Posted on Sep 15, 2023

If you’re an employer with a SIMPLE IRA plan for your workforce and want to switch to a 401(k) profit-sharing plan beginning January 1, 2024, the deadline is November 1, 2023, to notify employees that your current plan will be discontinued. A 401(k) profit-sharing plan enables employers to give employees, including owners, a discretionary contribution employer match or profit-sharing contribution each year. Employer contributions are not mandatory or guaranteed, giving employers flexibility to determine how much to contribute each year based on the company’s financial wellness.  

Benefits for employers include:  

  • Higher contribution options. For 2023, the total employer contribution limit is the lesser of 100% of an employee’s total compensation, or $66,000. With catch-up contributions, this amount increases to $73,500 for employees aged 50 and older.

  • More flexibility with plan design. A 401(k) profit-sharing plan allows employers more flexibility in tailoring the plan to their specific needs. For example, employers have the option to choose a contribution vesting schedule based on the employee's length of service, which can incentivize retention.

  • Tax benefits. The employer’s profit sharing and matching contribution is typically 100% tax deductible for the business, which can help the business lower its tax burden.

  • Boost to retirement accounts. Owners and employees can get a boost to their retirement accounts without increasing their taxable income in a given year. In addition, profit-sharing and matching contributions are not subject to Social Security or Medicare withholding. As a year-end bonus, a profit-sharing contribution can thus be worth more to employees than a similarly-sized direct bonus payment that is subject to tax withholding.  

With increased tax credits for the employer as a result of SECURE Act 2.0, 401(k) profit-sharing plans are more affordable than ever.

This material is provided for informational purposes only, and is not intended as authoritative guidance, legal advice, or assurance of compliance with state and federal regulations.

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