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- Small Business Overview
Fidelity's 401(k) plans for small businesses through Fidelity Workplace Services can help you offer competitive benefits to your employees. Offering a retirement plan is a smart way to help level the professional playing field between your small business and larger companies.
A good retirement plan can help you:
- Attract talented people in today's challenging job market.
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- Enjoy tax advantages that may be available to you as an employer offering the plan.
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401(k) Plans for Businesses
Schwab makes it easy to get a retirement plan that's individually designed for your business, regardless of its size. With a 401(k) plan, employees can typically make larger salary deferrals than with other retirement plans, and your business gets tax benefits.
What are the fees?
Fees vary and are based on business needs and solutions.
What do I get with a Schwab 401(k) plan for my business?
- A customizable plan
- Business tax advantages
- Higher employee contributions than other plans offer
- Optional employer-matched contributions
- Tax-advantaged growth
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Call 877-456-0777 for more information or to get help setting up a 401(k) plan.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.
Have questions about 401(k) plans for businesses? Here are responses to some of the most common questions we hear. If you have a specific question that’s not answered here, please call us at 877-456-0777 .
A 401(k) plan is suitable for a company of any size that is looking for a retirement solution that allows high levels of salary deferrals by employees. Plans are generally offered to all employees at least 21 years of age who worked at least 1,000 hours in the previous year.
Employee contributions are generally made with pre-tax dollars, although some 401(k) plans feature after-tax Roth contributions. Earnings grow tax-deferred.
The plan is funded with elective employee salary deferrals and optional annual employer contributions. The plan does not need to be funded annually. Employer contributions are tax-deductible up to 25% of participant compensation. Employee salary deferrals are fully vested immediately, while employer contributions vest according to plan terms.
Employees may make an elective salary deferral of up to $20,500 for 2022 and $22,500 for 2023 ($27,000 for 2022 and $30,000 for 2023 if age 50 or older). Employers may make tax-deductible contributions of up to 25% of participant compensation, as long as the combination of the employer contributions and the employee contributions cannot exceed $61,000 for tax year 2022 and $66,000 for tax year 2023 ($67,500 for 2022 and $73,500 for 2023 if age 50 or older).
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We offer a variety of tax-advantaged small-business plans for self-employed professionals, entrepreneurs, and business owners and their employees.
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An Individual 401(k) maximizes retirement savings if you're self-employed or a business owner with no employees other than a spouse. We also offer an Individual Roth 401(k) option.
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With generous contribution limits, the SEP-IRA (Simplified Employee Pension) plan is the simplest, most flexible, tax-deferred retirement plan you can sponsor.
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A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a great starter plan that encourages employees to contribute.
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Small plan 401(k)
Our program for small- and mid-sized businesses is a high-quality, easy-to-administer retirement offer for 401(k) plans, 403(b) plans and other retirement plan types.
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Why choose Vanguard for your small business?
Selecting Vanguard for your retirement plan means you can expect high-quality, low-cost funds; investment flexibility; and exceptional service—all from a partner trusted by businesses like yours to align with our clients' interests.
Jump start your savings
As a small-business owner, planning for your retirement is entirely up to you. And if you employ others, you'll be helping them get on the right track for retirement too.
Benefit from tax breaks
All retirement plans offer tax-deferred growth on earnings. As an employer, you also benefit from tax-deductible employer contributions.
Give your money a chance to grow
In addition to your plan contributions, the compounding of interest, dividends, and capital gains allows your account to generate earnings on top of earnings.
Attract and retain employees
Offering a retirement plan to your employees can keep you competitive in the job marketplace and help your business flourish.
Size up your retirement plan
Get to know the retirement plans that Vanguard offers for small businesses: the SEP-IRA, the SIMPLE IRA, the Individual 401(k), and the Small Plan 401(k). Try our interactive tool to see which plan may be best for you and your business.
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Looking to enrich your existing retirement plan with quality mutual funds? Our investment-only service opens the door for you to offer Vanguard funds.
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7 Top 401(k) Providers for 2022
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Table of Contents
How to choose a 401(k) provider
7 best 401(k) providers for small businesses.
Regardless of your business’s size, offering your employees a retirement savings plan is a crucial part of any HR operation. The key is to choose a 401(k) provider that is specially equipped to provide small businesses with quality retirement plans, investment advisory services and administrative support.
There are a few retirement plans available for self-employed and small businesses, including SEP-IRA, SIMPLE IRA and individual 401(k) plans, but traditional 401(k) plans are by far the most common option. Traditional 401(k) plans allow participants to make pre-tax contributions to an individual retirement account up to the limit set by the IRS. Employers can also choose to make contributions on behalf of their employees, match their employees’ contributions or both, also up to the IRS limit.
In this guide, we’ll go over seven of the best 401(k) providers for small businesses and walk you through how to go about choosing the best 401(k) provider for you and your employees.
» MORE : NerdWallet's best HR software for small businesses
You’ll first need to choose the firm that provides the type of retirement plan you really want to offer, whether that’s a traditional 401(k) plan or something else. Also take a look at the plan design to ensure that their eligibility requirements, vesting schedule, investment options and other details are appropriate for your employees. You’ll also need to evaluate the fees attached to your retirement plan. Often, fees vary depending on your business and the number of employees, so you will need to get in touch with each provider directly to receive a quote.
On a qualitative level, you’ll likely want to work with a 401(k) provider with excellent customer service, individualized investment and plan design guidance and a support team that’s easy to reach — especially because the landscape of retirement plans can be confusing to navigate, both for you and your employees.
Moreover, you should consider a provider that acts as a fiduciary advisor. Fiduciaries are legally and ethically bound to provide unbiased investment advice that aligns with their clients’ best interests. They also manage, monitor and adjust their clients’ retirement plans. There are several types of fiduciaries, but you’ll most often see the term 3(38) fiduciary.
Also note that a couple of the 401(k) providers in this round-up are online-based, which is a great option if you’re looking to really streamline and digitize this process. Certain providers can offer employer benefits beyond 401(k) plans, as well, which is a good option if you want to integrate all your fringe benefits under one provider.
Here are seven of the best and most reputable 401(k) providers for small businesses that you should consider in 2022.
