Employer 401k contributions remain fully deductible

Secure your workforce retirement benefits while maximizing tax deductions

The One Big Beautiful Bill Act delivers substantial certainty for American businesses by preserving the full tax deductibility of employer 401k contributions. While the legislation introduces sweeping changes to individual and business taxation, it preserves the critical retirement-planning provisions that allow employers to deduct contributions up to 25% of eligible employee compensation, creating powerful opportunities for businesses to reduce taxable income while building employee wealth.

For businesses evaluating their 2026 tax strategies, preserving employer retirement contribution deductions is one of the most valuable and reliable tax-planning tools available. Combined with the OBBB Act's enhanced QBI deduction provisions and expanded business expense treatments, employer-sponsored retirement plans create a comprehensive approach to reducing federal tax liability while attracting and retaining talented employees.

Understanding the mechanics of employer 401k contribution deductions becomes essential as businesses navigate the new tax landscape created by the One Big Beautiful Bill Act. These contributions generate immediate tax benefits for the business while providing tax-deferred growth for employees, creating a mutually beneficial arrangement that supports both business profitability and workforce financial security.

How employer 401k contribution deductions work under current law

The Internal Revenue Code establishes clear guidelines for how businesses can deduct contributions made to qualified retirement plans, including Traditional 401k plans. These provisions remain intact following the One Big Beautiful Bill Act's enactment, providing stability for business tax planning.

Employer contributions to Traditional 401k plans are deductible as ordinary business expenses under IRC Section 404. The deduction limit equals 25% of total eligible compensation paid to all plan participants during the tax year. This percentage applies to the aggregate compensation of all employees covered by the plan rather than individual employee limits.

Key deduction parameters for 2026 include the following provisions:

1. The maximum deductible contribution equals 25% of the total eligible compensation
2. The compensation limit per employee is $305,000 for calculating contributions
3. Contributions must be made by the tax return due date, including extensions
4. Deductions reduce ordinary business income dollar-for-dollar

The compensation limitation means that even if an employee earns $500,000 annually, only $305,000 can be used when calculating the employer's maximum deductible contribution for that individual. This creates a ceiling that primarily affects higher-compensated employees while preserving full benefits for most workforce members.

Eligible business entities for employer contribution deductions

The One Big Beautiful Bill Act maintains eligibility for employer 401k contribution deductions across all standard business entity types. Whether you operate as a corporation, partnership, or sole proprietorship, your business can establish a qualified retirement plan and claim deductions for employer contributions.

Eligible entity types include the following structures:

• C Corporations can deduct contributions as ordinary business expenses against corporate income
• S Corporations pass through deductions to shareholders proportionally
• Partnerships allocate deductions according to partnership agreements
• Schedule C sole proprietorships claim deductions on the business owner's individual return
• Schedule F agricultural operations receive equivalent treatment for farm employees

For pass-through entities such as S Corporations and Partnerships, the employer contribution deduction flows through to the individual owners' tax returns. This creates direct tax savings at the owner's marginal tax rate while building retirement security for both employees and owner-participants in the plan.

Calculating your maximum employer contribution deduction

Determining your business's maximum deductible employer contribution requires calculating total eligible compensation across all plan participants. The 25% limit applies to this aggregate figure, creating substantial deduction opportunities for businesses with multiple employees.

Consider a manufacturing company with the following employee compensation structure:

• Employee A earns $120,000 annually
• Employee B earns $85,000 annually
• Employee C earns $95,000 annually
• Employee D earns $350,000 annually, capped at $305,000 for contribution purposes

The company's total eligible compensation is $605,000 (the sum of $120,000, $85,000, $95,000, and $305,000). The maximum deductible employer contribution would be $151,250, representing 25% of total eligible compensation. At a 21% corporate tax rate, this creates $31,762.50 in direct federal tax savings.

For pass-through entities, the tax savings increase with the owner's marginal rate. A partnership owner in the 37% bracket would save $55,962.50 in federal taxes with the same $151,250 contribution, underscoring the greater value of retirement contributions for high-income business owners.

Coordination with the enhanced QBI deduction

The One Big Beautiful Bill Act permanently extends and enhances the qualified business income deduction for pass-through entities, creating meaningful coordination opportunities with employer retirement contributions. Understanding how these provisions interact helps businesses maximize their overall tax benefits.

Section 70105 of the OBBB Act makes the 20% QBI deduction permanent and raises income thresholds for phase-out limitations. For 2026, single filers with taxable income below $191,950 and married filers below $383,900 can claim the full deduction without limitation. Above these thresholds, 75% of excess income reduces the deduction limitations based on W-2 wages and property.

