than with an IRA. However, for plans with no safe harbor provision, annual nondiscrimination testing may limit how much owners are allowed to contribute.

If it's time for your company to evaluate your current benefits and possibly update your offerings, conducting a benefits audit may be a logical next step.