Small Business 401k Retirement Plans: Should you have them?

by | Jul 2, 2020

As pensions go extinct, more Americans turn to individual retirement accounts to prepare for their golden years. One of the most popular is the 401k, an employer-sponsored plan that allows workers to save a percentage of pre-tax dollars from paychecks.

1. 401k Advisors Help You Decipher Your Current Plan

Before you start the 401k rollover process, meet with your 401k advisor to discuss your options. Bring your current plan’s most recent statement and documentation with you, so you’ll know:

  • Your current balance
  • How much you’ve contributed
  • How much your employer matched
  • Your account’s growth

You should also contact your plan administrator and have them walk you through the 401(k) rollover process. Your advisor will work with you to identify which funds your account is invested in the portfolio and its associated growth patterns.

Your advisor will work with you to identify which funds your account is invested in and its associated growth patterns.

As of 2014, 401k plans were the most popular type of retirement savings, representing about 18 percent of the retirement plan holdings in the U.S., according to the ICI.  But while 89 percent of workers at large companies (500+ employees) have access to employer-sponsored 401k plans, only 45 percent of businesses with <100 employees offer 401(k) plans, and only 16 percent of businesses with <10 employees offer 401ks. Overall, that translates into only about half of Americans with access to workplace retirement plans as a small business 401k is not common.

Here’s how small businesses can benefit from offering 401k plans to their employees.

Business owners may be able to deduct from 15 to 40% of employer contributions/matches, along with costs incurred due to plan set-up and administration.

401(k) Advisors Weigh In: What’s the Resistance?

Why do a majority of small businesses choose not to offer workplace retirement plans? Common reasons include:

  • Cost.  Many feel that setting up and administering 401k plans is simply too expensive.
  • Regulations. Small business owners may feel too busy to wade through 401k rules and regulations.
  • Lack of employee interest. When asked to choose perks like insurance, PTO, or salary bumps, retirement plans may come in low on the list.
  • Lack of options. Some business owners worry that they won’t find a 401(k) plan that works for their small company.

However, having a 401(k) plan offers benefits to both employees and business owners. When a small business owner puts in hours of hard work, time, and effort building their company, they may think of the business itself as their retirement plan. Often, the hope maybe that when they’re ready to retire, a buyer will come along and they’ll live off the sale of the business.

In reality, though, this may not happen. With a properly designed 401(k) plan, a business owner can currently contribute up to $24,000 per year, depending on their age. When plan matches and profit-sharing are included the total contribution may reach up to $59,000 per year. But that’s not the only way a 401(k) can help business owners.

401(k) Plans and Tax Benefits: Financial Planning Strategies

401(k) retirement plans offer a number of tax benefits. For starters, income is contributed before taxes. Additionally, business owners may be able to deduct from 15 to 40 percent of employer contributions/matches, along with costs incurred due to plan set-up and administration.

The federal government offers tax credits for small business owners who wish to set up 401(k) plans. For the plan’s first three years, business owners can claim a deduction of 50 percent of the costs of establishing the plan, up to $500 annually. So-called “safe harbor” plans allow businesses to skip annual contributions testing in exchange for providing employees with minimum contributions or matches, whether or not they’re participating in the plan. These safe-harbor contributions are vested immediately.

Factoring in these tax benefits contributes to a businesses’ bottom line. Technological advances mean that many inexpensive 401(k) plan options now exist for employers. Today’s 401(k) plans are less expensive to establish and administer than ever.

In addition, offering 401(k) plans means a business can attract — and retain — high-quality employees. Many employees realize that they have to take responsibility for their retirement, so they’re more likely to pay attention to, and value, the retirement benefits offered by potential employers. 401(k) plans can serve as a powerful incentive when recruiting and retaining talent. In today’s competitive market, offering a 401(k) provides benefits to both employees and business owners alike.

Latest Insights