Employer 401k contributions affect QBI calculations in several important ways:

1. Contributions reduce qualified business income by lowering the business's net income
2. W-2 wages paid to employees increase the W-2 wage limitation for QBI purposes
3. Strategic contribution timing can optimize both deductions simultaneously

For businesses above the income threshold, paying higher W-2 wages through combined salary and retirement contributions can actually increase the available QBI deduction by expanding the W-2 wage limitation. This creates a scenario in which employer contributions result in both direct deductions and enhanced QBI benefits.

Strategic timing considerations for employer contributions

The One Big Beautiful Bill Act maintains existing timing rules for employer contribution deductions while providing new planning opportunities through its broader tax changes. Businesses can optimize their tax position by carefully coordinating contribution timing with other deductions and income recognition.

Employer contributions are deductible in the tax year in which they are made, provided contributions occur by the tax return due date, including extensions. For calendar year businesses, this means contributions made by October 15, 2027 (with an extension) can be deducted on the 2026 tax return, providing flexibility in managing cash flow and tax liability.

Strategic timing approaches include the following methods:

• Making contributions early in the year to maximize tax-deferred investment growth
• Timing contributions to coincide with peak cash flow periods
• Using extension periods to evaluate full-year income before finalizing contribution amounts
• Coordinating with Depreciation and amortization elections that affect taxable income

The OBBB Act's enhanced Section 179 expensing limits and 100% bonus depreciation provisions create additional variables for contribution timing decisions. Businesses making significant equipment purchases may want to coordinate retirement contributions with depreciation elections to optimize their overall tax position.

Employee participation requirements and contribution allocation

Qualified 401k plans must satisfy nondiscrimination requirements that ensure benefits are distributed fairly across the workforce. The One Big Beautiful Bill Act preserves these requirements while maintaining the flexibility businesses need to design plans that meet their specific objectives.

Employer contributions can be structured in several ways that satisfy participation requirements:

• Matching contributions tied to employee elective deferrals
• Profit-sharing contributions are allocated based on compensation
• Safe harbor contributions that automatically satisfy nondiscrimination testing
• Combined approaches using multiple contribution formulas

Safe harbor plans provide particular advantages for businesses with highly compensated employees, allowing owners and key employees to maximize their deferrals without concern about plan testing failures. The required safe harbor contribution, typically 3% to 4% of compensation for all eligible employees, generates deductible expenses while ensuring plan compliance.

For businesses with significant wage disparities between owners and employees, safe harbor designs can provide the most tax-efficient structure while maintaining regulatory compliance. The employer contribution deduction applies regardless of the contribution formula used, provided the plan satisfies qualification requirements.

Coordination with other employee benefit strategies

Employer 401k contributions work synergistically with other tax-advantaged employee benefit strategies preserved or enhanced under the One Big Beautiful Bill Act. Building a comprehensive benefits package maximizes both employee value and employer tax deductions.

Health reimbursement arrangements provide another deductible benefit that complements retirement contributions. Employers can reimburse employees for qualified medical expenses on a tax-free basis, creating a business deduction while providing valuable coverage to employees.

Additional coordination opportunities include the following strategies:

1. Employee achievement awards for length of service and safety recognition
2. Qualified education assistance programs provide tax-free tuition benefits
3. The OBBB Act's enhanced dependent care assistance exclusion of $7,500

The OBBB Act makes the employer student loan repayment exclusion permanent under Section 70412, allowing employers to contribute up to $5,250 annually toward employees' student loans on a tax-free basis. This provision, combined with 401k contributions, creates a comprehensive financial wellness package that attracts and retains talented employees.

Roth 401k employer contribution considerations

While the One Big Beautiful Bill Act primarily addresses traditional pre-tax retirement contributions, employers should understand how Roth 401k options affect their deduction strategies. Traditional employer contributions create immediate deductions with tax-deferred growth, while Roth-designated employer contributions still create deductions but are taxed to the employee.

For most businesses, traditional employer contributions to Roth 401k plans provide the most apparent tax benefits while offering employees the choice between pre-tax and Roth deferrals for their own contributions. This balanced approach maximizes employer deductions while accommodating diverse employee preferences.

Self-employed owner considerations under the OBBB Act

Self-employed business owners face unique considerations when calculating their maximum deductible retirement contributions. The One Big Beautiful Bill Act preserves the special rules that apply to sole proprietors and partners, including the IRC Section 164(f) adjustment that affects the calculation of eligible compensation.

