(877) 832-3847

401(k) Plans: What’s In it for The Business Owner? 

Estimated read time: 3 minutes 

By Philip Alford, CFP®

401(k) Plans: What’s In it for The Business Owner? 

Why Starting an Employer Sponsored Plan May Make Sense for Your Business 

Looking for a way to attract and retain great talent? What about more ways to add value to your company while not breaking the bank?  

Employer Sponsored Retirement Plans (ESRPs) may be the next best step for your growing business. Not only does setting up a retirement plan help you and your employees save for retirement, but they also provide tax deductions and credits for the employer. Especially for businesses with fewer than 100 employees, setting up a retirement plan may not be as costly as one might think.  

According to the Internal Revenue Service, “Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.)” 1 To qualify, you simply need to meet a few requirements found here, and claim the credit using Form 8881.

As far as the amount of the credit, you may claim up to 50% of your eligible startup costs (including set up costs and employee education) up to the greater of $500 or the lesser of $250 multiplied by the number of eligible participants, assuming they are non-highly compensated employees (NHCEs). The credit maxes out at $5,000 a year and can be claimed for the first 3 years of the plan.2 

Sound complicated? Here’s an example to show how easy it really is:

The ABC Company has 25 non-highly compensated employees who are eligible for the plan. To set up a 401(k)-retirement savings plan will cost ABC $4,000.00 in Year 1 with an ongoing administration fee of $1,500.00 to administer the plan. They also would like to include an auto-enroll feature for newly eligible employees.  

Their tax credit would hypothetically be calculated as follows

  • In Year 1, ABC Company can claim a total of $2,500.00 in tax credits (50% of $4,000 in set up costs + $500 credit for establishing an auto-enrollment feature)
  • In Years 2-3 ABC Company can claim the auto-enrollment feature tax credit of $500, each year.  
  • Their total tax savings over 3 years would $3,500.00, meaning that they would have only spent $500.00 net to set up a retirement plan. 

Setting up a retirement plan such as a 401(k) may seem intimidating, costly, or complicated, but Values First Advisors  can help make the set-up process a breeze. Ready to take the next step? Schedule a discovery meeting here 



Service, I. R. (2023, July 28). Retirement Plans Startup Costs Tax Credit. Retrieved from www.irs.gov: https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit