We may all 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.
1. The SECURE Act Offers Meaningful Tax Credits
One of the most compelling incentives for starting a retirement plan is the significant tax credits afforded by the SECURE Act. Small businesses that sponsor a retirement plan for the first time are eligible for a tax credit of up to $5,000 per year for three years. Additionally, any small plan that implements automatic enrollment in 2020 or later is eligible for a $500 credit for three years. This applies to both existing and new plans and can be combined with the start-up tax credit for additional savings. Thanks to these credits, starting a 401(k) has become incredibly affordable. In instances where you pass some expenses onto participants, you might not end up paying any fees for recordkeeping or other services for up to three years.
By way of example, the cost of starting a standard Vestwell 401(k) could look like this in Year 1:
2. There are Company Tax Deductions Too
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.
3. It can also reduce individual Taxes — Especially for owners
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 $19,500 a year as of 2020, with an extra $6,500 in catch-up contributions for those over 50 years of age, which means you can reduce your taxable income by up to $26,000 a year. Business owners can save even more. With certain plan types, like profit sharing, business owners can save as much as $57,000 a year before taxes or $63,500 with catch-up contributions.
4. you want your employees to retire…eventually
In June 2020, 72% of employees said they plan on working after they claim Social Security retirement benefits. This is up from 67% this May, a trend closely tied to the current economic climate. 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.
5. employees want your support
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.
if you’re interested in implementing a plan on or before January 1, 2021, here are some deadlines to consider:
- August 15, 2020: Deadline for deciding to implement a Safe Harbor 401(k) plan in 2020. This type of plan is incredibly popular with small businesses because they allow companies to bypass certain compliance testing requirements. There is still time to reap the benefits for the 2020 calendar year if you act quickly.
- November 1, 2020: Deadline for agreeing to move an existing 401(k) plan to Vestwell for a January 1, 2021 start date as well as the deadline for terminating a SIMPLE IRA and moving it to a 401(k) plan structure for 2021.
- November 15, 2020: Deadline for deciding to start a new, non-Safe Harbor 401(k) plan for a January 1, 2021 start date. This maximizes your tax benefits for the 2021 calendar year.
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.