ADP is one of the most respected names in payroll processing, but their comprehensive HR and employer services suite includes retirement plans and administration. While they can serve businesses of all sizes, ADP is unique in that they extend their full arsenal of services and decades’ worth of expertise to small businesses (which they define as businesses with one to 49 employees), in addition to large enterprises.
If you sign up for ADP’s retirement planning service, you’ll have access to a team of professionals who can help you browse, choose and customize which of their available retirement plans is best for you and your employees. In addition to 401(k) plans, ADP offers SIMPLE and SEP IRA options, which are great choices for very small businesses. They also offer tiered investment options, which are suitable for investors with all experience levels.
Once they’ve helped you design a retirement plan, your ADP advisors will help you implement and manage your plan to ensure you’re staying compliant. If you’re an ADP payroll client, your retirement plan’s record-keeping system will automatically integrate with your payroll system.
2. Betterment for Business
Betterment for Business is the 401(k) channel of Betterment, a robo-advisor that helps consumers make smarter investment choices using a combination of technology and human expertise. With this service, Betterment for Business’ human advisors and technology help business owners design 401(k) plans and advise employees on the smartest investments they can make in a variety of ETFs to optimize their retirement savings. Betterment for Business is a certified 3(38) fiduciary, so they’re legally and ethically required to act in your company’s best interests when giving investment advice.
Obviously, Betterment for Business is only a viable option if you and your employees are comfortable using a robo-advisor and managing your plan digitally. If you are interested, we’d recommend taking a look at our Betterment for Business review for a more in-depth understanding of this unique 401(k) provider.
3. Charles Schwab
Charles Schwab is one of the most established and best-known investment and retirement firms in the country — a better option if you consider yourself a bit too much of a technophobe to opt for a robo-advisor. Charles Schwab offers a managed account service that offers your employees personalized advice on a range of investment options, including ETFs or index mutual funds.
They’ll also provide ongoing account monitoring and automatic adjustments. As an alternative, Charles Schwab also offers SIMPLE and SEP IRA plans; or, if you’re self-employed, you can opt for their Individual 401(k) plan, which is essentially a traditional 401(k) plan designed particularly for individually owned businesses. It’s worth noting that this plan has no setup or monthly maintenance fees.
4. ShareBuilder 401k
Sharebuilder 401k allows self-employed individuals and small businesses to buy and set up low-cost 401(k) plans completely online. They also act as 3(38) fiduciaries, so they’re certified to make investment advice, manage portfolios, and handle plan administration.
With Sharebuilder 401k, you’ll have four retirement plan options: Solo 401(k), Safe Harbor 401(k), Traditional 401(k) and Tiered Profit-Sharing 401(k). All plans require a one-time setup fee, a flat monthly administration fee and an annual fund fee that varies from 0.04% to 0.39% per year. Investment options include index ETFs and five types of model portfolios based on the individual investor’s risk tolerance.
5. Fidelity Investments
Another trusted name in retirement services, Fidelity has over 30 years of experience and currently over 30 million plan participants under their belt. Fidelity can service businesses of all sizes, but they say that 86% of their business clients have fewer than 500 employees — so despite the big name, they’re fully equipped to serve small businesses.
Fidelity’s 401(k) plan offers a wide range of investment options, including over 16,000 mutual funds from 380 fund companies. They also offer comprehensive advisory services, as well as administrative, reporting and compliance support, and you can reach their advisors either in person, online or over the phone. Their advisors will help you design a plan or you can choose to work with your current broker. Plus, Fidelity has an app and online dashboard where you and your employees can view and manage their plans and get in touch with advisors whenever they need. Beyond retirement plans, Fidelity also offers integrated employer benefits, including payroll and health plans.
6. T. Rowe Price
At 83 years old, T. Rowe Price is the most established asset management firm on this list. They offer four retirement plans for small businesses: SEP-IRA, SIMPLE IRA, Individual 401(k) and a 401(k) for Small Business. The former three plans are best for self-employed individuals or businesses with under 100 employees, while the latter plan is best suited for businesses with up to 1,000 employees.
Under the 401(k) for Small Business, plan sponsors can choose from over 100 no-load mutual funds and over 5,400 non-proprietary funds. T. Rowe Price also offers plan participants 24/7 phone support, plus an online portal where they can manage their plans and conduct transactions.
7. Merrill Edge
Under the Merrill Small Business 401(k) plan, independent advisors select and manage funds and model portfolios for all participants. Unlike the other participants on this list, pricing for this plan is very transparent: It costs a one-time setup fee of $390 and a monthly administration fee of $90. Then, each participant is responsible for a $4 monthly recordkeeping fee and an annual asset-based fee of 0.52%. You also have the option of converting your existing 401(k) plan to a Merrill Small Business 401(k), in which case you may end up saving money.
Merrill Edge’s Merril Small Business 401(k) is suitable for corporations, partnerships and nonprofits, but they also offer SEP-IRA, SIMPLE IRA and Individual 401(k) plans for sole proprietorships and self-employed individuals.
» MORE: NerdWallet's best small-business apps
This article originally appeared on Fundera, a subsidiary of NerdWallet.
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Retirement benefits aren’t a luxury reserved just for midsized and large businesses. A variety of retirement plan solutions exist today, from 401(k) to SIMPLE IRAs and SEP IRAs, that can help small business owners not only secure a nest egg for themselves, but also attract and retain talented employees .
What types of 401(k) plans are available for small business owners?
Small business owners generally have many retirement plan options to choose from, some of which may be more appropriate than others, depending on the size of their organization. Examples include:
Individual or solo 401(k), safe harbor 401(k), roth 401(k), who is eligible for an individual or solo 401(k) plan.
Generally, only businesses that consist of an owner and a spouse, if that individual also works for the organization, may participate in a solo 401(k). Those who adopt these plans may need to set eligibility requirements, such as years of service. If the business hires non-owner employees who at some point meet those requirements, then the employer may no longer be eligible for an individual 401(k) and would have to choose a different type of plan, e.g., traditional 401(k) or SIMPLE IRA.
Can owners of an LLC contribute to a 401(k)?
