As open enrollment approaches, you may be wondering if it’s time to add a retirement plan to your employee benefits package. Or, you might simply want to provide more information about what is currently available to your employees. While employer-sponsored retirement plans offer numerous benefits to employees, there are some serious benefits to focus on from the employer’s perspective.
When it comes to retirement plans, there are a few key things to keep in mind. Here are three key benefits for your business:
1. Take Advantage of Tax Deductions
If your company offers a 401(k) plan to employees, not only do the employees benefit from some great tax perks, but your company can reap some pretty significant tax benefits as well. In fact, there are three key tax benefits that companies get by sponsoring a retirement plan:
- Your company’s contributions are tax-deductible.
- You can (usually) deduct plan administration fees from your taxes.
- If you’re a small business owner, you could be eligible for tax credits by starting or adding auto-enrollment to a new retirement plan.
By contributing to your employees’ 401(k)s, you not only enhance their retirement savings and make your benefits more attractive, but you can also deduct your contributions from your company’s taxable income — provided they don’t exceed the IRS limit. That annual contribution limit is 25% of the compensation paid to eligible employees and doesn’t alter yearly.
Example: If you contribute $2,000 to an employee’s 401(k), neither of you will owe FICA. The employee immediately gets the full $2,000 contribution on a pre-tax basis with the potential for tax-free growth in a Traditional 401(k) until retirement. For you as the employer, your taxes would be reduced by $500 from that $2,000 contribution — making your total cost only $1,500 instead of giving a salary increase of $2,000.
2. Lower Your Tax Obligation Through Tax Credits
Thanks to the SECURE Act of 2019, employers may be able to receive a tax credit of up to $5,000, for up to three years. This can be used toward the costs of starting and maintaining a SEP, SIMPLE IRA, or qualified plan (such as a 401(k) plan).
A tax credit lowers your total taxes owed, dollar for dollar. So, if you have a $5,000 tax credit and owe $15,000 in taxes overall, the credit will reduce your tax liability by $5,000.
The SECURE Act of 2019 created two valuable three-year tax credits for businesses with fewer than 100 employees:
- For those opening a new retirement savings plan: You may be eligible for three years of annual tax credits totaling up to $15,000. These tax credits can cover 50% of the cost to establish and administer your retirement savings plan.
- For adding eligible auto enroll: If you add an eligible auto-enroll feature to your new or existing plan, you may be eligible to receive three years of annual tax credits worth $500 per year for a 3-year taxable period.
Your business may qualify to claim this credit:
● If you had 100 or fewer employees who earned at least $5,000 in compensation from you the previous year.
● At least one of your plan participants was a non-highly compensated employee (NHCE).
● To be eligible for the credit, in the three tax years before the first year you’re eligible for the credit, your employees cannot have substantially been the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.
SECURE ACT 2.0 adds additional incentives for small businesses.
- In 2023 for employers with 50 or fewer employees the start-up credit is now allowed for up to 100% of plan start-up costs instead of previous limit of 50%.
- In 2023 for employers with 50 or fewer employees will be eligible for an additional credit for employer contributions to Defined Contribution plans made during the first 4 years.
3. Win the War for Talent
If you are looking to attract top-tier talent in today’s ultra-competitive employment market, then offering an employer-sponsored retirement plan is a must.
Company-sponsored plans are typically a great way to remain competitive in the war for talent and promote employee retention. Employees often have more control over investment decisions with these types of plans, as well as a wider range of options at different levels of risk and potential savings.
Employers can contribute to their employees’ savings by matching contributions up to a set amount. Further, employers that offer this benefit also get tax deductions on the contributions they make, which are capped at IRS limits.
The Bottom Line
Employer-sponsored retirement plans are a great way to help your employees save for retirement and unlock significant benefits for your company.
Contributing to your employee’s plans can reduce your taxable income, decreasing how much of your income is subject to taxes.
Taking advantage of these plans can unlock multiple tax credits for your company, giving you a dollar-for-dollar reduction of your tax liability.
And finally, these plans are a significant piece of the puzzle for attracting new talent to your company while helping you retain your current talent pool.
If you are looking to learn about unique ways that business owners are approaching today’s turbulent business environment, check out the Owner’s Corner Podcast.
The Owner’s Corner Podcast is a show for business owners at all stages in their journey. Join us as host and financial planner Seth Whicker connects with business owners and experts to talk about what it takes to build a successful business. Our guests come from many industries and walks of life to share their biggest wins, mistakes made along the way, and their thinking about the all-important exit planning.ill
Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This blog is for informational purposes only and does not constitute investment, legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness.