401k Benefits & Pitfalls for Employers

Written by Anna Quinn

September 9, 2021

If you’re considering 401k benefits for your business as you evaluate Pooled Employer Plans (PEPs), you need to know that there are a wide range of options available on the market, and the plan you pick will affect your company’s financial investment and legal risk.


If the idea of handling those obligations makes your head spin, consider a safe harbor option.


An option like the one peppermint provides allows your business to avoid the administrative compliance and legal risk that normally come with sponsoring a traditional 401k plan. If you select our safe harbor option, you’ll be required to contribute to employees’ retirement plans via company match, but you’ll have considerably fewer fees for compliance and testing.


It’s a tradeoff that more and more employers are willing to make in order to give employees the valuable retirement benefits they desire – while giving the company an advantage when it comes to talent retention and recruitment.


Reap 401k Benefits for Employers at Tax Time

So how do companies benefit from offering their employees a 401k plan with matching contributions? The financial incentives include tax credits and deductions.


The SECURE Act of 2019 created small business tax credits for companies that start new 401k plans. There are even extra incentives for options that include an automatic enrollment feature.


Eligible businesses can claim half of the necessary startup and administration costs for new plans, maxing out at $5,000 per year for up to three years; you can even choose to start claiming the credit in the tax year before the plan becomes effective. In addition, expenses for educating employees about your new plan are also deductible.


Congress has made it easier – and more cost-effective – for businesses to stay competitive in the job market and support workers with retirement benefits that ensure the economy’s long-term balance.


Take These Deductions, Too

But the financial incentives for employers don’t stop there.


401k matches can be taken as deductions on your company’s federal corporate income tax returns, lowering your tax burden. Matching contributions are often exempt from state and payroll taxes, and administration costs can also be write-offs.


When an employer allocates a safe harbor, matching, and/or profit-sharing contribution to their 401k participants, they can deduct the amount contributed. The deduction is limited to 25% of the total compensation earned by plan participants during the year. For 2021, the maximum compensation that can be taken into account for each participant is $290,000.


Be sure to check with your tax professional or the IRS about your specific tax situation.


Gain a Recruitment & Retention Advantage

Beyond the ability to lower your tax debt, 401k employer matching also strengthens your company’s advantage from a talent recruitment and retention perspective because it shows that your company invests in its employees.


Keeping in mind that 60% of employees cite health and retirement benefits as being important for retention, this is a powerful benefit – particularly for small companies who need to recruit A-players in order to scale and grow but who might not yet be able to offer all the same perks as larger organizations.


If a job candidate is weighing multiple offers where salary and perks are otherwise comparable, offering to put free retirement money into their pocket can be a big differentiator.


Incentivize Top Performers with 401k Match

Besides helping to make your company more competitive when it comes to attracting top talent, 401k employer matching has also been shown to reduce resignations among long-term employees. It’s clear that employers who focus on employee engagement retain talent longer. 


One powerful way to increase engagement is to incentivize employees by matching 401k contributions. Depending on how you decide to structure your 401k program, you may choose to tie employer contributions to specific goals or benchmarks. This tactic rewards your employees for performance while supporting the company’s success; it’s a win-win.


Are you an employee who wants your boss to start offering a 401k? See our guide on how to tell your boss about peppermint.


Avoid The Pitfalls of Safe Harbor 401ks

Maintaining a 401k plan can be legally complex, since retirement plans are regulated by both the Department of Labor and the IRS.

There are many rules and regulations regarding these plans, and keeping on top of them can be a burden for many businesses because many don’t have expertise in plan management. In some cases, employers can be personally liable if they don’t properly administer and manage the plan. Yikes!

Some other cons of offering a 401k safe harbor PEP plan include:


Hidden Administration Costs. Sponsoring a retirement plan comes with several necessary, unavoidable costs: record keeping, investment management, and custodial services. With a peppermint 401k PEP, we keep your financial investment cost-effective and our pricing transparent. But not all plans are this way, so be sure to read the fine print.


Annual Contribution Costs. Safe harbor options require mandatory contributions on behalf of employees. Your business must provide these contributions every pay period or at the end of the plan year. Failure to comply with this rule is serious; your plan could lose its tax-qualified status. 


Immediate Vesting Requirements. Safe harbor contributions must be immediately vested. That means once your business deposits a contribution into an employee account, the employee owns 100% of that money.


Annual Compliance. Safe harbor 401ks have compliance and regulatory requirements that businesses must fulfill, including mailing notices to participants. One advantage of Peppermint is that we take care of all the administration for you.

When you’re considering the pitfalls of offering a safe harbor 401k, you can see that it’s not for every business.

That’s why peppermint exists.


How Can a Small Business Offer a Safe Harbor 401k?

With peppermint as your plan sponsor, you can give your employees the retirement plan options they want – without the cost, risk, and administrative burden of a traditional 401k – while you do what you do best: run your core business.


Improve employee satisfaction, retention, and recruitment while helping your team save for the future.


Interested in getting started with peppermint’s right away? It’s easy. Learn more about peppermint’s Pooled Employer Plan options.

The peppermint blog assumes no responsibility or liability for any errors or omissions in the content of this site. The information contained in this site is provided on an “as is” basis with no guarantees of completeness, accuracy, usefulness, or timeliness. It does not represent or replace actual financial advice provided by a certified financial professional. Since everyone’s situation is different, we always recommend addressing specific questions to your plan provider or certified financial professional. As such, peppermint may not be held liable for your use or reliance on any information contained herein.

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