The 401(k) Plan - An Employee Benefit With Employer Benefits

A 401(k) plan is a company-sponsored retirement account that can provide eligible employees with a functional retirement savings tool. Depending on your eligibility, there may be several types of 401(k) plans you could offer, such as a traditional 401(k) plan, safe harbor 401(k) plan, SIMPLE 401(k) plan, or Roth 401(k) plan. As an employee benefit, a 401(k) plan naturally benefits the employees who opt into it, but what about you as the sponsoring employer? 

Offering a 401(k) plan can benefit the employer too. It can be a powerful recruiting and employee retention tool, provide tax advantages, and, in some cases, help you meet state-mandated requirements. 

Good help is hard to find, and keeping good help is no easy win either. 

The labor shortage is making recruiting particularly challenging for employers. According to the U.S. Bureau of Labor Statistics (BLS), at the end of October, there were 10.6 million job openings in America, but there were only 6.9 million people classified as out of work and actively looking for jobs at that time. 

Retention is also proving to be increasingly difficult, as many employees are struggling with pandemic fatigue, which has them reevaluating their priorities and expectations. During what’s now called “The Great Resignation,” workers are abandoning ship for other opportunities at an alarming rate. According to BLS data, in October 2021 alone, nearly 3% of the total U.S. workforce quit voluntarily. Around 82,000 of those workers who voluntarily left their jobs were in Massachusetts. 

Because higher pay and better employee benefits are among the top reasons for many of these voluntary departures, employers should take note, keeping in mind that employee benefits like 401(k) plans play a significant role in attracting top talent and retaining key employees. 

Employers can take advantage of 401(k)-related tax benefits. 

If an employer opts to match a percentage of their employees’ 401(k) contributions, they can lower their federal tax burden by deducting their matched contributions, subject to certain limits that are adjusted annually. Additionally, any non-elective contributions you make to your employees’ accounts are tax-deductible.

Because different rules apply to each different type of 401(k) plan, employers need to be familiar with the rules that apply to the plan they choose so they can ensure that the plan is appropriately administered for tax-favored status. 

For a traditional and Roth 401(k)s, contributions:

  • may be made at your discretion 

  • will be treated as pre-tax contributions that will remain untaxed until distribution 

  • are subject to contribution limits:

    • employee’s 401(k) contributions for 2022 are limited to $20,500

    • those who are 50 or older may also make catch-up contributions of up to $6,500

    • combined employee and employer contributions may not exceed $61,000 

Small businesses may also be eligible for the Small Business Retirement Plan Tax Credit, which they can use to offset plan start-up expenses. Qualifying businesses can claim a tax credit for up to $5,000 a year for the first three plan years in start-up expenses.

Depending on where you operate, you could be subject to a state mandate.

Several states have proposed or enacted legislation to establish either a mandatory or a voluntary state-sponsored retirement program. 

  • The pilot phase of Connecticut’s mandatory state-sponsored Roth auto-IRA program, MyCTSavings, started in October 2021. The program relies on payroll deductions and requires all Connecticut employers with five or more employees to enroll unless they offer a qualifying private plan.

  • Illinois’s mandatory program, SecureChoice, already requires most employers to opt into their state-sponsored auto-IRA retirement plan or another qualifying private plan. Two additional registration deadlines remain for small employers: September 2022 for those with 15-24 employees and September 2023 for those with 5-14 employees. 

  • New Jersey enacted the New Jersey Secure Choice Savings Program, which requires companies with 25 or more employees to opt into their state-sponsored auto-IRA retirement plan or another qualifying private plan. The current enrollment deadline is set for March 28, 2022.

  • California, Oregon, Maryland, and Colorado have enacted legislation that includes a mandated state-sponsored plan, and program-specified employers will have to enroll this year. 

  • New York City, Virginia, and Maine established mandated state-sponsored plans; however, enrollment for program-specified employers does not begin until 2023.

Contact Livingston & Haynes

L&H’s employee benefits team can assist by providing advisory services and performing financial statement reviews, compilations, and audits, including those for 100+ employee plans, as required by the U.S. DOL. We also file Forms 5500 as required by ERISA and perform SOC engagements and agreed-upon procedures. To discuss your 401(k) accounting, auditing, tax, and advisory needs, contact me today. 

by Wendi Haynes, CPA

Wendi Haynes, CPA, serves as Livingston & Haynes’ Managing Partner and has been with the firm for over 30 years. Wendi has extensive experience providing accounting, auditing, tax, and advisory services for employee benefit plans, small businesses, and nonprofit organizations.



Employee BenefitsWendi Haynes, CPA