LAST REVIEWED Apr 29 2020 9 MIN READ
By Cyndia Zwahlen
What’s on the menu when it comes to offering employee benefits at your restaurant? Though retirement plans are cited as a major reason that staff join and stay with their employers, the traditional 401(k) is often seen as too costly and complex for a small restaurant business to provide.
We’re here to break down that myth, and help you decide whether you should offer a 401(k) for your restaurant workers, especially since it may become legally required in your state soon. We wrote this article specifically for restaurant (or bar, deli, brewery, cafe, etc.) owners and managers but if you are an employee at such a business, you may also find this helpful for understanding the various industry-specific pros and cons of a 401(k).
Here are the three concrete, high-level benefits: Offering a 401(k) helps you hire and keep great workers, offers your restaurant significant tax deductions, and opens up employee tax breaks as well. More detail on each of these below!
Benefits to the Restaurant: Why Offer a 401(k)
Attract the best new hires. If you already offer health insurance at work, it may be time to add a retirement savings plan. According to a Willis Towers Watson survey, 51% of workers said that their employer’s retirement benefits were a major reason they chose to join.
Retain your workers. If you want to encourage your best workers to stay at your restaurant for the long term, a 401(k) can be a great incentive, especially if it’s matched. That’s free money to them, and a tax deduction for you. In that same survey, over 75% of new employees said that retirement plans gave them a reason to stay with their company. This retention boost is even more important for managers, chefs, and other skilled team members where retention and institutional knowledge are critical.
Earn 401(k) tax credits and deductions for your restaurant. Cash is almost always tight at a restaurant business, but Uncle Sam provides healthy tax breaks for employers offering a 401(k). Through the SECURE Act, employers starting a new retirement benefit are eligible for much larger tax credits:
The greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The setup tax credit continues to apply for three years.
In addition, there’s an additional $500 tax credit available for employers who opt to start a plan with auto-enrollment as well as to existing plans that adding the feature!
Furthermore, you can deduct the remaining costs and contributions as a business expense.
So, if you use, say, Human Interest to provide a 401(k) plan, you can take a tax credit for the $499 set-up fee the first year and then take a $500 credit each year for two more years against the plan’s base price of $1,440 a year. You can claim a tax deduction for the rest, including the $4 per employee charge each month.
Employees save more than they would with a salary boost. Because retirement contributions offer tax incentives, an employer contribution to employees’ 401(k)’s goes further than a simple salary increase or bonus of the same amount.
Employees may qualify for a saver’s credit. Restaurant workers, especially those just starting out in their careers, are usually on the lower end of the IRS pay scale. Lower-income workers can claim a tax credit on a percentage of their 401(k) contributions, further sweetening the pot from your employees’ end. In 2019, workers with incomes below $48,000 (head of household), $64,000 (married filing jointly), or $32,000 (all other filers) can claim the saver’s credit.
Tailor Your 401(k) to the Restaurant Business: Part-time Workers and Immigrants/Foreign Nationals
Restaurants have unique challenges when it comes to setting up a 401(k) plans they can afford and that meets the IRS rules for plan fairness. The IRS wants to ensure that 401(k)s are benefitting rank-and-file employees, not just the top earners. To that end, your plan must pass a nondiscrimination test comparing the contributions of highly compensated employees (in 2017, that’s people with 5% ownership of the business or more, or with incomes over $150,000) to non-highly compensated employees. The nondiscrimination tests get really detailed really fast, but the upshot is that you don’t want most of your 401(k) contributions coming from your top earners. (This article examines the nondiscrimination test in detail.)
So why does this matter to restaurants? Well, high employee turnover and a relatively young, potentially international, part-time workforce can mean that 401(k) participation is likely to be on the low side. This can make it harder to pass the nondiscrimination test. Should your business fail the test, the IRS will limit how much highly compensated employees can put into their own 401(k)s, and the plan might be penalized. We’ll walk through some possible solutions.
Based on your particular employee demographic, you may find these resources helpful:
How Can Restaurants Encourage 401(k) Participation?
Make enrollment and contributions easy. Choose a plan with an automatic enrollment option to encourage your employees to contribute, and limit how much it costs employees (the average plan costs employees 1.89% annually; Human Interest costs 0.5%).
Limit plan fees. Restaurants are low-margin businesses, so choosing plans with online administration and low-cost index fund investments can keep costs down.
Restrict eligibility to full-time workers. You can lower the costs of offering the plan by limiting eligibility to full-time workers, implementing minimum service requirements, or those over 21.
Delay vesting. To boost retention among your skilled workers and limit your costs in this high-turnover business, you can delay full ownership of your contributions to their 401(k) accounts over a period of time no longer than five years for a traditional 401(k).
Read more about the recommended steps below:
Hiring and retaining skilled workers is a challenge most restaurants face. Give your business a leg up by offering a tax-advantaged benefit that employees clearly value.
If you’re looking for a great 401(k) for your employees, click here to request more information about Human Interest.
Image credit: Nick Karvounis
Cyndia Zwahlen, a former small-business columnist for the Los Angeles Times, is a freelance business writer and editor for media, academic and business clients. She founded the Small Biz Mix blog.