Solo 401(k) plans are not limited to sole proprietorships. Businesses that are structured as limited liability corporations (LLC), as well as partnerships, may also participate in these plans if they meet all the eligibility requirements.
Can those who are self-employed contribute to a 401(k)?
There are several different types of retirement plans – Solo 401(k), SEP IRA, SIMPLE IRA and traditional 401(k) – that are available to self-employed individuals. The Solo 401(k), in particular, was designed specifically for entrepreneurs and their spouses. Those whose business is a side venture may also contribute to a 401(k) offered by an employer, but the combined contributions between both plans must not exceed the annual limits set by the IRS.
How does a solo 401(k) plan benefit the small business owner?
The primary benefit to a solo 401(k) is that it permits small business owners to contribute large portions of eligible compensation to the plan, thereby maximizing their retirement savings. Other advantages include:
- Within certain limits, participants may be able to borrow from the plan.
- Filing Form 5500, Annual Return/Report of Employee Benefit Plan may not be necessary, depending on the plan’s balance.
- Since these plans usually only cover one individual, discrimination testing is moot and not required.
Drawbacks to a solo 401(k)
A solo 401(k) may not be right for small businesses that plan to expand and hire employees in the near-term, since doing so would likely result in plan ineligibility. In addition, calculating profit-sharing contributions for sole proprietorships and partnerships tends to be complex because it requires modified net profits. The formula for this calculation is available in IRS Publication 560 .
What else do small business owners need to know about 401(k) plans?
Small business owners who offer retirement savings plans may be able to take advantage of tax incentives. Matching employee contributions, for instance, is generally tax deductible as a business expense. For the first three years of the plan, employers may also be eligible for tax credits up to 50% of the start-up and administration costs or $5,000 (not to exceed $250 per non-highly compensated employee), as well as a $500 automatic enrollment credit per year.
How do small business owners choose the best 401(k) for their needs?
To find the right 401(k) for their small business, employers generally look for plan providers that:
- Charge reasonable plan and investment fees and have no hidden costs
- Provide real-time integration between the 401(k) recordkeeping and payroll systems to eliminate manual data entry and reduce errors
- Offer a simplified compliance process
- Make administrative fiduciary oversight available
- Offer ERISA bond and corporate trustee services
- Help with investment fiduciary services and plan investment responsibilities
- Make investment advisory services available for employees
Frequently asked questions about 401(k) for small business owners
How much can a small business owner contribute to a 401(k).
The combined limit for employee and employer contributions to a 401(k) is the lesser of 100% of an employee’s compensation or $66,000. This maximum increases to $73,500 if the employee is 50 years of age or older and participates in a plan that allows catch-up contributions.
Can I borrow from a SEP IRA, SIMPLE IRA or 401(k)?
Loans are permitted with 401(k), but not a SEP IRA or SIMPLE IRA. Although these types of loans are enticing because of the low interest rate environment, they can have long-term consequences on retirement savings. Individuals may want to consult a financial advisor before borrowing against their 401(k).
What is the best type of retirement plan for small business owners?
SEP IRAs and SIMPLE IRAs are generally good starting points to consider for small businesses, but 401(k) plans may offer greater choices in plan design. The right choice ultimately depends on the specific needs of the organization and its workforce.
If I offer a 401(k) to my employees, are there compliance regulations I must follow or can the retirement plan provider help with these?
Certain employers who offer 401(k) and other retirement plans must abide by the Employee Retirement Income Security Act (ERISA) of 1974, as amended, which helps ensure that plans are operated correctly and participants’ rights are protected. In addition, a 401(k) plan must pass non-discrimination tests to prevent the plan from disproportionately favoring highly compensated employees over others. The plan fiduciary is usually responsible for helping comply with these measures.
This information is intended to be used as a starting point in analyzing employer-sponsored 401(k) plans and is not a comprehensive resource of all requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services. For specific details about any 401(k) they may be considering, employers should consult a financial advisor or tax consultant.
Unless otherwise agreed in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisor or firm for the provision of advice; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans. All ADP companies identified are affiliated companies.
ADP, Inc. is affiliated with ADP Broker-Dealer, Inc. (“ADP BD”), a limited purpose broker dealer registered with the Financial Industry Regulatory Authority (“FINRA”), and operating pursuant to Securities and Exchange Commission (“SEC”) Rule 15c3-3(k)(2)(i), approved by FINRA to offer 401(k) and SEP/ SIMPLE IRAs, and related retirement plans (the “Retirement Products”) on a payroll deduction basis.
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401(k): What Small Businesses Need to Know
There are few perks workers desire more than 401(k) retirement plans.
When it comes to employee benefits, there are few perks workers desire more than 401(k) retirement plans. As such, many employers are using retirement plans to attract and retain quality employees. Learn why the 401(k) plan is one of the more popular choices for business owners and about alternative options and the top retirement plan providers.
What is a 401(k) plan?
A 401(k) plan is an employer-sponsored benefit that allows employees to save money for retirement. According to the IRS, a 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. Employees typically have several choices for the types of investments the money is put into.
How do 401(k) plans work?
If a business offers 401(k) plans to its staff, an employee can sign up and designate a percentage of their paycheck to be placed into a retirement investment account. That money can grow significantly over the duration of the employee’s career and ultimately fund their retirement.
Eliza Badeau, vice president of workplace consulting thought leadership and commercialization at Fidelity, said that most workers are responsible for funding their own retirement in the current workplace environment. “We are shifting from an employer-funded pension plan to a defined contribution plan landscape. A 401(k) is a great way to save for the future.”
To boost participation, employers sometimes contribute to their team’s 401(k) accounts based on how much an employee contributes. For example, if an employee contributes 4% of their paycheck, their employer might match that contribution. This essentially doubles the amount the employee saves.
While the employer sponsors these plans, the money being invested belongs to the employee. The money they contribute to their account is theirs to take if and when they move on to a new job. As for the employer contributions, there is often a vesting period that requires an employee to stay with the company for a certain length of time before they can take that money with them if they land another job.
An individual can borrow from their 401(k) account if they’re in financial need, but there are pros and cons to doing so. This is commonly known as a 401(k) loan.
What are the benefits of offering 401(k) plans to employees?
