Introduction

With inflation driving up the costs of everything from raw materials to labor, small and mid-sized businesses are looking for ways to manage expenses and stabilize their financial footing. Retirement plans, often considered essential to attracting and retaining talent, may seem like a costly benefit to maintain during uncertain times. However, Pooled Employer Plans (PEPs) offer a powerful solution for businesses looking to maximize long-term tax efficiency and counter inflationary pressures. Recent legislation, like the SECURE 2.0 Act, has amplified the tax-saving benefits of PEPs, making them a more strategic choice than ever. 

This post explores how PEPs can act as a buffer against rising costs, with specific examples to highlight how businesses have used PEPs to enhance tax efficiency and boost financial resilience.  

Section 1: Understanding the Financial Structure of PEPs and Tax Efficiency 

At their core, Pooled Employer Plans (PEPs) allow multiple employers to join together under a single retirement plan, creating significant cost efficiencies. Instead of each business managing its own administrative and compliance responsibilities, a PEP consolidates these duties under a designated provider. This arrangement reduces the operational burden on individual employers and helps streamline plan management. 

With recent updates under the SECURE 2.0 Act, these tax benefits have become even more impactful: 

• Increased Tax Deductions for Contributions: Employers receive deductions for their contributions to employee retirement plans, which directly lowers their taxable income. 

• Reduced Administrative Costs: By pooling resources, businesses in a PEP can benefit from shared administrative and compliance services provided by the PEP provider, lowering the financial and logistical commitment compared to sponsoring a standalone plan. 

Example: Reducing Operational Costs through PEPs
A mid-sized manufacturing company with 75 employees joined a PEP in early 2023. Facing increased costs of goods and supply chain challenges, the company sought tax relief options that wouldn’t compromise employee benefits. By joining a PEP, the company reduced its administrative costs by 20% compared to a traditional 401(k) plan, while the PEP provider managed compliance and other regulatory responsibilities. This change qualified the company for additional tax credits introduced by the SECURE 2.0 Act. Over the first year, the company saved approximately $12,000 on retirement plan expenses while maintaining a valuable benefit for employees. 

Section 2: Key Legislative Tax Credits and Their Long-Term Impact 

The SECURE 2.0 Act introduces tax credits designed to encourage more businesses to adopt PEPs and maintain them long-term. Here’s a look at two key credits and their potential for ongoing tax efficiency: 

1. Enhanced Start-Up Credits for New PEP Participants 

Under SECURE 2.0, businesses with 100 or fewer employees can claim a tax credit to cover up to 100% of the administrative costs of launching a PEP, with an annual cap of $5,000 for the first three years. For companies facing inflationary pressure, this credit makes it possible to provide a retirement plan without incurring prohibitive initial costs. 

• Long-Term Impact: By covering setup costs, businesses can allocate funds to other areas, such as employee engagement or operational improvements, while still gaining the tax benefits of a retirement plan. 

2. Per-Employee Credit for Non-Highly Compensated Workers 

To support businesses offering benefits to lower- and middle-income employees, SECURE 2.0 includes an additional credit of up to $1,000 per eligible employee. This credit phases out over five years, giving businesses time to stabilize and scale the retirement plan’s impact on the workforce. 

• Example: A small tech startup with 20 non-highly compensated employees could qualify for up to $20,000 in credits, enabling the business to offset plan-related costs during early growth years and reinvest those funds into expansion initiatives. 

Case Study: Phasing in Benefits to Maximize Credits

A health services provider with 35 employees joined a PEP to take advantage of per-employee credits. The business initially claimed the full per-employee credit for 25 eligible employees, amounting to $25,000 in savings. This financial boost offset inflation-driven operational costs, and with the phased credit structure, the business expects to retain cost efficiencies while gradually increasing its contributions over the next five years. 

Section 3: PEPs as a Strategic Tool to Counter Inflation and Manage Costs 

As businesses navigate rising costs, PEPs offer an additional layer of financial resilience by reducing payroll tax burdens and optimizing cash flow. Here’s how these plans can help maintain financial stability during economic uncertainty: 

Shared Administrative Burden Reduces Overhead 

With inflation affecting nearly every aspect of business operations, sharing the administrative tasks of a retirement plan allows companies to retain benefits at a fraction of the individual cost. PEP providers take on the bulk of plan administration, including compliance, reporting, and employee communications, further reducing strain on employers’ resources. 

• Example: For small businesses with limited administrative support, joining a PEP frees up internal resources that would otherwise be spent managing compliance, allowing them to focus more on core business operations instead. 

Immediate Tax Deductions on Employer Contributions Preserve Cash Flow 

PEPs offer businesses the opportunity to take immediate tax deductions on contributions made to employees’ retirement accounts. This reduces taxable income, providing businesses with more cash on hand—a crucial benefit during periods of economic uncertainty, such as inflationary cycles. By reducing their tax liability through these contributions, businesses can better manage cash flow and reinvest savings into critical areas of their operations. 

Example: Cash Flow Management in a PEP-Driven Strategy
A small logistics firm with high seasonal costs joined a PEP to stabilize its cash flow. By making employer contributions to their employees, the firm received immediate tax deductions, lowering its taxable income and freeing up cash for essential business expenses during peak cost months. Over one year, these tax efficiencies resulted in an estimated $8,000 in savings, allowing the firm to maintain operations and continue providing strong retirement benefits for its employees. 

Section 4: Steps to Ensure Maximum Long-Term Tax Efficiency with PEPs 

To fully leverage PEPs for long-term tax efficiency, businesses should consider these steps: 

• Evaluate Potential Tax Credits with a Financial Advisor
  • Work with a financial advisor or tax professional to analyze your eligibility for credits under current legislation. Advisors can ensure that your PEP structure aligns with tax-saving opportunities and that any plan-related expenses are tracked accurately for claiming credits. 
• Optimize PEP Contributions Based on Cash Flow Needs 
  • For businesses using a discretionary plan, adjusting your contribution schedule to align with your cash flow cycle can be a powerful strategy. For instance, businesses with seasonal revenue fluctuations may benefit from making larger contributions during peak months to maximize deductions without straining cash flow. This flexibility allows companies to support their employees’ retirement goals while maintaining financial stability throughout the year. 
• Partner with a PEP Provider Experienced in Tax Compliance 
  • Choose a provider, like Peppermint401k, with expertise in managing compliance and maximizing tax-related advantages for employers. While tax professionals are best suited to offer guidance on specific tax policies, a knowledgeable PEP provider can ensure that your plan structure and administration align with compliance standards, making it easier for your business to access and retain available tax benefits. By streamlining administrative processes and offering cost-saving efficiencies, PEPs enable employers to optimize their tax savings while providing a valuable benefit to employees. 

Conclusion

With the expanded tax credits and cost-sharing benefits of Pooled Employer Plans, businesses can manage their retirement plans more effectively even in an inflationary economy. By strategically using PEPs to reduce costs and enhance tax efficiency, companies of all sizes can support employee retention and financial well-being without compromising their bottom line. Peppermint401k is here to guide you through leveraging these tax benefits—reach out to discover how a PEP can enhance your long-term financial strategy.