401(k) and Tax Benefits for Small Businesses

According to a 2019 AARP study, 48% of Americans 55 and older don’t have any retirement funds at all. This could be largely due to the fact that small businesses make up 99.7 percent of U.S. employers and only 10% of small businesses offer a 401(k) to their employees.

There are many reasons why a small business should offer a 401(k) plan.  One of the reasons is that when an individual is job searching, retirement-related benefits are the top 3 most important employee benefits that they are looking for when applying for a job. Therefore, having a retirement plan will bring in the best candidates. 401(k) plans are also known to bring employee satisfaction while working for a company because they have peace of mind knowing that there is money waiting for them when they decide it’s time to retire.

401(k) plans also bring many tax saving advantages to both employers and employees. Employer contributions are not subject to federal or state income tax and are more tax efficient than an outright bonus. An owner-employee can contribute up to $19,500 pretax from their paychecks ($26,000 if they are age 50 or over) with an additional employer contribution for a max of $58,000 per year for 2021.  The employer contribution is also a business deduction and as such is not taxed.  Employees can save up to $19,500 in 2021 and an additional $6,500 if they are age 50 or over. This money will be withheld from their paycheck before federal and state income taxes are calculated, so the amount of the contributions will reduce income taxes on the employee’s personal tax return. Some employers will offer matching contributions up to a certain limit, acting to incentivize employees to contribute more to their 401(k) and boost their retirement savings.

The new deadline for small businesses to adopt a 401(k) plan varies depending on the type of company you have.  You will find the major deadlines for the 2021 tax year below by company type.

October 1, 2021:  Deadline to adopt a safe harbor 401(k) plan for 2021. 

December 2, 2021:  Deadline to adopt the amendment necessary to convert a traditional 401(k) plan to a 3% nonelective safe harbor plan for 2021.

March 15, 2022:  Deadline for S-Corps and partnerships (or LLCs taxed as either) to adopt a traditional 401(k) plan for 2021 (assuming NO tax return extension is filed).

April 15, 2022:  Deadline for C-Corps and sole proprietorships (or LLCs taxed as either) to adopt a traditional 401(k) plan for 2021 (assuming NO tax return extension is filed).

September 15, 2022:  Deadline for S-Corps and partnerships (or LLCs taxed as either) to adopt a traditional 401(k) plan for 2021 (assuming a tax return extension is filed). 

October 15, 2022:  Deadline for C-Corps and sole proprietorships (or LLCs taxed as either) to adopt a traditional 401(k) plan for 2021 (assuming a tax return extension is filed).

December 31, 2022:  Deadline to adopt the amendment necessary to convert a traditional 401(k) plan into a 4% nonelective safe harbor plan for 2021.