There are significant benefits to offering employees a 401(k) plan. Even without matching contributions, offering a 401(k) plan allows employees to save pretax dollars for retirement. An employee can contribute up to $20,500 each year as of 2022. If a business owner matches the investment, the contribution amount cannot exceed $61,000 per year. That’s a big chunk of change that can help an employee prepare for retirement.
Employees feel more loyalty to an employer that offers a 401(k) plan, particularly one that contributes with matching. This is a significant benefit to a company’s staff as well as to the company itself. Businesses can attract and retain top talent by offering perks like 401(k) plans and a robust healthcare package. [See the best health insurance and employee benefit providers .]
“I think it is really important, if you are trying to grow your business, to think through offering a 401(k) plan and what that can mean to attracting and keeping talented employees,” Badeau said.
Employer contributions to employee 401(k) plans are tax-deductible, which helps the company financially. Some businesses may even qualify for tax credits. Plus, offering a 401(k) plan usually means that business owners are able to contribute a significant amount of money toward their own retirement. This helps business owners plan their own future and ensure their financial security.
What are the types of 401(k) plans?
There are two types of 401(k) plans: traditional and Roth.
In a traditional 401(k) plan, the money an employee chooses to invest in the plan is pretax. This means the money they contribute comes out of their paycheck before taxes are deducted. However, they will pay taxes on the money when they withdraw it from their retirement account.
With a Roth 401(k) plan, the money comes out of an employee’s paycheck after taxes have been deducted. That means they won’t pay taxes on the money when they withdraw it since it was paid upfront.
While a Roth 401(k) doesn’t give a tax benefit now, it is a powerful tool to grow assets tax-free over time, making it popular with many employees who are not concerned about immediately reducing tax liabilities.
What are 401(k) alternatives for small businesses?
If you don’t feel comfortable offering a 401(k) plan, you have some other options for giving employees a way to save for retirement. Retirement savings education can be a more affordable means of helping your employees without directly managing retirement accounts for them.
A 401(k) is not the only option for small businesses looking to establish a retirement plan for their employees. Business owners should also consider SEP and SIMPLE IRA plans as potential alternatives.
A Simplified Employee Pension (SEP) IRA is a plan that allows an employer to put away up to 25% of their income to save for retirement. They can establish these funds for themselves and their employees. Contributions to a SEP must be made by the employer on behalf of the employee; there are no employee contributions.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan that allows both employers and employees to contribute to an employee’s retirement savings. In a SIMPLE IRA, an employer must match up to 3% of an employee’s annual compensation or make a 2% non-elective contribution for employees, with an annual limit of $305,000.
There are also traditional and Roth IRAs , which are different from traditional and Roth 401(k) plans.
Talk to a financial professional to see what retirement plan best fits your savings needs and your company’s needs. You may find that the 401(k) is not the best option for your business.
How do I set up a 401(k) plan for my business?
While a 401(k) plan is a benefit traditionally offered by larger organizations, Fidelity’s Badeau said that small businesses should strongly consider offering one too. “Many [retirement plan] providers have solutions that are great for small businesses,” she said. “Fidelity works with thousands of small businesses.”
Employers that want to begin offering 401(k) plans should follow these steps to get started.
1. Select a plan provider.
There are numerous financial institutions, like Fidelity, Charles Schwab and Merrill Edge, that companies can partner with. Another option is to work with a human resources services provider, like a high-quality payroll services provider or a top-rated professional employer organization . In addition to their core features, many of these HR providers offer 401(k) plan management.
“A payroll provider may be the best option, as they can process any necessary deductions automatically when payroll is run and eliminate duplicate data entry,” said a spokesperson for Gusto, a payroll and HR services provider. [Check out our review of Gusto .]
2. Check state regulations.
As to whether they can even offer a retirement plan to employees, some small businesses might not have a choice, depending on the state they operate in.
“Many states have passed laws which require employers to provide employer-sponsored retirement programs,” said the Gusto rep. “For example, California requires businesses with five or more employees to offer a retirement plan or provide access to a Secure Choice IRA through the state-run fund.”
Small business owners and entrepreneurs should research whether their state has any similar requirements and at what point they might take effect.
3. Analyze the 401(k) plan features.
Once you’ve decided which plan provider to partner with and confirmed your state’s regulations, there are some more decisions to make, including the number and type of funds you will offer.
“There are a lot of different features and functions,” Badeau said. “It all depends on [how] you want the final plan to look.”
One option is an automatic enrollment policy , where each employee is automatically enrolled in the 401(k) plan at a certain savings percentage unless they specifically opt out. Automated enrollment can lower the overhead costs of providing this benefit and make it easier to maintain for employees.
The biggest factor to consider is whether to offer matching contributions. While nothing requires employers to provide this added benefit, Badeau said it could pay off in the long run. “A well-designed 401(k) plan, with a company match and that incentive, can really help keep people and attract the right people [a business is] looking for.”
In addition to paying off for the employer, matching contributions is a significant perk for employees. Badeau said that they incentivize employees to save more. “It is likely they will contribute enough to reach [the maximum employer contribution], so it encourages them to have a higher contribution rate.”
While matching contributions can be a positive for employers and employees, there are some instances when it might not make sense to offer them. “If a company is not yet profitable or is going through a tight financial situation, for example, they may not want to match contributions,” said the Gusto spokesperson.
Another plan feature to consider is a professionally managed option. With this, employees have access to a financial advisor who will help them with fund selection and contribution amounts.
4. Determine the 401(k) costs.
For small businesses, the costs of offering a 401(k) retirement plan can vary greatly.
There are typically setup and maintenance fees, the latter of which are often based on the number of participating employees. Complete Payroll Solutions estimates the setup costs as between $500 and $2,000, with annual administration fees of $750 to $3,000.
It is essential to note that added plan features, such as automatic enrollment, increased fund options or professionally managed services, will probably increase a company’s costs. “It is important for employers to be conscious of those when considering [whether to offer a 401(k) plan],” Badeau said.
That said, some of these costs can be offset by certain tax deductions that small businesses with fewer than 100 employees may be eligible for.
“Some administrative fees are considered tax-deductible business expenses,” said the Gusto rep. “Small businesses may be eligible for the credit for small-employer pension plan startup costs, a tax credit of up to a maximum of $500 per year, which covers 50% of eligible setup costs to qualified retirement plans.”
