A Win-Win Situation: Why Your Clients Should Offer 401(k) Plans

Quick look: The concept of “cool perks” in the workplace has shifted away from free lunches and company happy hours toward more meaningful and sustainable offerings. Employees have made it clear they want to work somewhere they can invest in their future. As a result, it’s no surprise the tried-and-true 401(k) plan continues to reign as one of the most competitive benefits, leading many SMB leaders to consider them for the first time.

In the heyday of hustle culture, company perks and benefits were designed to entice employees to spend more time at work. However, over the past four years, the workforce has evolved from an extended 9-to-5 office schedule to creating a better work-life balance.

As people seek more quality time away from the office and more employees work remotely, they desire the security of affordable healthcare, flexible work schedules, and retirement savings. A 401(k) plan speaks to this intrinsic value and helps assure employees they’ll receive a positive return.

Though planning for retirement has often been a standard benefit for most large corporations, small- and medium-sized businesses (SMBs) are reconsidering their value when recruiting top talent.

3 ways clients benefit from offering 401(k) plans

Encouraging SMB clients to offer 401(k) plans for their employees offers significant benefits as they build and grow their companies. It can improve recruiting and retention efforts across all demographics, help potentially lower an organization’s tax liability, and increase productivity and engagement. Business leaders who focus on providing lasting value for their employees will find a greater sense of loyalty in return.

1. Competitive recruiting and retention advantage

Many job candidates—especially younger employees, who make up a sizeable portion of the workforce—consider retirement benefits an important factor and may look elsewhere if a 401(k) plan isn’t included in a compensation package. For example, recent Transamerica research found that 87% of Millennials and 74% of Gen Z think retirement benefits are a key factor in deciding to work for a prospective employer.

On the other hand, investing in employees incentivizes reciprocity through company loyalty. A 401(k) plan is often a small price to pay to retain a quality employee and continue building a strong team, especially considering recruiting and onboarding a replacement costs an average of $4,700 per hire. Additionally, turnover can lead to decreased productivity for the duration of the recruiting period and a possible decline in employee morale.

2. Lower tax liability and higher tax credits

Another benefit of SMBs offering a 401(k) plan is a lower tax liability. SMB owners may not realize they could qualify for a lower tax bracket by contributing a significant amount of their own salary to their 401(k). As of 2024, the maximum deferral amount for employers ages 49 and under was $23,000 and up to $30,000 for employers who are 50 or older.

Additionally, the SECURE Act increases business tax credits for those setting up 401(k) plans for the first time. Prior to the enforcement of this legislation, the business tax credit for the first three years of an employee 401(k) plan equaled 50% of qualified startup costs (without exceeding $500). This number has increased to $5,000 for SMBs employing one to 100 workers.

Further, SMB employers matching 401(k) contributions for employees may qualify these as tax-deductible business expenses, further reducing their tax liability. In previous years, it may not have seemed feasible for SMBs to explore 401(k) plans as a benefits option, but the decreased limitations and increased advantages make it almost a necessity.

3. Increased employee productivity and engagement

Clients can encourage their staff to be more productive and engaged by providing them with access to 401(k) plans.

PwC found that 60% of full-time employees are stressed about their finances. An employer-sponsored retirement plan can help workers experience less financial stress, leading to higher productivity and job satisfaction.

Offering a 401(k) plan also demonstrates that clients care about their employees’ financial well-being, fostering a positive workplace culture.

Key considerations when offering 401(k)s

Brokers must be aware of the various state and federal legislation related to employer-sponsored 401(k) plans.

State mandates

Many states now require employers to offer retirement plans to employees. For example, as of March 2022, New Jersey SMBs with 25 or more employees without a retirement savings plan are required to facilitate enrollment in the New Jersey Secure Choice Savings Program.

As a professional employer organization (PEO) broker, it is invaluable to keep SMB leaders current and informed about market demand and changing regulations while also providing options tailored to their unique goals.

SECURE 2.0 Act

The SECURE Act, signed into law in December 2019, is designed to help SMBs provide their workers with more affordable and easier-to-manage “safe harbor” retirement plans. In addition to the increased potential tax credits mentioned above, the SECURE Act also states that businesses that match 401(k) contributions for employees may qualify these as tax-deductible business expenses, further reducing their tax liability.

Brokers should note that SECURE Act 2.0 was recently written into law and includes the following changes:

• Enhanced tax credits for SMBs setting up retirement savings for employees (credits could increase to 100% of qualified costs for SMBs with up to 50 employees instead of the current 50%, and the maximum credit potential could jump from $500 to $5,000).
• The opportunity for companies to match contributions to employee retirement savings accounts based on their workers’ student loan payments.
• An increase in catch-up contributions for older workers.
• Qualification of part-time workers for employer retirement plans.
• Starting in 2025, businesses that offer 401(k) and 403(b) plans must automatically enroll eligible employees and provide a contribution rate of at least 3%.

Click here to view the complete SECURE 2.0 Act >>

The value-added advantage of partnering with a PEO

The success of PEO brokers hinges on their ability to find the best plans for each client. ExtensisHR, a highly certified PEO, equips brokers with flexible plans to provide their clients—and the extra advantage of no administrative headaches.

ExtensisHR’s Multiple Employer Plan provides SMB employers the flexibility of a standalone plan without managing compliance or incurring the expenses and administrative burdens associated with an employer-sponsored retirement plan.

PEOs help reduce administrative expenses, paperwork, and other costs that may deter a company from proceeding. They also enable employers to receive higher-quality and lower-cost plans than private 401(k) options.

Saving for retirement is a matter of when, not if, for all employees. They want to make investments today that will pay off in the future. ExtensisHR can help your clients set up 401(k) plans and determine eligibility requirements, vesting, matching, and profit-sharing contributions. With a wide variety of investment options available for SMBs, they can make any necessary changes as their businesses grow.

Even as company perks come and go, prioritizing financial stability will always be an attractive option.

Looking for a new 401(k) plan to offer your clients? Contact the experts at ExtensisHR to learn more or get started.