Last Updated: March 4th, 2023
We may still be living on the edge of uncertainty as we navigate the COVID-19 climate, but the one thing we can all be sure of is that Americans need a healthy nest egg in order to retire comfortably. So at a time when health and money are top of mind for most, if you don’t already offer your employees a tax-deductible way to save, this marks a great opportunity to start a company-sponsored retirement plan. Not only does a 401(k) help you do right by your employees, but it also offers many benefits for the company as well.
One of the most compelling incentives for starting a retirement plan is the significant tax credits afforded by legislation known as "SECURE 2.0." Employers with 50 or fewer employees can receive a startup credit of 100% of administrative expenses, up to $5,000 per year, for three years. The full credit is available to employers with 50 or fewer employees, phasing out for employers with more than 100 employees. Additionally, employers can also receive a tax credit equal to the amount of contributions they have made on behalf of non-highly compensated employees (those making under $150,000 per year), up to $1,000 per employee. Taken together, the changes brought by SECURE 2.0 have made it significantly more affordable for small businesses to start a new retirement plan.
While employers are not required to match employee contributions – unless they’ve opted into a Safe Harbor Plan, which has many incentives – many chose to do so as a way to reward employees and help them save faster and more successfully. That said, the contributions help the employer as well. Not only are they tax-deductible, but they’re not subject to Social Security or Medicare taxes.
At a time when financial stress is at an all time high, reducing taxes now while at the same time saving for a financial future can be a big incentive. Annual pre-tax contribution limits are $22,500 a year as of 2023 (up from $20,500 in 2022), with an extra $7,500 in catch-up contributions for those over 50 years of age, which means you can reduce your taxable income by up to $30,000 a year. Business owners can save even more. With certain plan types, like profit sharing, business owners can save as much as $66,000 a year before taxes.
In June 2020, 72% of employees said they plan on working after they claim Social Security retirement benefits. While this is an issue for individuals, it can also be an even bigger issue for businesses, specifically when it comes to rising payroll costs. A recent survey showed that 49% of employers are concerned that delaying retirement will raise benefits costs, 41% worried it would force up overall wage and salary expenses, and 37% feared it would block younger employees from promotions. Offering a 401(k) plan not only helps your employees become retirement ready, but it could also help with the long term view of your business.
52% of U.S. employees state that finances are their biggest concern, more than all other aspects of their wellbeing including physical, mental, and social health. Not only that, but 47% believe their employers have a responsibility to address their financial wellbeing (up from 40% pre-COVID). Offering a company-sponsored retirement plan allows you to educate and support employees when it comes to their financial future.
It’s times like this when many take stock of what’s important. As a business, one can argue the financial health of the company and the people within it are paramount. Offering a company-sponsored retirement plan is not only surprisingly affordable, but can benefit the company and its employees for years to come.