What are the top employee retirement plan providers?
Finding the right employee retirement plan provider can take some research. Fortunately, we reviewed top providers to find the best business employee retirement plans for small businesses. See some of our recommendations below.
Human Interest was founded in 2015 to help address a growing concern among Americans who needed to save for retirement. The company, headquartered in San Francisco, is appealing due to its affordability, with low monthly employer and employee fees. Its plans are flexible and can be customized to address an employer’s specific needs. See our full Human Interest review .
ADP, founded in 1949, is a popular payroll provider. On top of doing payroll services, the company also offers 401(k) account administration. Businesses can integrate with ADP payroll to make processing contributions automatic and easy. Employers will also appreciate the mobile app, which allows for easy enrollment of new employees. We found ADP to be one of the best service providers for small businesses. Be sure to read our complete review of ADP for more information.
American 401k stands out for its transparency because the company lays things out in a clear way that’s easy for business owners to understand. They walk you through the 401(k) process and offer more than 15,000 funds and ETFs so employees can maximize their savings with diverse investment options. Each fund’s expense ratio is disclosed upfront so business owners can see the costs of the investments and make informed decisions. Our American 401k review has more details.
Kimberlee Leonard contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.
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A small business 401(k) is a streamlined and affordable retirement plan designed with small business owners and their employees in mind., small business 401(k) features, discover affordable and straightforward pricing, pricing for your business footnote 6, pricing for individuals with a balance footnote 7, what's a key difference between a small business 401(k) and a simple ira, get started with a small business 401(k) in 3 easy steps, answer a few questions, review your proposal, purchase your plan, explore all plans available for small business, frequently asked questions, what types of businesses can set up a small business 401(k), what are the potential tax benefits of a 401(k), how much can employers contribute annually, how much can employees contribute annually, does my business have to contribute to employee accounts, what is a safe harbor plan, how much does it cost to set up and administer a small business 401(k) for my company, what is the difference between roth and pre-tax contributions, when are contributions fully vested, what investment choices are offered, can participants withdraw funds or take loans from their 401(k)s, what is the plan establishment deadline, is irs reporting required.
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Choosing a Retirement Plan: SIMPLE 401(k) Plan
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A subset of the 401(k) plan is the SIMPLE 401(k) plan. Just like the SIMPLE IRA plan, this is a plan just for you: the small business owner with 100 or fewer employees. However, just as with the SIMPLE IRA plan, there is a two-year grace period if you exceed 100 employees, to allow for growing businesses.
Under a SIMPLE 401(k) plan, an employee can elect to defer some compensation. But unlike a regular 401(k) plan, you the employer must make either:
- A matching contribution up to 3% of each employee’s pay, or
- A non-elective contribution of 2% of each eligible employee’s pay.
No other contributions can be made. The employees are totally vested in any and all contributions .
If you establish a SIMPLE 401(k) plan, you:
- Must have 100 or fewer employees.
- Cannot have any other retirement plans.
- Need to annually file a Form 5500.
The IRS has issued Model Amendments for SIMPLE 401(k) plans. These Model Amendments permit a 401(k) plan to become a SIMPLE 401(k) plan (if the other requirements are met).
Pros and cons
- Plan is not subject to the non-discrimination rules that apply to everyday 401(k) plans.
- Employees are fully vested in all contributions.
- Straightforward benefit formula allows for easy administration.
- Optional participant loans and hardship withdrawals add flexibility for employees.
- No other retirement plans can be maintained.
- Withdrawal and loan flexibility adds administrative burden for the employer.
Employee salary deferrals and Employer contributions.
Employee - $15,500 in 2023, $14,000 in 2022 and $13,500 in 2020 and 2021. If the employee is age 50 and over, an additional “catch-up” contribution is allowed. The additional contribution amount is $3,500 in 2023 ($3,000 in 2022, 2021, and 2020).
Employer - A dollar-for-dollar match up to 3% of pay or a 2% non-elective contribution for each eligible employee .
Annual filing of Form 5500 is required.
Loans are permitted.
Yes, but subject to possible 10% penalty if under age 59-1/2.
- Consider a SEP or SIMPLE IRA plan.
Setting Up a 401(k) Plan for Small Business Employees
Small businesses can struggle to recruit top talent against large corporations, especially when it comes to the large benefit packages that corporations can offer.
Following salary and health care, retirement benefits are the third-most important factor in small businesses retaining their employees, according to a MetLife study . So if you own a small business, offering retirement benefits like a 401(k) helps communicate to your potential and current employees that you’re invested in them, and their future.
Here we answer some of the most common questions about 401(k)s. As always, this is a resource and is not meant as financial advice. Make sure you talk with your accountant if you’re thinking of providing retirement benefits for your business.
What are the benefits of offering a 401(k) to employees?
A 401(k) plan is a qualified employer-established plan to which employees can make contributions from their salary on a post-tax and/or pretax basis. 401(k) stands for the subsection 401(k) in the Internal Revenue Code, which describes the account.
Offering retirement benefits can help recruit and retain top talent. To offset setup and administrative costs, small businesses can also qualify for an up-to-$500 credit annually for the first three years in which they offer a 401(k) plan.
In addition, as an owner of your business, you can also participate in the 401(k) plan. It’s easy to want to spend all your savings and cash on growing your business. But opting into the 401(k) plan yourself will guarantee you are saving for your future, too.
How to set up a 401(k) plan for your employees
- You first have to select a plan that matches the needs, size, and budget of your business.
- Decide if you will offer an employer match. This is often formulated as a percentage of what your employee is contributing. (Remember, though, you aren’t required to match funds.)
- Communicate your offerings. Draft a written plan of what you’ll offer and share that information with eligible employees.
- Once employees have signed up, you need to monitor and follow all 401(k) reporting requirements . This means developing a record-keeping system to make sure that you are tracking your employees’ contributions.
- You also need to ensure that the appropriate percentages of pretax funds are deducted from your employees’ paychecks. (Aa payroll service like Square Payroll can help you with this.)
Get Started with Square Payroll
Access benefits made for small businesses.
