I was sitting with Sara, the controller at a 20-person marketing agency, when she asked the question I wish more people would:
“David, if we start a 401(k) plan, what’s the real cost to us?”
“Glad you asked,” I replied. “Because right now, with its little-known tax credits program, the federal government is basically paying small businesses to launch retirement plans.”
She laughed. “That sounds interesting. So what are we talking about?”
“There are three major tax credits. If you qualify—and most small employers do—they can cover almost all of your startup and admin costs, and even help subsidize employer contributions.”
“Okay,” she said, “start from the top.”
“Tax Credit #1 Startup Costs: If you’ve got 50 or fewer employees, you get a tax credit of $250 per non-highly-compensated employee, up to $5,000 per year—and it rounds for the first 3 years. So let’s say you have ten qualifying employees. That’s $2,500 per year in credits, or $7,500 over three years.”
“What’s a non-highly compensated employee again?” she asked.
“Anyone who isn’t an owner or relative of the owner who earns less than $160,000 a year.”
Sara nodded. “We’ve got plenty of those.”
“Perfect. Next there’s Tax Credit #2—Employer Contributions. This one covers contributions you make for employees earning under $100,000. In year one, the credit is 100% of what you contribute—up to $1,000 per employee.”
“That sounds huge,” Sara said.
“It is. In year two, it’s still 100%. Then it drops to 75% in year three, 50% in year four, and 25% in year five. It phases out gradually, but can add up to tens of thousands in savings.”
“And what’s the third credit?”
“Automatic Enrollment s Tax Credit #3. If you implement auto-enrollment in your 401(k), you get an extra $500 per year—for three years.”
She raised an eyebrow. “So if we design this right, we could end up paying almost nothing out of pocket for five years?”
“Exactly,” I said. “With good plan design and these tax credits, the government essentially foots the bill while your employees start saving for their future. That’s a win-win.”