Should My Company Start A 401(k) Plan?

Should My Company Start A 401(k) Plan?

Retirement plans afford you and your employees with the means to start saving today for retirement tomorrow. 

Why is now the right time?

Now is the perfect time to start a new 401(k) or any other qualified retirement plan. Not too long ago, the SECURE Act was passed. The Act included a special provision that increased the Qualified Tax Credit for would-be plan sponsors. Among other provisions, the Qualified Tax Credit provides employers with even more incentive to start a new retirement plan.

What is the Special Tax Credit?

For small businesses, specifically "small employers" (generally, those with under 100 employees), the Special Tax Credit can provide up to $5,000 per year for 3 years!

How does it work?

Background: Prior to the SECURE Act, an employer could claim a qualified tax credit of no more than $500 per year for the same 3-year period. Today, small employers have up to $5,000 available.

Some Math Required: True to form, there is some work you'll have to do to determine your Qualified Tax Credit maximum. As with most tax credits, nothing is ever as simple as one would hope. Fortunately, the calculation to determine how much business owners can claim under the Qualified Tax Credit is fairly straight-forward: 

Step 1: Determine the number of NHCE's (non-highly compensated employees)

Step 2: Multiply the NHCE amount by $250

Step 3: If Step 2 is over $5,000, you'll cap at $5,000

Example: Betty's Bakery

  • Betty's Bakery employs a total of 15 people, including Betty.
  • All 15 employees are eligible for the retirement plan that Betty has designed with the help of her TPA.
  • Betty is the sole owner of Betty's Bakery and like a smart small business owner she has help from her family - 2 children (each earning $30,000) and her spouse (earning $65,000) all work for the bakery.

So, how many NHCE's are there? Well, we know that Betty is an HCE (highly compensated employee) because of her ownership in the bakery - regardless of what she pays herself.

OK, but does this mean that the rest are all NHCE's? Well, according to stock attribution rules, the answer is no. Betty's children and spouse are also considered HCE's for plan purposes. Attribution is applied linearly (kind of) - first to the more than 5% owner, then up to that owner's parent(s), then the owner's grandparent(s), side-ways to the owner's spouse, and downward to the owner's child (or children).

After we take into consideration attribution, Betty's Bakery has a total of 11 NHCE's.  

Qualified Tax Credit: 11 NHCE's X $250 each = $2,750 the first year the plan goes into effect. 

Assuming the demographics at Betty's Bakery remain constant over the next 2 years that follow she can claim $2,750 each year for a grand total of $8,250 over the initial 3-year period as a Qualified Tax Credit. 

But, aren't Retirement Plans Expensive?

Cost is relative and it truly does depend on a number of factors. Overall, generally speaking, the cost for establishing and maintaining a retirement plan today is half of what it was 5 to 10 years ago. The decision maker needs to weight the service against the cost. The services provided for 401(k) plans must be necessary and the expenses reasonable. Now that the SECURE Act has increased the Qualified Tax Credit, expenses incurred by the business are eligible for deduction. 

How Can I Start A New Retirement Plan?

Complete our RFP and we'll guide you through starting a retirement plan.