The benefits of being a retirement plan participant are well-documented, but the perks available to the sponsoring employer are often overlooked.

In offering a retirement plan, plan sponsors can enjoy the advantages of tax deductions and credits, flexible design options and attraction and retention of employees, along with the benefits of being a participant in the plan.

Tax Benefits: When an employer makes a matching, safe harbor, profit sharing, defined benefit or money purchase contribution to the plan, they may deduct the contribution on their tax return. On top of that, any expenses toward plan administration are also tax-deductible so long as they’re paid by the employer—if the plan pays the expenses, the sponsor can’t deduct those fees.

In some cases, tax credits may be available for small businesses to cover the costs of plan startup or automatic enrollment expenses.

Pre-tax contributions made by participants can also impact the employer’s taxes. These contributions will reduce an employee’s gross taxable income, which in turn lowers the corresponding taxes (such as FICA) paid by the employer.

Specific questions regarding tax deductibility should be directed to your tax advisor.

Flexible Design Options: In addition to providing retirement benefits for employees, the plan can be designed to meet the employer’s goals as well. Some designs require the employer to make a set contribution each year; as a result, several compliance tests can be avoided, allowing the highly compensated employees (HCEs) to contribute a higher amount.

Other designs might allow for flexibility in the amount of contributions. For example, when the employer needs a bigger tax deduction, a larger contribution can be made; alternatively, a lower contribution could be made when money is required elsewhere.

Attraction and Retention: Gone are the days of employees working for a single employer their entire career and retiring with a company-sponsored pension. Today’s employees want portability and control over their retirement. A company’s benefits package, including retirement benefits, can be the deciding factor when considering a position. The employee’s perception of the available benefits may even be more critical than the benefits themselves.

An employer can’t just focus on attracting new talent; they are also competing with other companies to keep their current staff. Keeping up to date with an industry’s retirement trends and keeping employees apprised of their options may help to alleviate concerns in these areas.

Benefits of Participation: As an employee, a company’s owner may be able to participate in the plan, thereby receiving the accompanying benefits. If the plan includes an employer match, that contribution can be considered additional compensation. For example, a 4% salary deferral might be matched with an additional 4% employer contribution, providing extra compensation that is applied to the owner’s retirement goals.

Also consider the potential tax benefits, as pre-tax contributions can be a way to defer personal income taxes. On the other hand, earnings on after-tax or Roth contributions might never be taxed. In these ways, the plan design considerations mentioned previously can significantly impact the retirement account of the owner.

Whatever reason inspires you to sponsor a retirement plan, we are here to help. Whether it’s the potential for tax breaks, providing value for your employees or simply taking advantage of plan benefits for yourself, we want to help you maximize the value of being a plan sponsor. If you have any questions on plan advantages, please feel free to reach out to us.

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This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.