For small business owners, offering a retirement plan like a 401(k) plan may be a valuable benefit for employees and a way for employers to recruit and retain top talent. However, it's crucial for employers to have a clear understanding of the possible tax implications of offering and contributing to a 401(k) plan, not only for your business but also for your employees. In this article, we'll discuss some of the key factors small business owners need to know about the taxes involved in administering a 401(k) plan, including topics like tax-deductible contributions, employee contributions, employer matching contributions, and the tax implications of certain withdrawals.
Whether you're considering offering a 401(k) plan or you're already managing one, this article will provide you with key insights you may consider to make more informed decisions for your business.
While both small business owners and their employees may derive tax benefits from offering an employer-sponsored 401(k) plan, one of the biggest winners may be the business itself. Some of the tax benefits a small business may derive from offering a retirement plan include:
One of the most compelling incentives for starting a retirement plan is the significant tax credits afforded by recent legislation known as the "SECURE Act 2.0." Businesses with 50 or fewer employees may receive a startup credit of up to 100% of administrative expenses, with a cap of $5,000 per year, for three years. The full credit may be available to employers with 50 or fewer employees, phasing out for employers with more than 100 employees.
Employers may 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 or more per year in 2023), capped at $1,000 per employee. This credit makes it significantly more affordable not only to offer a retirement plan to your employees, but also to reward employees for making contributions to the plan. In doing so, your small business can encourage high plan participation and thereby potentially raise employee retention rates.
Beyond the benefits of offering a 401(k) plan to your small business employees, there are also benefits to be had for the small business owners themselves. Some of these benefits may include:
Small business owners may make tax-deductible contributions to their own retirement plan, reducing their taxable income for the year. The earnings on these contributions also grow tax-free, allowing small business owners to turn their hard-earned compensation into compounding investments.
Under the Employee Retirement Income Security Act of 1974 (ERISA), certain retirement plans, such as a 401(k) plan, may be protected from bankruptcy proceedings and civil lawsuits. In other words, making contributions to the 401(k) your small business offers may allow a business owner to protect their assets in the case of business disruption or failure. With 65% of small businesses failing within the first 10 years, making contributions to a retirement plan may help protect against the downside risk of owning a business.
Offering a retirement plan may help small businesses recruit and retain top talent, but the benefits may extend beyond mere employee retention. Small business owners may benefit personally from offering a 401(k) plan, while also furthering their bottom line through the generous SECURE Act 2.0's tax credits.
Although running a small business may be hard, fortunately, offering a retirement plan doesn’t have to be. Vestwell is a digital retirement plan platform that makes it easier for you to offer and administer an employer-sponsored 401(k) or 403(b) plan. By combining technology with user-first design and offering 3(16) plan administration services, Vestwell can help you take the hassle out of setting up and administering a 401(k) plan.