Managing 401(k) plans for a small business
What are the benefits of a 401(k) plan compared to other retirement options.
Most people know about 401(k) retirement plans, but they aren’t the only options out there. Here are the different types of plans that exist:
Research retirement options for your business
What’s the difference between a traditional and a roth 401(k).
You can offer a traditional 401(k) or a Roth 401(k) plan. A traditional 401(k) plan allows employees to make pretax contributions to their retirement savings, but it taxes any withdrawals made. A Roth 401(k) offers employees a different tax-advantaged option. Employees make contributions with after-tax dollars, but any withdrawals are fully tax-free, as long as certain conditions are met.
What is a SIMPLE IRA?
Many small business owners opt to administer SIMPLE IRAs for their employees as opposed to 401(k)s. SIMPLE stands for Savings Incentive Match PLan for Employees and as the name implies, it allows employees and employers to contribute to traditional IRAs set up for employees.
In this plan, an employer is required to either:
- Match each employee’s salary contributions, dollar for dollar, up to three percent of the employee’s compensation; or
- Make a nonelective contribution of two percent of each eligible employee’s compensation (even if the employee is not contributing themselves).
Because SIMPLE IRAs are easy and inexpensive to set up and operate, they are well suited for small employers who don’t have a retirement plan. But employer contributions are less flexible in this type of plan and it has lower contribution limits than other plans.
If you have more questions about retirement account options, take a look at the IRS website .
Choose a plan for your employees
Once you choose your plan, now it’s time to set it up. Here are some common steps:
How to set up a 401k for a small business
- Create a 401(k) plan document
- Set up a trust to hold the plan assets
- Maintain records of 401(k) employee contributions and values
- Provide information to plan participants
Common questions plan participants may ask employers about a new 401(k) plan:
- What other plans were considered? How does this choice compare?
- When can I start contributing?
- What affect will this have on my taxes?
- Does the company match contributions? How does that work? What is the limit?
- What are the investment options? Can I manage my own investments?
- How often can I change my investment and contribution options?
- Can I access my plan online?
- When can I withdraw money? Can I make an emergency withdrawal from my plan?
How much should an employer contribute to the plan?
Now that you’ve put all the hard work into selecting a fund, you want your employees to take advantage of it.
It’s not required, but many employers choose to match employees’ 401(k) contributions up to a certain percentage. You can offer to match anywhere from 1 to 100 percent of what employees contribute. You also get a tax benefit from matching your employees’ contributions.
You can also require a vesting schedule for employees to earn their 401(k) match, meaning employees must work for the company for a preset period of time before they are eligible to utilize the match.
(As a friendly reminder, if you’re also making contributions into the 401(k) plan for yourself, you can match your own contributions.)
How much should employees contribute?
While it’s great to save, there are contribution limits, determined by the IRS . Employees may contribute up to $19,500 to their 401(k) in 2021 and $20,500 in 2022. Employees who are 50 and older also can make additional “catch-up” contributions up to $6,500.
There are specific reasons or life events that allow employees to make withdrawals from the account, such as the employee’s retirement, death, disability, or separation from employment. Other reasons include if an employee reaches the age of 59.5, or experiences a hardship as defined and permitted by the plan.
How much does it cost to set up a 401(k) for a small business?
401(k) fees are categorized into three sections by the Labor Department , including plan administration fees, investment fees, and individual service fees.
- Plan administration fees: Encompassing day-to-day administration, these fees include services like accounting, legal and trustee services, and plan recordkeeping, as well as electronic access to plans, daily valuations, and other features. These may be deducted directly from returns, or paid overall by you, as the employer.
- Investment fees: Investment management and the associated services account for the largest portion of fees. These are deducted directly from participants’ investment returns.
- Individual service fees: Additional service fees may be set for participants who take advantage of specific services, such as taking a loan, and are charged on an individual basis.
Fees differ by plan, but they are required by law to be “reasonable,” and usually vary from 0.5 percent to 1.4 percent of the total managed assets.
Keep in mind, any plan with more than 100 participants undergoes an annual audit, which can add to the cost. If you have 100 employees or fewer, you can receive a credit for the first three years you have the plan.
It’s important to do your research in this area to keep costs low.
What are the maintenance costs for setting up a 401(k)?
Costs vary based on company size, but business owners can expect to pay an initial start up fee (ranging from a few hundred dollars to a few thousands dollars), charges per participant (that can add up to around $100 per year) and an annual maintenance fee (approximately $500-$1,000).
How long does it take for a small business to set up a 401(k)?
With the help of an integrated payroll and benefits service — s uch as Square Payroll and 401(k) partner guideline — a small business can be up and running in just a few business days.
What role does the employer play in 401(k) plans?
An employer selects the 401(k) — or options for 401(k) plans — and ensures the plan is compliance with relevant laws and regulations. The employer is also responsible for tracking employee contributions, employer matches, reporting of plan contributions in W-2 forms — all of which can be done with a benefits partner.
How do you choose the best funds to offer to your employees?
The contributions you make to your 401(k) are invested in a portfolio made up of mutual funds, stocks, bonds, money market funds, savings accounts, and other investment options, as permitted by the plan.
Beneficial funds allow your employees to choose the types of investments they make. The fund choices are transparent, have a low fee, and follow well-researched investment approaches. Again, speak with a finance professional while you are researching options.
Ready to offer benefits?
Square Payroll partners with leading benefits providers so you and your team can access 401(k) as well as health insurance, workers’ comp, and more — all in one place.
If you already use Square Payroll, you can enroll in benefits directly from the Square Payroll dashboard. You can choose the benefits that best suit your needs and budget, and we’ll take care of everything else, from employee enrollment to calculating deductions and contributions for each pay run. Square Payroll also determines the taxability and reporting requirements for each benefit to make sure your taxes and tax forms are accurate.
Create an account with Square Payroll to learn more about signing up for benefits. Or, if you already have benefits that you want to sync with Square Payroll, learn about adding your benefits to Payroll in our Support Center .
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How to Pick the Best Small Business 401(k) Plan Provider
Look at the options available and research thoroughly before choosing a retirement plan for employees.
