Lesson 1.2: Should Your Business Pay Plan Costs?
Module: Tax Optimization (Lever 1)
Course: The Four Levers of Business Growth
Est. read time: 5 minutes
The Question Nobody Asks
Here's something that almost never comes up in conversations about retirement plans: who pays the plan expenses?
Most plans deduct expenses directly from participant account balances. It happens automatically. Nobody questions it because nobody talks about it.
But how plan expenses are paid matters more than most people think. And when you look at the four reasons it matters, the case for the business writing a check — instead of letting fees come out of plan assets — is hard to argue against.
Reason 1: Deductibility
If the business writes a check for plan expenses, those costs are a deductible business expense. Just like rent. Just like payroll. It reduces taxable income.
When expenses come out of plan assets instead? They're not deductible to the business. The money disappears from participant accounts, but the company gets no tax benefit from it.
Business owners make silly purchases every year just to create tax deductions. A company car they don't need. Office furniture they're replacing too early. Plan expenses are a legitimate, justifiable deduction that most businesses are completely missing.
Reason 2: Fiduciary Exposure
Under ERISA — the federal law governing retirement plans — anything done with plan assets carries a higher level of fiduciary scrutiny. Every dollar that comes out of a participant's account has to pass fiduciary review. Was this expense reasonable? Was it necessary? Did the fiduciary exercise due diligence?
Company-paid expenses are outside that bucket. The business is making a business expense decision, not a fiduciary decision. Same outcome — the plan vendor gets paid — but with less regulatory risk.
Less risk. Same result. That's a straightforward improvement.
Reason 3: Who's Really Paying?
Asset-based fees are charged as a percentage of account balances. That means the people with the largest balances pay the most in dollar terms.
Who has the largest balances? The owners and highly compensated employees. Exactly the people the plan is supposed to benefit most.
Every dollar taken from those accounts in fees is a dollar that's no longer invested. No longer compounding. No longer building toward retirement.
Company-paid fees mean more of every participant's contributions stay invested and working. But the impact is biggest for the people with the most at stake — the owners.
Reason 4: Recruiting and Retention
"We offer a 401(k) AND the company pays the plan expenses."
That's a sentence most employers can't say. And it's a cheap, powerful differentiator for hiring. In a tight labor market, small advantages matter. This one costs relatively little and signals something meaningful: we invest in your future, and we don't nickel-and-dime it.
This is a direct cross-lever connection. What starts as a tax optimization decision (writing the check for deductibility) becomes a turnover reduction tool (the loyalty message to employees). The levers don't work in isolation — they reinforce each other.
The Talk Track
If you're a CPA or financial professional bringing this to a client meeting, here's how to frame it:
"I want to ask you something about your 401(k) that probably hasn't come up before. Who pays the plan expenses — the company or the plan participants?
Most plans take expenses out of participant accounts automatically. But there are four reasons that might not be the best approach for your business."
[Walk through the four reasons above.]
"The net effect: you get a tax deduction, you reduce fiduciary exposure, your own retirement account stops subsidizing plan costs, and you get a recruiting message you can use in every job posting. For most businesses, the cost of writing that check is less than the combined value of what you get back."
It's the kind of idea CPAs can bring to clients on Monday that changes the dynamic of the relationship.
The Startup Credits That Change the Math
If a business doesn't have a plan yet, there's a second piece of tax math that many owners and professionals have never run: the federal startup credits, expanded under SECURE 2.0.
For a business with 50 or fewer employees, three federal credits may apply when starting a first plan (figures per the IRS):
- Startup cost credit: 100% of qualified setup, administration, and retirement-education costs, capped each year at the greater of $500, or the lesser of $250 per eligible non-highly-compensated employee or $5,000 — for the first credit year and the two following years. Businesses with 51–100 employees get 50% instead of 100%. Applying the percentage without that cap produces an incomplete number.
- Employer contribution credit: up to $1,000 per employee — for employees earning under $110,000 in 2026, a figure the IRS indexes each year. Note this is an earnings test, not the highly-compensated test; they are different thresholds and they are easy to confuse. The applicable percentage runs 100% in years one and two, then 75%, 50%, and 25% in years three through five — and it applies to the contribution, with the $1,000 per-employee ceiling applied after it. For employers with more than 50 employees the credit is then cut proportionally, by 2% of the amount for each employee over 50.
- Auto-enrollment credit: a flat $500 per year for three years for an eligible automatic enrollment arrangement. Plans established after December 29, 2022 are generally required to auto-enroll for plan years beginning after December 31, 2024, with exceptions (see Lesson 1.1) — so for most new plans this credit offsets part of a requirement rather than paying for an optional feature.
Eligibility, briefly: 100 or fewer employees who earned at least $5,000 in the prior tax year, at least one plan participant who is not highly compensated, and — the one that catches people — no qualified employer plan covering substantially the same employees in the prior three tax years. Read that last test carefully. It is not limited to a similar kind of plan: under IRC 4972(d) a SEP or a SIMPLE IRA counts, alongside a 401(k), a profit sharing plan, or a 403(a) annuity. So an owner who has been running a SEP or a SIMPLE for the same people may fall outside both 45E credits even though the 401(k) itself is new, and the test reaches the whole controlled group and any predecessor employer, not just the entity signing the document. The details are exactly the kind of thing to route through the business's CPA and TPA — but the headline is simple: for many small businesses, the credits offset most — and sometimes all — of a plan's setup and administration costs for the first three years. The contribution credit runs separately.
The tool: the free What Are the Credits Worth? estimator sizes all four credits year by year and asks the eligibility questions above before it shows any number. It also carries a piece that is easy to omit: because both 45E credits require the matching deduction to be reduced, a gross credit figure does not show the full after-tax effect. Use it to frame the CPA and TPA conversation, not to produce a figure a client relies on.
And if your state requires employers to offer a retirement option, this is the other half of that conversation: the requirement puts the question on the table, and the credits change what answering it costs. For a CPA, walking a client through these numbers is a short conversation with real dollars attached.
Credit amounts and eligibility are set by federal law and IRS guidance and can change; confirm 2026 figures with the business's CPA and TPA before acting.
A Note on Investment Management
A common question when discussing plan costs: "If we're changing how expenses are paid, what about the investment side?"
In the 401Grow system, investment management is handled by a 3(38) fiduciary — a specialized firm that takes full fiduciary responsibility for selecting and monitoring the plan's investment options. The cost is typically 4-5 basis points (0.04-0.05% of assets). This means the business owner doesn't carry investment liability, and investment decisions are made by professionals whose sole job is managing plan investments.
This matters because it separates the strategic work (plan design, tax optimization, employee engagement) from the investment work. The 3(38) handles investments. The Four Lever System handles everything else — which is where the real business value lives.
What This Means for Your Business
Take 5 minutes to find out how your plan expenses are paid. If they're coming out of participant accounts, ask your TPA or recordkeeper what it would cost for the business to pay them directly. Then talk to your CPA about the deduction.
For many businesses with 10-99 employees, the math works. You're probably already looking for deductions — this one also happens to protect your retirement savings, reduce your liability, and help you recruit.