For business owners wondering, “Are employer contributions to retirement plans tax-deductible?” The answer is yes. The same goes for healthcare plans. There are multiple ways for you to save your business money and keep your employees happy at the same time. I’m talking about tax deductions for healthcare and retirement plans.
Now, I’m going to break down how you, as a small business owner, can save money by doing two things:
- Create tax-deductible healthcare and retirement plans for your employees.
- Contribute to those plans in a tax-efficient manner.
Let’s get started.
Create a tax-deductible retirement plan for your employees.
When you establish a retirement plan, you support your employees' financial futures and save your business money. So, when employer contributions to retirement plans are tax-deductible, the value goes both ways. Employee retirement and healthcare are going to factor into how business owners set up retirement plans.
As Section 404 of the Internal Revenue Code notes, employers can deduct costs associated with a retirement plan setup, including administrative expenses and contributions.¹ So, the answer is yes, employer contributions to retirement plans are tax-deductible.
Small businesses may also be eligible for SECURE 2.0 Act tax credits, which offer incentives for starting new retirement plans.
Three of the go-to retirement plans for small business owners to set up are 401(k)s, SIMPLE IRAs, and SEP IRAs.
401(k) Plans are flexible and popular for higher contributions.
A 401(k) plan allows employees to contribute pre-tax income toward retirement, with optional employer matching. Employees are often attracted to 401(k)s because of the high contribution limits and flexibility.
SIMPLE IRAs are cost-effective and easy.
SIMPLE IRAs are for businesses with 100 or fewer employees. They require less setup and allow tax-deductible employer contributions, either as a matched contribution or a fixed percentage.
SEP IRAs are great for self-employed or small companies.
Simplified Employee Pension (SEP) IRAs give smaller employers an easy way to contribute to their employees' retirement. They don’t come with many of the start-up and operating costs of other plans but have high contribution limits.
Contribution limits change each year.
So it’s important to pay attention. In 2024, the contribution limit for a 401(k) plan is $23,000. For SIMPLE IRAs, it’s $16,000. SEP IRAs allow employers to contribute up to $69,000 per employee or 25% of the employee's compensation, whichever is less.²
Find out if your business is eligible for SECURE 2.0 Act tax credits.
Under the SECURE 2.0 Act, eligible small businesses can claim up to $5,000 per year for the first three years of a retirement plan to account for set-up costs and another $500 annually if the plan has automatic enrollment.
Here are the eligibility requirements your business must meet for SECURE 2.0:
- A business must have one hundred or fewer employees who received at least $5,000 in compensation from you for the preceding year.
- A business must have at least one plan participant who is a non-highly compensated employee, which means that the employee is not in upper management.
Finally, your business is eligible for the credit if, the three tax years before the first year, your employees are not substantially the same employees who received contributions or accrued benefits from another plan provided by your business, a member of a controlled group that includes you, or a predecessor of either.³
Keep contributing to your employees’ retirement.
Once you’ve set up a retirement plan, you can keep lowering your taxable income through employer contributions.
The three ways to contribute are:
- matching contributions,
- profit-sharing, and
- fixed (non-elective) contributions
Each one gives your team financial security and is tax-deductible under Internal Revenue Service (IRS) Section 404.
Set up tax-efficient healthcare plans.
Now, let’s move to healthcare, which also has significant tax advantages for your business.
Offering healthcare through the SHOP (Small Business Health Options Program) can make you eligible for the Small Business Health Care Tax Credit. More on this credit in a moment — but know that it covers up to 50% of the premiums you pay.
Healthcare contributions are tax-deductible.
That means you can offer valuable support to employees and see tax reductions at the end of the year.
Use Small Business Health Care Tax Credit to offset employer-sponsored health insurance costs.
If your business provides health insurance, the Small Business Health Care Tax Credit offsets some of the cost.
To be eligible, your business must:
- Have fewer than 25 full-time equivalent (FTE) employees.
- Have an average employee salary of $56,000 per year or less.
- Pay at least 50% of your full-time employee’s premium costs.
- Offer SHOP coverage to all of your full-time employees.⁴
As I mentioned, this credit covers up to 50% of premiums you pay for employees, making it a powerful way to offer health coverage while lowering your overall tax liability.
Healthcare benefits attract and retain quality employees.
Here’s the bottom line: Retirement and healthcare plans keep your current employees happy and help you attract top talent.
Retirement and healthcare aren’t just perks. They’re needed to show your employees that you’re serious about investing in them. The result for your business is increased loyalty and reduced turnover.
Let’s get started with employee healthcare & retirement plans.
We're a Fort Worth-based CPA firm specializing in proactive tax planning and business advisory services.
If you need help setting up retirement and healthcare plans or contributing to them in ways that maximize your tax benefits, schedule a discovery call today.
Talk soon,
Jeremy A. Johnson, CPA
References
- 401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000 | Internal Revenue Service [Internet]. IRS.gov. 2023 [cited 2024 Nov 6]. Available from: https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
- Holland, Jr, J. Section 404. Deduction for Contributions of an Employer to an Employees’ Trust or Annuity Plan and Compensation Under a Deferred Payment Plan [Internet]. IRS.gov. Available from: https://www.irs.gov/pub/irs-lbi/revrul200246l19irs.pdf
- SECURE 2.0 Act changes affect how businesses complete Forms W-2 | Internal Revenue Service [Internet]. IRS.gov. 2024 [cited 2024 Nov 5]. Available from: https://www.irs.gov/newsroom/secure-2-point-0-act-changes-affect-how-businesses-complete-forms-w-2
- Small Business Health Care Tax Credit Questions and Answers: Who Gets the Tax Credit | Internal Revenue Service [Internet]. IRS.gov. 2024 [cited 2024 Nov 5]. Available from: https://www.irs.gov/newsroom/small-business-health-care-tax-credit-questions-and-answers-who-gets-the-tax-credit
