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Launch A 401(k) At Little to No Cost with The New SECURE ACT Tax Credits

Employee Benefits

By Sean Condon, CFP®

One of the best ways to attract top talent and support your employees’ financial wellness is to offer a company-sponsored 401(k).

For small companies funneling much of their revenues back into the company, 401k costs can be prohibitive.  After all, to comply with your fiduciary obligations of running a 401(k) plan, there are professional and investment costs that need to be paid. 

Fortunately, the game is changing. Thanks to the new SECURE ACT of 2019, you may be able to set up a 401(k) in 2020… at little to no cost.

If you’ve been thinking about offering a 401(k) to your employees, here is a primer on the new rules and how it might benefit your firm.  

SECURE ACT Tax Credits Can Pay For Starting A New 401(k) Plan 

In the past, small businesses were offered $500/year in tax credits (for up to three years) to help cover 401(k) start-up costs.

Starting in 2020, these credits are increased up to a maximum of $5,000. Going forward, you will receive a $250 tax credit for every eligible employee in your company that earns less than $130,000.  For example, if your small business had 20 non-highly-compensated employees, you will receive a credit of $5,000 each year for up to three years.

This credit can make up for most, if not all, of your plan’s start-up costs.

Bonus Tax Credit For Setting Up Automatic Enrollment

The new SECURE ACT not only offers you an incentive for opening a 401(k) but it also encourages your employees to participate as well.  In addition to the credits you receive for starting a new 401(k), you’ll receive an additional $500 credit if you adopt an automatic enrollment plan.

It’s common for new employees to miss out on employer-sponsored retirement benefits because they don’t enroll. With an automatic enrollment plan, they will be opted-in to your company’s 401(k) by default when hired.  This behavioral tool can lead to real financial results for you and your co-workers; when enrollment is voluntary, only 47% of new employees enroll in their company retirement plan. However, when enrolled automatically, 93% of employees stay enrolled.1

It’s important to note that this bonus tax credit is also available to companies who set up automatic enrollment on an already established 401(k).

Costs To Offer An Employee Match Can Be Variable 

A potential outlay related to launching a 401(k) is not just the costs of administering the plan but the dollars you give to employees via a match.  A match is a great benefit for employee retention and the financial wellness of your team.  Aiming for a match around 3% of your payroll is a laudable goal.  In the scheme of your entire benefits cost structure, many would argue that this is a relatively small price for the long-term financial benefits you are providing your employees.  

Understandably, not all small companies can initially afford to provide a 401(k) match.  What many founders don’t realize is that the cash outlay for a match can be very flexible based on your company’s needs.  For example, while matching contributions are a great benefit for employees, providing a match is entirely optional.  Many small companies choose to start a plan without providing a match so that their team can at least begin to save on their own. This keeps plan costs to a minimum.  Another technique is to provide just a small match – for example 0.25% of salary – with the goal of increasing it in the future.  This can be affordable for most businesses while encouraging employees to begin the sound habit of saving for themselves as soon as they can.  

[1] https://institutional.vanguard.com/iam/pdf/CIRAE.pdf

Next Steps

With all the new tax credits available, now is the perfect time to finally set up your company’s 401(k).  As with any new project, you should have a clear idea of how much cash flow will be needed to offer a 401(k) plan before launch.  Your provider or investment advisor can show you the annual cost of funding a plan under different scenarios, including future staff growth, salary increases, or additional profit sharing.  

In order to make the best decision for you, your employees, and your company, it’s a good idea to consult with a financial advisor. If you have any questions, we at Windgate Wealth Management are happy to help. You can reach us by calling (844) 377-4963 or emailing windgate@windgatewealth.com. You can also book an appointment online here.

About Sean

Sean Condon is a wealth advisor with more than a decade of industry experience. He specializes in helping entrepreneurs build a culture of financial confidence by offering their employees unprecedented access to a CERTIFIED FINANCIAL PLANNER™ professional. Taking an owner’s approach, Sean does his best to understand the many elements of clients’ entrepreneurial journeys. He works in a technically competent and caring manner to reduce clients’ anxiety about money issues and serves as a fiduciary by always putting his clients’ best interests first. Learn more about Sean by connecting with him on LinkedIn.