Offering pension benefits is a significant way for businesses to attract and retain valuable employees, and for business owners to plan for their own retirement. These benefits, which include employer contributions to retirement plans, represent an important business expense. For accountants and Small to Medium-sized Business (SMB) owners, understanding how to correctly categorize and deduct these expenses is crucial for accurate financial reporting and maximizing tax advantages.
This guide will discuss the pension benefits expenses category, key considerations when classifying these costs, common examples, their tax implications under IRS guidelines, and how Fyle can assist in tracking expenditures related to plan administration.
Pension benefit expenses primarily refer to the contributions an employer makes to qualified retirement plans on behalf of their employees. These contributions are a form of employee compensation and are generally considered Operating Expenses for the business.
In an accounting system, these expenses are typically recorded under categories such as:
The cost associated with administering these plans, such as trustee fees, may also be considered a business expense.
The specific rules for deductibility and contribution limits vary depending on the type of plan established. Common plans for small businesses include:
The IRS sets annual limits on the amount that can be contributed to various retirement plans for each employee and the total amount the business can deduct. It's crucial to stay within these limits to maintain the plan's qualified status and avoid penalties.
For many plans, to deduct contributions for a specific tax year, the employer must make those contributions by the due date of their tax return for that year, including extensions.
Maintaining an updated, formal written plan document and adhering to all operational and administrative rules (such as nondiscrimination testing for certain plans) is vital for the plan to remain "qualified" and for contributions to be deductible.
Fees paid for setting up, administering, and maintaining a retirement plan (e.g., fees to financial institutions or third-party administrators) are generally deductible by the business if not paid out of plan assets.
Understand the vesting schedule of your plan, as it determines when employees gain non-forfeitable ownership of employer contributions.
These are costs typically incurred by the employer:
Contributions made by an employer to a qualified retirement plan for the benefit of employees are generally deductible as an ordinary and necessary business expense, provided they are within IRS limits. For sole proprietors, these are reported on line 19 of Schedule C (Form 1040).
Contributions made by a sole proprietor or partner for their own retirement plan are typically deducted on Schedule 1 (Form 1040), line 16, as an adjustment to income.
Earnings on contributions within these retirement plans generally grow tax-deferred (or tax-free in the case of Roth contributions/accounts) until the funds are distributed to the employee in retirement.
To deduct contributions for a given tax year, they generally must be made by the business's tax return filing deadline for that year, including extensions.
Businesses starting a new qualified defined benefit or defined contribution plan (including a 401(k)), SIMPLE plan, or SEP plan may be eligible for tax credits to help offset the costs of starting and maintaining the plan, and for implementing automatic enrollment features. Form 8881, Credit for Small Employer Pension Plan Startup Costs, is used for this purpose.
It is critical that the retirement plan meets all IRS requirements for being a "qualified plan." If a plan loses its qualified status, contributions may not be deductible, and adverse tax consequences can arise for both the employer and employees. (For detailed rules, employers should consult IRS Publication 560, Retirement Plans for Small Business, which is the comprehensive guide on this topic.)
While Fyle is primarily designed for managing day-to-day operating expenses, receipts, and corporate card transactions, it can still assist in tracking certain costs associated with pension benefit administration.
If your business pays trustee fees or other plan administration charges using a corporate credit card, Fyle’s real-time feeds will capture these transactions automatically. Invoices for such services can be easily uploaded or forwarded to Fyle and attached to the relevant transaction.
Although actual pension contributions are often made via payroll deductions or direct bank transfers (which Fyle’s card feeds typically don't capture), Fyle can serve as a repository for related documentation. For instance, summary reports of contributions, confirmation of payments from payroll, or statements from the plan administrator can be uploaded and stored within Fyle for record-keeping and easy access by accountants.
Payments made for pension plan administrative services can be specifically categorized in Fyle (e.g., "Pension Admin Fees," "Employee Benefit Costs") for accurate financial reporting.
If payments for administrative fees or discretionary contributions require internal review, Fyle’s customizable approval workflows can be utilized to manage this process.
Fyle can export categorized expenses, such as plan administration fees, along with their supporting documentation, to your main accounting system (QuickBooks, Xero, NetSuite, Sage Intacct). This helps ensure these costs are correctly recorded in the general ledger.
Fyle’s reporting features can help track spending on the administrative aspects of your pension plans, contributing to a better overall understanding of employee benefit costs.
By using Fyle to manage the documentation and tracking of payments for pension plan administrative fees, businesses can improve organization and ensure accountants have easy access to records needed for financial reporting and tax compliance. For the detailed rules and administration of retirement plans themselves, businesses should consult IRS Publication 560 and their plan administrators.