The Best Small Business 401(k) Plan Providers
Some 401(k) plan providers cater to smaller companies, such as a startup or those with fewer than 50 employees, while others are set up for medium-sized or large businesses. (Getty Images)
To attract and keep talented employees, it can be a smart move to add a 401(k) plan to your small business. As a result of the SECURE Act , which was passed in 2019, there are now more opportunities for small employers to offer retirement plans. The law allows small businesses to participate in pooled employer plans, making it easier and less costly for small employers to provide workers with a retirement plan. Here's how to select the right 401(k) plan provider for your small business.
Find the Best 401(k) Providers for Small Business
Since there are many providers to choose from, keep in mind that not all will offer the same services or prices. Some 401(k) plan providers cater to smaller companies, such as a startup or those with fewer than 50 employees, while others are set up for medium-sized or large businesses.
These providers specialize in 401(k) plans for small businesses:
- American Funds. Small businesses of any size, from startups to those that have recently merged, can find traditional and Roth options through this provider.
- Betterment. Through its online cost calculator, small business owners can enter their number of employees and plan preferences to gain a personalized estimate of 401(k) costs.
- Charles Schwab. Charles Schwab provides 401(k) plans for companies of any size and creates customized plans to fit a business’ specific needs.
- Employee Fiduciary. With 401(k) plan establishment fees that start at $500, Employee Fiduciary provides personalized service from setup through plan administration.
- Fidelity Investments. Fidelity has small business 401(k) plans available for businesses with more than 20 employees and an app that employees can use to monitor their accounts.
How to Set Up a 401(k) for a Small Business
To offer a 401(k) plan for employees, the IRS lays out four steps to get started. These include:
- Adopt a written plan. If you have assistance from a professional or a financial institution, this step will usually be provided for you.
- Arrange a trust for the assets. A plan’s assets need to be in a trust to make sure they are used only for the participants and their beneficiaries.
- Develop a recordkeeping system. If you work with a financial institution, you can generally expect to have help with keeping the necessary records.
- Communicate information to employees. This includes sharing details about the plan with workers who are eligible to participate.
You will also have to decide on the type of 401(k) plan to offer employees. This could be a traditional 401(k) plan, a safe harbor 401(k) plan or an automatic enrollment plan. With a traditional 401(k) plan, the employer can elect to make contributions for all plan participants or offer a 401(k) match , but is not required to contribute. A safe harbor 401(k) plan requires the employer to make annual contributions on behalf of employees. An automatic enrollment 401(k) plan permits the company to automatically sign employees up for the plan and place salary deductions in certain investments.
Consider Whether to Match Employee 401(k) Contributions
Many employees rely on a 401(k) plan to help fund their retirement. “In our experience, a company’s contribution to the plan has become a key recruitment and retention tool of high-performing leaders,” says Eric Shisler, vice president and director of research and retirement plan services at Budros, Ruhlin & Roe in Columbus, Ohio. You might offer a match which consists of a percentage of an employee’s contribution, up to a specified percentage of the employee’s salary. Or you could provide a match up to a certain dollar amount.
Another type of employer contribution is 401(k) profit sharing, which allows a business to set aside a portion of its pre-tax profits in employee retirement accounts. You may choose to contribute a certain dollar amount, or a percentage of each employee’s salary. Before committing to contributions, you’ll want to think about short- and long-term profit projections. “Another key consideration for business owners when setting up a plan is if the company can sustain their contribution if cash flow fluctuates,” Shisler says.
Look at Small Business 401(k) Costs
Providing 401(k) accounts to employees will come with fees , and you should carefully sort through the fine print before selecting a 401(k) plan. A small business 401(k) plan might charge recordkeeping fees, investment fees and transaction fees.
Keep in mind that fees might change if the company hires more workers. “Look to understand how the fees quoted may change as the plan grows,” Shisler says. “Plans with the cheapest pricing upfront are not always the cheapest plans over time, especially with well-funded plans.”
Consider the Small Business 401(k) Investment Options
Look for a 401(k) plan that provides an assortment of investment options , rather than just a few ways to invest. “One of the major things that you want to look for in a plan for small companies is what kind of lineup of investment options will be available to the employees,” says Mike Scarborough, president and CEO of Oak Wealth Partners in Lexington Park, Maryland. “It should be broad-based in the sense that it should have large and small stocks, various types of bonds, some international exposure that is very broad-based, as well as emerging markets."
Carefully Select a Small Business 401(k) Provider
You’ll typically want to involve experts in the financial industry to help oversee the 401(k) plan. "Many individuals in the financial services industry can sell you a plan, but usually there are certain advisors who specialize in working with 401(k)s," says Art Haws, CEO and managing partner and HawsGoodwin Wealth in Franklin, Tennessee. "They can help you navigate the many issues and decisions made when starting and maintaining a plan."
A trustee will manage the 401(k) plan assets, and carries the responsibility of making decisions according to the plan's terms. A 401(k) custodian does not make management decisions, but holds plan assets.
When researching options, ask about the third party administration setup. "Some plans bundle the TPA services like plan design and documents, testing and tax preparation, while others require you to work with an outside TPA," Haws says. "An experienced financial advisor can help explain the benefits of either, and recommend the best solution for your specific situation." Some financial professionals will help you communicate about the retirement plan to employees. Also ask about payroll integration, as a 401(k) provider with payroll-related services might make your 401(k) plan easier to manage.
How to Max Out Your 401(k) in 2021
Tags: 401(k)s , retirement , money , small business , entrepreneurship
The Most Important Ages for Retirement Planning
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- Small Business 401(k)
A guide for small business owners to affordable and easy 401(k) plans. A Ubiquity Retirement + Savings™ 401(k) enables you to:
- Attract and retain your workforce
- Integrate payroll
- Automate your plan administration
(*Up to $5,000 per year, plus an additional $500 per year for automatic enrollment for the first 3 years)
Keep what's yours with Ubiquity's affordable, flat fee 401(k) plans. Call 866.634.6116 or schedule a free consultation with a retirement expert to learn more.
Small business 401(k) plans offer unique benefits to both business owners and their employees who participate in the plan.
