Many small business owners want to offer a 401(k) plan to their employees. They understand it can help attract new talent and be a valued employee benefit. They understand that it will help their employees save for retirement. They may even understand that it is one of the best ways to max out their own retirement savings.

But… surveys show that most small businesses DO NOT offer a 401(k) plan[1]. Why?

If business owners understand all these potential benefits, why do most not follow through?

Many small business owners assume that starting a 401(k) plan is too expensive and that they can’t afford it.

If you’re a small business owner, offering a 401(k) plan is not as expensive as you think it is.

What’s more, through the SECURE 2.0 legislation[2], the IRS offers several tax credits to make it even easier and more affordable for small businesses to offer a retirement plan[3]! The credits can cover eligible start-up costs such as the ordinary and necessary costs of setting up and administering the plan and educating employees about the plan.

(These are not deductions; these are tax credits! That means that they actually subtract from the business tax owed creating even more savings!)

 

Eligible businesses

Businesses qualify to claim this credit if:

  • They have 100 or fewer employees who received at least $5,000 in compensation for the preceding year;
  • They have at least one plan participant who was a non-highly compensated employee (NHCE); and
  • In the three tax years before the first year of eligibility, the employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by the business, a member of a controlled group that includes the business, or a predecessor of either.

 

Businesses with 1-50 Employees

Small businesses with 50 or fewer employees stand to claim the largest benefits!

  • 100% of eligible start-up costs up to 1) the greater of $500 or 2) the lesser of $5,000 or $250 times the number of eligible NHCEs. Credit is available for the first 3 years of the plan.
  • $500 credit for implementing auto-enrollment. Credit is available for the first 3 years of the plan.
  • Tax credit for employer matching and safe harbor contributions up to a maximum of the lesser of actual employer contribution or $1,000 for each employee making $100,000 or less. The credit is reduced over 5 years using the following scale:
    • 100% of employer contributions in years one and two
    • 75% in year three
    • 50% in year four
    • 25% in year five

 

Businesses with 51-100 Employees

Businesses with 51 to 100 employees can also claim some great tax credits:

  • 100% of eligible start-up costs up to 1) the greater of $500 or 2) the lesser of $5,000 or $250 times the number of eligible NHCEs. Credit is available for the first 3 years of the plan.
  • $500 credit for implementing auto-enrollment. Credit is available for the first 3 years of the plan.
  • Tax credit for employer matching and safe harbor contributions up to a maximum of the lesser of actual employer contribution or $1,000 for each employee making $100,000 or less. The credit is reduced by 2% per employee over 50 employees. The credit is reduced over 5 years using the following scale:
    • 100% of employer contributions in years one and two
    • 75% in year three
    • 50% in year four
    • 25% in year five

 

For a small business with less than 50 employees, the employer could claim a tax credit for the start-up costs and auto-enrollment up to $16,500 across the first three years of the plan. This doesn’t even include the credit for employer contributions.

Offering a 401(k) plan is a key benefit for employees who can save for retirement and reduce their taxes. Business owners can also max-out their own retirement contributions and save on their personal taxes.

These great tax credits make it even more affordable for small businesses to take advantage of all that a 401(k) plan can offer.

 

Kingdom(k)

If you want to have a conversation about starting a 401(K) plan at your business, give us a call today! Our Kingdom(k) is a turnkey 401(k) plan specifically designed to serve Christian business owners that include:

  • Competitive fees
  • A fund line-up of traditional retirement plan options as well as faith-based investment options
  • Engaging participant wellness resources
  • A dedicated advisor available to speak with employees to explain the plan benefits and options and guide them in their retirement planning
  • 3(38) fiduciary investment management (relieving you of significant liability)

Give us a call today or schedule a meeting to talk with Beacon Wealth’s President & Director of Institutional Sales, Cassandra Laymon!

 

 

 

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.  You should consult with your tax, legal, or accounting professional for such advice.

 

[1] https://www.plansponsor.com/three-four-small-businesses-dont-offer-401k-plan/

[2] https://www.asppa.org/news/where-credit-due-tax-credits-small-employer-plans-under-secure-20

[3] https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit