Many 401(k)s are set up to have participants pay plan costs from plan assets. Plan sponsors may instead elect to pay plan costs out of company funds. This can benefit employers and employees:
Additional tax deduction
Lower participant fees
Reduced litigation risk
One way to tell if a 401(k) plan is successful is to set measurable objectives for participant outcomes. The following hypothetical example shows how plan expenses can be part of that mix.
Assumes $1 million in plan assets, 30 participants, $11,000 in annual plan costs and an 8% annual investment growth rate over 20 years
In this example, the employer receives an $11,000 annual tax deduction and participants receive a cumulative addition of $543,530 to their account balances over 20 years. This additional accumulation may really make a difference in the quality of retirement for participants. Sponsors, of course, can elect to pay or not pay plan expenses each year, depending on business conditions.
• Tax savings — Out-of-pocket plan fees are a tax-deductible expense.
• Reduced litigation risk — Exposure to excessive fee claims may be lower.
• More plan assets — May help the plan qualify for lower pricing.
• Better fee transparency — Participants have fewer embedded costs.
• Lower share of costs — Employers pay a greater portion of plan expenses.
• Potential higher account balances — Could help improve retirement outcomes.
The SECURE 2.0 Act of 2022 created a new startup plan tax credit based on contributions the employer makes on behalf of participants, and expanded the existing startup tax credit on employer out-of-pocket plan costs. These tax credits may provide a significant cost savings for small businesses that are starting a plan.
Learn more about the SECURE 2.0 tax credits.