Year-end small business tax benefits of sponsoring a 401(k) plan

Year-end small business tax benefits of sponsoring a 401(k) plan


It’s hard to believe, but the fourth quarter of 2018 has already arrived. And 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 big 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’ Christmas bonuses right at year-end 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 work in the retirement industry day-in and day-out, which means we often hear business owners talk about the reasons they don’t already offer a 401(k) plan. At the top of the list sit excuses 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, 88 percent of employees say a 401(k) is a must-have benefit and even more would think twice about taking a job that didn’t offer one [1].

Plus, tax credits are available for small businesses that are starting a plan 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 $500 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 even 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 as well as 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. Studies show that offering a 401(k) or similar retirement plan can help lower recruiting costs, increase employee productivity, and lower employee turnover [2]. And it makes total sense when you think about it; 33 percent of workers have turned down of a job due to lackluster benefits [3], 46 percent of financially-stressed employees spend three or more hours per week thinking about or dealing with financial issues while on the clock [4], and half of employees would leave their current employer for one with better benefits [5]. All things considered, offering a retirement plan now seems much more “worth it.”

But what should you look for in a provider?

Three things to look for in a 401(k) provider

Sponsoring a retirement plan can be complicated, especially when you’re asked to make decisions on things like employee eligibility requirements and vesting schedules. After all, you’re a business owner—not a financial expert. You’ll likely need a little bit of help and guidance with your plan, so you’ll want to make sure your 401(k) provider can provide the assistance and features you’re looking for.

· Fiduciary responsibilities

There’s a lot of misconception out there about who actually acts as a fiduciary to a retirement plan, but in reality, every plan sponsor is a fiduciary. And acting as a fiduciary requires a lot of responsibility—so much so that it’s probably outside the average business owner’s wheelhouse. Luckily, you don’t have to navigate those murky 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 care of investment selection monitoring, taking that highly-regulated duty off your shoulders.

· 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.

Cue the confusion.

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. Again, your plan provider should be able to help—this time by justifying 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 have a lot on their plate and often wear many hats in one day, which means they 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 escalation make sure employees who want to save for their future can do so without having to go out of their way to get enrolled and start actively saving.

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.

With year-end just around the corner, now is the time to jump on board the 401(k) bandwagon. Not only can you save on taxes, but your employees and prospective employees alike will surely appreciate the gesture and may help your business save money in other indirect ways.

To learn more about starting a 401(k) plan for your business before year-end arrives, contact a member of our team today: 800.236.7400, option 1.