Two Men Shaking Hands — As an employer, there are a number of 401(k) plan benefits that go unnoticed. Whether it is the tax savings or being able to attract and retain top talent, it remains an essential benefit to run a successful business. The good news is, it has never been more efficient, affordable, and easier to understand. If you have questions about your 401(k) eligibility, we recommend you can check out our 401(k)-plan eligibility guide.

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Employer Benefits of 401(k) Plans

Benefit 1 - Attract and Retain Talent

Employers are at a disadvantage by not offering a 401(k) plan. Even if you are a small business; you will risk losing top talent if you do not offer a 401(k) plan as a part of your benefits package. On top of that, you may want to consider offering an employer contribution. While not mandatory, to remain competitive in the marketplace for attracting top talent, you may need to consider offering a match. Attracting, recruiting, and retaining employees is a costly and time-consuming process. That is why it is imperative to bring in top candidates and hire them with the intent of keeping them at your company. LT Trust has made it simple and more affordable than ever. Please reference our pricing page for further detail. If you are a small business owner and looking at starting a 401(k) plan, check out our small business guide on starting a 401(k).

Benefit 2 - Help your Employees Prepare for their Future.

There are many benefits an employer can offer. Ranging from medical benefits, gym memberships to beer taps and ping pong tables. When deciding which benefits you should offer, a 401(k) plan needs to be one of the highest priorities. According to an Employment Benefit Research Institute (EBRI) study, nearly half of employees are concerned with their household’s financial wellbeing, citing saving for retirement and having savings in case of an emergency as top sources of financial stress. As an employer, it is your responsibility to help guide and offer a retirement program to your employees. A 401(k) plan serves as in employee's primary long-term savings vehicle with features like convenient payroll deduction and automatic enrollment make it easy for employees to save for their future. Furthermore, there are several states across the country that are requiring some form of an employer-sponsored retirement plan.

Benefit 3 - Tax Advantages

All employer contributions are deductible for a business' federal income tax return. While matching is optional, most small business owners find it lucrative to create a tax shelter while increasing employee satisfaction.

When starting a 401(k) for the first time, the government has recently made it more palatable. If you have less than 100 employees, employers can qualify for a minimum $500 tax credit to a maximum of $5,000 for each of the first three years of the plan. The business must have at least one employee, besides the owner, who earns less than $130,000 a year (a Non-Highly Compensated or NHC employee) to qualify for a tax credit. The tax credit received is the greater of $500 or $250 per NHC employee with a cap of $5,000 applied to 50% of the business costs you incurred. There is also an automatic enrollment tax credit that is not beholden to the 50% of business cost rule, so you can earn a $500 tax credit just by adding this feature.

Employee Benefits of 401(k) Plans

401(k) Employer Match

How does a 401(k) match work? A 401(k)-employer match is optional, although, offering one will boost company moral and recruit top talent. It will show loyalty as an employer that care about employee's financial wellness and future. Some employers offer a 100% matching benefit, while others do not match employee contributions at all. The popularity with the match has to do with the employee having to put “skin in the game” to receive an employer benefit. For example, within a Safe Harbor 401(k), one of the most common match formulas is $1 for $1 up to 4%. The employee will need to put 4% of their total compensation to receive 4% from the company matched 401(k). This not only encourages savings with the employee obtaining an 8% savings rate which is above the average but will automatically bypass non-discrimination testing by having the Safe Harbor provision. Currently, we see only a 60% participation percentage within a Safe Harbor 4% match. Keep in mind that the employer match will always be in pretax form regardless of whether the participant contributes pretax or Roth.

Tax-Advantaged Retirement Saving

Participants contributing towards their employer-sponsored 401(k) have two contribution options: pretax (tax-deferred) and Roth (after-tax). Pretax contributions are deposited into your 401(k) before taxes have been taken out of your paycheck, which allows the participant to save more money into a 401(k). Pretax contributions also lower the participants taxable income for the year. Pretax money will be taxed on the way out. On the other hand, Roth contributions are deposited into the 401(k) after taxes have been deducted from your paycheck. The benefit of Roth is both contributions and investment earnings will be tax-free on the way out assuming the participant is at least 59 1/2 years old and has held the account for at least five years. If you are unsure about which contribution type is best suited for you, we recommend speaking with a tax consultant as there are several factors involved.

FAQs:

+ How Does Employer Contributions to a 401(k) Work?

There are several ways for an employer to contribute towards an employee's 401(k) plan.

Non-elective contribution
- A set percentage amount whether the employee contributes or not. A common one is the Safe Harbor 3% non-elective. For example, if the employee’s salary is $75,000, the employer will put $2250 into the employees 401(k).
$1 for $1 match
- The employer puts in the same amount of money you do — up to a certain amount. A common match formula is $1 for $1 up to 4%, which is also an approved Safe Harbor formula. For example, if the employee's salary is $50,000, the employee must put in $2,000 to receive $2,000.
Partial matching
- The employer will match part of the money you put in -- up to a certain amount. A common partial match formula is .50 cents on the $1 up to 6%. For example, if the employee’s salary is $100,000, the employee must contribute $6,000 to receive $3,000 from the company.
Profit-Sharing

Based off company profits, the employer can delegate profits towards the employee’s 401(k). This usually happens towards the end of the year and is an optional feature included in the 401(k).

+ Are 401k Contributions Tax-Deductible for Employers?

As noted by the IRS (Internal Revenue Service), employer contributions are deductible for the business’ federal income tax return to the extent that the contributions do not exceed the limitations described in section 404 of the Internal Revenue Code. In plain language, employer contributions can create a tax shelter for the business. Instead of giving the government more money in taxes, shelter it by giving it to themselves and employees!

+ How Much can an Employer Contribute to a 401k in 2021?

The total limit for employer and employee contributions combined for 2021 is $58,000. Of that, the individual deferral limit for 2021 is $19,500. $26,000 if the participant is 50 years of age or older. The difference of the $58,000 versus the individual deferral needs to be an employer contribution which can come in the form of matching, non-elective, or profit-sharing contributions. The highest salary the company can match is $290,000 for the year 2021.

401(k) Benefits at LT Trust

Offering a 401(k) is not only a great benefit to the employees but also an advantageous means by the employer to create a tax shelter for the business and ownership group as well. Have any questions about the benefits offering a 401(k), or if a 401(k) is right for you and your employees? Contact LT Trust to learn more!

How does an Employer Benefit from Offering a 401(k)?