Tax season tips retirement plan sponsors might not know

Tax season tips retirement plan sponsors might not know


As a small 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 401(k) plan can help your business save on taxes. But how much and for how long?

Tax benefits for small business owners offering a 401(k) plan

It’s no secret that there are certain tax advantages for offering a 401(k) retirement savings plan to your employees, but many small business owners aren’t aware of what the exact benefits are. For starters, your company can receive a three-year tax credit if you’re establishing a plan for the first time. The credit covers 50 percent of the plan’s startup cost—up to $500 per year. This tax credit is designed to offset setup and administrative fees of the plan, which helps keep employer costs to a minimum.

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.

And since business owners are also employees, 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 401(k) plan yourself, and you’ll get all the personal benefits of tax-free contributions, tax-deferred account growth, and higher contribution limits than offered by other individual retirement savings vehicles. Just make sure to be aware of contribution limits for highly compensated employees (HCE), as you’ll be considered an HCE as the business owner.

Offering a 401(k) plan to employees makes a lot of sense as a small 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 the most important reasons for offering a company-sponsored retirement savings plan—the tax benefits are just the icing on the cake.


John Nahacky, JD, CPC - Compliance Manager - jenahacky@pai.com – 800.236.7400 Ext. 3250

John is the subject matter expert on 401(k) rules, regulations, compliance, plan design, and year end requirements.