How do 401(k) plans benefit employers?

Quick takeaways

• Retirement plans aren't just a perk for employees — there are also significant advantages for the companies that offer them.

• Employers offering a retirement benefit can save thousands with various tax benefits.¹

• Offering a retirement plan can improve recruitment and retention efforts, with 70% of employers saying it's helped them attract and hire top talent.²

When you ask employees about the benefits of a 401(k), you may hear a familiar response: it's a great way to save for retirement. But as an employer, the advantages can extend well beyond supporting your team's financial future.

Offering a 401(k) can greatly strengthen your ability to attract and keep top talent, making your company more competitive and appealing to job seekers.² Beyond hiring and retention, a 401(k) can also provide valuable tax breaks.¹

Curious about how a 401(k) can impact your organization? Let's get started.

Understand the basics of a 401(k)

Let's start with a refresher. A 401(k) plan is a tax-advantaged retirement account that helps employees save for the future. 401(k) plans are sponsored by employers, with companies often contributing via a 401(k) match or profit sharing to boost their employees' retirement savings.

Contributions to a traditional 401(k) are tax-advantaged in that they are generally made with pre-tax dollars and grow tax-deferred. Employees will pay taxes on their distributions in retirement. This can present a significant opportunity for your employees to achieve substantial tax savings and build a secure financial future.³

How does a 401(k) benefit employers?

While the advantages of providing a retirement plan for employees may be clear, you may be curious about how a 401(k) can benefit your company's bottom line. Offering a 401(k) can offer several key advantages for employers, including:

Offering a 401(k) plan can open the door to significant tax breaks

One major advantage of contributing to your employees' 401(k) plans is that employer contributions are generally 100% tax deductible (up to the annual corporate tax deduction limit). But it doesn't stop there.¹

There are also tax credits available for plans with auto-enrollment. With auto-enrollment, employees are enrolled automatically in your company's 401(k) plan unless they choose to opt out. This can boost participation and simplify the saving process for your team. Your business may qualify for this tax credit simply by offering a qualified plan with auto-enrollment.¹

If your company is offering a 401(k) for the first time, you're in luck. There are tax credits that cover startup costs for first-time 401(k) plans. If your company qualifies, you can claim a credit for your 401(k) startup costs for up to three years after establishing the plan, so long as you continue to qualify. This credit equals a percentage of your qualified startup costs, including what the IRS calls "the ordinary and necessary costs" to set up and administer your plan.¹

A 401(k) plan can strengthen recruitment

Offering a 401(k) plan can make your company a more desirable place to work. On the flip side, it can help with employee retention by making your company a more attractive place to keep working. That's not just wishful thinking: it's backed by research.

In fact, 70% of employers say that offering a retirement benefit has positively impacted their ability to recruit and hire talent. The same research found that one in two employees would turn down a job offer from a company that did not offer a retirement benefit.²

A retirement benefit can help your employees save and plan for the long-term

The need for a strong employer-sponsored retirement benefit is clear — one in five Americans aged 50+ have no retirement savings at all. This isn't just a problem for employees; it also poses challenges for businesses.

When workers lack financial security, it can lead to increased stress and decreased productivity, ultimately affecting your company's bottom line. Research from PwC reveals that financially stressed employees are 5x more likely to be distracted at work. Additionally, these financially stressed employees on average spend three or more hours per week of work time dealing with financial concerns.

Providing benefits that support your team's financial wellness can help employees prepare for the future and encourage a healthier, more engaged workforce. By providing a tax-advantaged way for employees to save for retirement — especially if you contribute directly — you can help alleviate some of that financial pressure, fostering a healthier, more engaged workforce.

At first glance, the benefits of offering a 401(k) plan as an employer may not seem obvious. However, once you explore the details, you can find numerous advantages, including potential tax savings, improved employee retention and recruitment, and reduced financial stress for your team. Altogether, it can be a winning strategy for your business.

FAQs

What tax benefits do employers get from offering a 401(k)?

Employer contributions are generally 100% tax deductible. Additionally, businesses who offer a 401(k) may qualify for tax credits for startup costs and auto-enrollment features.¹

How does a 401(k) help with employee recruitment?

70% of employers say offering a retirement benefit has positively impacted their ability to hire top talent. Half of employees would turn down a job without retirement benefits.²

Why is employee financial wellness important for employers?

Financially stressed employees are less productive. They are 5x more likely to be distracted at work and spend 3+ hours per week dealing with financial concerns.

Disclosures

¹ This content is for informational purposes only and is not intended to be taken as tax advice. Please consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim.

² Research run by Gusto Retirement using Suzy. Data collected Dec 2023-Jan 2024, survey of 776 US-based respondents. Gusto Retirement (formerly Guideline) was not identified as the survey sponsor. Though the survey is broad in scope, the experiences of the respondents in this survey may not be representative of all people.

³This content is for informational purposes only and is not intended to be taken as tax advice. Please contact a tax professional for further information.