Sponsoring a Retirement Plan: Tax Benefits You Should Know About

Offering your employees a retirement plan doesn’t have to be a burden on your budget. The federal government offers tax benefits to help make retirement plans more affordable for small businesses.

Here are a couple of ways you can save some money by sponsoring a retirement plan.

Receive an income tax credit

If you establish a new 401(k) plan and have not maintained another plan within the three preceding years, your business may be eligible for an income tax credit of 50 percent of the qualified startup costs to create and maintain the plan. The credit may be claimed for up to $500 of qualified costs you incur in each of three years, starting in the tax year when the plan becomes effective.

The small employer plan startup tax credit is part of the general business credit, which can be carried backward or forward to other tax years if it cannot be used in the current year.

To qualify for the tax credit, you must have had 100 or fewer employees whom you paid at least $5,000 in the preceding year, and at least one employee must be non-highly compensated.

Deduct your employer contributions

A tax deduction is also allowed for employer contributions to a defined contribution plan, including a 401(k) plan.

“Many of our clients are surprised to learn that they can deduct [employer contributions] up to 25 percent of their total payroll when filing their corporate taxes,” says Kathy Red, director of Insperity Retirement Services Consulting.

The deduction cannot be more than 25 percent of the compensation paid or accrued during the year to your eligible employees who participate in the plan. If you are self-employed, this limit may be reduced for contributions you make to your own account.

When figuring the deduction limit:

  • Elective deferrals are included in the calculation of total compensation, but do not count toward the limit.
  • Maximum compensation that can be taken into account for each employee is $245,000 in 2011; $250,000 in 2012; and $255,000 in 2013.

“For an employer who looks to give employees an annual incentive, this tax feature provides the employer with a nice [tax] advantage. Of course, it’s always best that the owner consult with a tax professional when filing a corporate return,” Red says.

Other money-saving options

While sponsoring a retirement plan can create potential money-saving benefits, not all businesses are eligible. But that doesn’t mean offering a retirement plan should be out of the question.

There are many affordable options that enable employers to provide a retirement vehicle to their employees. One way is to offer a plan without providing matching contributions. You may also want to consider a Safe Harbor 401(k), which allows you to maximize your personal contributions if you’re willing to make a minimum contribution on behalf of your employees.

The takeaway

As a business leader, discovering potential tax savings is always good news. But navigating the ever-changing laws, tax codes and eligibility requirements can get confusing. Before you file any paperwork, you should consult a tax professional to ensure you meet all of the eligibility requirements of the small employer plan tax credit or the employer contribution deduction.

Offer a retirement without the headaches and worry of administration and recordkeeping. With Insperity™ Retirement Services you can save on retirement plan costs while providing a first-class retirement package that you and your employees can get excited about.

The foregoing is for informational purposes only and should not be construed as tax or legal advice. The qualification for the tax benefits described above depends on factors unique to each situation. You should discuss with your tax advisor the applicability of this information to your business.