Self-employed individuals must reduce their net self-employment income by the deductible portion of self-employment taxes before calculating their maximum contribution. For a self-employed individual with $200,000 in net self-employment income, the maximum deductible contribution would be approximately $37,500 after accounting for this adjustment, representing substantial tax savings while building personal retirement security.

Documentation and compliance requirements

Maintaining proper documentation ensures businesses can substantiate their employer contribution deductions if questions arise during an IRS examination. Essential documentation includes plan documents, board resolutions authorizing contributions, compensation records, contribution calculation worksheets, and proof of timely deposits.

Businesses should maintain records demonstrating compliance with nondiscrimination requirements, particularly for plans covering both highly compensated and rank-and-file employees. Annual Form 5500 filings provide additional documentation of plan operations. For pass-through entities, K-1 schedules should reflect the appropriate allocation of retirement contribution deductions to individual owners.

State tax considerations for employer contributions

While the One Big Beautiful Bill Act addresses federal taxation, businesses must also consider how employer retirement contributions affect state tax liability. Most states follow federal treatment of employer contributions, providing straightforward deduction treatment that creates additional tax savings beyond the federal benefit.

State-specific considerations include separate deduction limitations, addback requirements that typically exclude retirement contributions, different filing deadlines affecting contribution timing, and multi-state apportionment rules. Businesses operating in multiple states should consult with tax professionals to optimize their retirement contribution strategy across all jurisdictions.

Transform your retirement benefit strategy in 2026

The One Big Beautiful Bill Act creates new opportunities for businesses to optimize their overall tax position while preserving the valuable employer 401k contribution deduction. By coordinating retirement contributions with enhanced QBI deductions, expanded expensing provisions, and other business tax strategies, companies can achieve substantial tax savings while building long-term value for employees and owners alike.

Instead's comprehensive tax platform helps businesses identify and implement optimal retirement contribution strategies under the new tax law. Our intelligent system calculates maximum deductible contributions, coordinates with other tax elections, and ensures compliance with qualification requirements.

Get started with Instead's pricing plans today to maximize your employer 401k contribution deductions while building a comprehensive tax strategy for 2026 and beyond.

Frequently asked questions

Q: How much can my business deduct for employer 401k contributions in 2026?

A: Your business can deduct employer 401k contributions up to 25% of total eligible compensation paid to all plan participants. For 2026, the per-employee compensation limit is $305,000, meaning that amount is the maximum used to calculate contributions for any individual employee. If your total eligible payroll is $1 million, your maximum deductible contribution would be $250,000.

Q: Does the One Big Beautiful Bill Act change employer retirement contribution rules?

A: The One Big Beautiful Bill Act preserves existing rules for employer retirement contribution deductions while introducing related changes that affect overall tax planning. The 25% compensation deduction limit remains intact, and all existing entity types continue to qualify for deductions. The Act's enhanced QBI provisions create new coordination opportunities for pass-through entities.

Q: Can S Corporation owner-employees receive employer 401k contributions?

A: Yes, S Corporation owner-employees can receive employer 401k contributions based on their W-2 wages from the corporation. The contribution is deductible to the S Corporation and flows through to reduce the owner's taxable income on their individual return. The contribution amount is limited to 25% of the owner's reasonable compensation up to the $305,000 annual limit.

Q: When must employer contributions be made to claim the deduction?

A: Employer contributions must be deposited with the plan trustee by the tax return due date, including extensions, to be deductible in the prior tax year. For calendar-year businesses, contributions made by October 15, 2027, with an extension, may be deducted on the 2026 tax return. This provides flexibility in managing cash flow while optimizing tax timing.

Q: How do employer 401k contributions affect the QBI deduction?

A: Employer 401k contributions reduce qualified business income by lowering net business income, which can reduce the QBI deduction amount. However, for businesses above the income threshold, the W-2 wages paid to employees, including contributions to retirement plans, increase the W-2 wage limitation that determines the maximum QBI deduction. Strategic planning can optimize both deductions simultaneously.

Q: Are employer contributions to Roth 401k accounts deductible?

A: Yes, employer contributions remain deductible regardless of whether they are designated as traditional or Roth contributions within the plan. The tax treatment affects the employee, not the employer's deduction. Traditional employer contributions grow tax-deferred, while Roth-designated employer contributions are taxed to the employee immediately and provide tax-free growth thereafter.