Tax Advantages of Employee Benefit Plans for Construction and Architecture Firms

Tax Advantages of Employee Benefit Plans for Construction and Architecture Firms. Beyond the benefit of improving employee retention and morale, employee benefit plans present a spectrum of tax advantages that can bolster your construction or architecture firm's financial health and strategic growth. As the industry faces unique challenges, from seasonal employment fluctuations to high turnover rates, understanding and leveraging these tax benefits becomes even more crucial.

At Correct Capital Wealth Management, we help architecture and construction firms design and implement customized retirement plans that benefit both their employees and their company's bottom line. If you're thinking of increasing or reworking employee benefits at your firm, call Correct Capital today at 314-930-401K, or contact us online.

About Employee Benefit Plans

Employee benefit plans encompass a wide array of non-wage benefits provided to employees. These can range from health insurance and retirement plans to disability coverage and more. Their primary purposes are two-fold:

  1. Attracting, retaining, and motivating employees by addressing their diverse needs and aspirations
  2. Taking advantage of laws that offer tax deductions and credits to employers that offer employee benefits

Essentially, an employee benefit plan is a program initiated by employers to supplement the wages of employees. While they can be mandated by law, such as social security or workers' compensation, many are voluntarily provided by employers as a part of their compensation strategy.

Varieties of Employee Benefit Plans

  • Retirement Plans These include 401(k)s, pensions, and more "creative" options like stock ownership and ESOPs
  • Health Benefits — Health, dental, and vision insurance plans that cover medical expenses
  • Insurance Coverages — Life insurance, disability coverage, and long-term care insurance, ensuring financial security during unforeseen events
  • Paid Time Off — Benefits such as vacation days, sick leaves, and personal days
  • Other Benefits — These can range from tuition assistance, childcare support, to smaller benefits like transportation reimbursements

Tax Advantages of Employee Benefits for the Company

Tax Deductions on Contributions

Employee benefit plans can significantly reduce a company's tax liability, and one of the primary ways they achieve this is through tax deductions on contributions.

  • When a company contributes to certain employee benefit plans, such as retirement plans (e.g., 401(k)s) or health savings accounts (HSAs), these contributions are typically considered a business expense. As a result, they can be deducted from the company's taxable income, reducing the overall tax liability.
  • There are caps on how much an employer can deduct for their contributions. For example, in 401(k)s and other IRS-approved plans, annual total contributions to an employee's retirement account cannot exceed the lesser of:
  • Some benefits provide immediate tax deductions for the company, while others, like certain retirement plans or profit-sharing plans, offer deferred tax benefits. This means that the earnings (like interest, dividends, and capital gains) on the assets held in these plans grow tax-free until they are distributed. This can lead to a significant accumulation of wealth over time, benefiting both the employee and the employer and allowing for more strategic tax planning.

Tax deductions associated with employee benefit plans present a win-win scenario. Companies not only provide valuable benefits to their employees but also enjoy substantial tax savings.

Tax Credits for Plan StartUp Costs

Starting an employee benefit plan, especially a retirement plan, often comes with associated administrative and set-up costs. To incentivize small businesses to offer these plans, the government provides retirement plan startup costs tax credits that can offset some of these initial expenses.

  • A tax credit is a direct reduction in the amount of taxes a company owes. Unlike deductions that reduce taxable income, credits reduce the tax bill dollar-for-dollar.
  • Under the SECURE Act 2.0, some businesses can claim 50% of administrative costs of starting up a retirement plan as a tax credit, up to $5,000. You're eligible for this tax credit if:
    • You had 100 or fewer employees who earned at least $5,000 the previous year
    • At least one plan participant was a non-highly compensated employee (NHCE)
    • In the preceding 3 years before starting your plan, you did not already offer a plan to substantially the same employees
  • The tax credit is 50% of your plan startup costs, up to the greater of:
    • $500
    • The lesser of $250 multiplied by number of NHCEs or $5,000
  • To further encourage businesses to promote employee participation, an additional tax credit is available for plans that include an automatic enrollment feature. This credit can be up to $500 per year and is available for three years, irrespective of when the auto-enrollment feature is added.
  • Other employee benefits, in addition to retirement plans, are also eligible for tax credits – for example, the Small Business Health Care Tax Credit.

Tax credits for plan startup costs provide a tangible incentive for construction and architecture firms to establish employee benefit plans. Not only do they help offset initial expenses, but they also pave the way for long-term employee satisfaction and fiscal health of the company.

Special Considerations for Construction and Architecture Firms

The construction and architecture sectors have unique operational dynamics, often characterized by project-based work, seasonal employment patterns, and fluctuating workforce demands. These distinctive features require a tailored approach when considering and implementing employee benefit plans.

  • The cyclical nature of construction projects can lead to periods of intense activity followed by quieter times. This can impact the consistency of contributions to benefit plans and the ability to meet certain eligibility requirements. Flexible benefit plans that accommodate variable contribution rates, or plans with provisions tailored for seasonal workers, can help address these challenges.
  • Both construction and architecture industries can experience high turnover rates due to the project-based nature of the work and the demand for specialized skills. Offering a competitive benefits package can act as a significant retention tool, ensuring that skilled professionals remain with the firm even between projects. While this may not have a direct impact on taxes, it can lower costs for hiring and training. Setting up a retirement plan with a vesting schedule can motivate employees to stay on for longer.
  • Profit-sharing plans like ESOPs are common in the construction and architecture industry, and they offer additional tax advantages. If you offer a portion of your business to employees (minimum 30%), you can defer capital gains taxes (provided you reinvest into qualified replacement securities).

While the construction and architecture industries have their unique set of challenges, with careful planning and expert guidance, they can craft benefit packages that cater to their company's unique workforce dynamics and turn those challenges into points of strength.

Call Correct Capital For Customized Construction Retirement Plans

Navigating the intricate landscape of employee benefit plans, especially in specialized sectors like construction and architecture, requires a combination of financial savvy, experience, and a deep understanding of client needs. Correct Capital takes a client-centric approach to retirement planning to find the most available benefits for both your profits and your employees.

If you're ready to elevate your employee benefit offerings and harness the full spectrum of tax advantages, reach out to Correct Capital today. Schedule an appointment with a member of our advisor team, call us at 314-930-401K, or contact us online to get started.