Many small business employers want to provide a 401(k) to help their employees, but don’t think they have time or resources to manage a retirement plan, or don’t think they can afford one. However, with the budget-friendly, easy-to-use 401(k) solutions from Ubiquity Retirement + Savings™, small business owners can take advantage of the business tax benefits of a 401(k) plan and offer competitive retirement plan benefits for employees.
What is a small business 401(k)?
A 401(k) plan can be adopted by any employer other than a state or local unit of government. A small business 401(k) is defined as a 401(k) plan for a company with anywhere from one to 100 employees. At Ubiquity, we specialize in the retirement plan needs of small and growing businesses, including owner-only and start-up businesses.
If a business only employs the owner, or only has employees who would not be eligible to participate in a plan, then our Single(k)® plan would your best option.
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Benefits of small business 401(k)
With the right 401(k) solution, both the business and its employees enjoy substantial business benefits, including:
- Competitive retirement benefits to attract and retain employees
- Efficient process for managing employee contributions through payroll deduction
- Fewer employees working past their desired retirement date , which can impact morale and business costs
- Tax deduction for plan expenses paid by the business owner
- Tax credit for plan startup costs
Small business owners along with their employees can benefit personally from saving in a 401(k) plan, including:
- Efficient, disciplined savings through automatic payroll deductions
- Higher contribution amounts than permitted in SEP or SIMPLE IRA plans
- Reduced taxable income through pre-tax salary contributions
- Control over when taxes are paid on retirement assets (pre-tax versus post-tax Roth contributions )
- Tax credits for some employees
- Access to a broad range of investment options
- Tax-deferred growth on investments while in the 401(k) plan
- Option to take a loan from retirement savings
- Ability to move assets to other retirement arrangements if changing jobs or retiring
Not too familiar with 401(k) plans?
No problem – we’ll give you the lowdown.
No confusing language or too much financial jargon. Just a clear, concise, simple explanation.
Download Ubiquity’s Guide to Small Business 401(k) Planning and learn how a 401(k) can help lower your taxable income at a low fee and help you and your employees achieve greater financial security.
After almost two decades helping small business owners overcome their fears related to saving for retirement, we understand what’s holding you back, and we’re always here to help. The Ubiquity 401(k) Guide can help you better understand your small business 401(k) options, and help you find the right small business retirement plan.
Free guide to 401(k)
Our retirement planning experts will work closely with you to develop a retirement strategy that meets your needs and delivers beyond what you may have thought possible.
Maximum pre-tax contributions
Business owners who are looking to maximize their savings can contribute a significant amount to a 401(k) each year. Plan contribution limits for owners and high earners may be reduced if other employees are not actively saving in the plan. Ubiquity retirement plan consultants work with each business owner to identify the optimum plan design and resources to meet their individual needs.
Plan start-up tax credit
Business owners may be able to claim a tax credit for the administrative expenses of establishing their first retirement plan. The tax credit is equal to 50% of eligible start-up costs , with a maximum of $16,500 in tax credits (up to $5,000 per year for the first 3 years of the plan, plus an additional $500 per year if you include auto-enrollment).
One of the most important benefits of a 401(k) is the large amount that can be contributed each year, tax-free.
Maximum employee elective contribution (age 49 and younger)
Maximum employee elective contribution (age 50 and older)
Maximum employee elective deferral plus catch-up contribution (age 50 or older)
Defined contribution maximum limit, employee + employer (age 49 or younger)
Defined contribution maximum limit (age 50 or older), all sources + catch-up
Highly compensated employees’ threshold for nondiscrimination testing
Key employee officer compensation threshold
Annual compensation limit for HCEs and Key Employees
How to set up a small business 401(k) plan
Although each 401(k) provider will have its documentation and procedures for establishing a 401(k) plan, most business owners will need to:
- Select plan features and services
- Adopt a written plan
- Select a menu of investments for the plan
- Provide employee demographic information to service providers
- Notify eligible employees of the terms of the plan
Ubiquity manages all five steps for business owners online or with the help of a Retirement Plan Consultant.
Employer 401(k) Contributions
Many employers make additional contributions to their employees’ 401(k) plan accounts to help their employees reach their retirement planning goals faster, while also taking advantage of additional tax benefits for their business.
The most common employer contribution is a match on a portion of the dollars an employee puts into the plan – for example, an employer may choose to contribute $1 for each dollar the employee contributes, up to the first 3% of the employees pre-tax pay. Employers, including self-employed individuals, also sometimes make discretionary profit sharing contributions to their employees? 401(k).
Maximum 401(k) Contributions
For 2017, you can save up to $18,000 of your pay in a 401(k) ($24,000 if you’re age 50 or older). In addition, the business may make matching or profit sharing contributions. Employee contributions, combined with any employer contributions, cannot be greater than the employee’s income for the year, up to a maximum of $54,000 for 2017.
Limits for High-Earning Individuals
Tax laws require 401(k)s to pass nondiscrimination tests each year to make certain the 401(k) is not primarily benefiting high-earning individuals within the company. The IRS wants to ensure that plans that are being established within an organization are fair and balanced, hence the name, “nondiscrimination” testing. If lower-paid individuals are not making significant contributions, high-earners and business owners may not be able to maximize their contributions ($18,000 for 2017, $24,000 if age 50 or older).
“I am a new plan sponsor for my employer with Ubiquity. The friendliness of customer support was outstanding. So far, I am very impressed with Ubiquity! ”
Operating a 401(k) for small business owners
Once a 401(k) is set up, the business owner will work with the chosen service provider to make sure the plan operates according to the terms of the plan document and in compliance with other IRS tax rules that apply to 401(k) plans.
A business owner is responsible for:
- Timely deposits of employee contributions
- Making employer contributions (e.g., matching)
- Monitoring the plan investment lineup
- Ensuring that required information is provided to employees
- Approving loan, hardship. and distribution requests , as applicable
Ubiquity helps small business owners handle all of these plan maintenance steps. Start here to set up a plan.
One of the most important responsibilities of a business owner operating a 401(k) plan is to deposit plan contributions that are withheld from employees’ paychecks.
Business owners who do not make timely deposits may be subject to IRS and Department of Labor DOL) penalties. Small businesses (those with fewer than 100 employees) need to meet deposit requirements within seven days following payroll.
Contributions made by the business owner (e.g., matching, profit sharing) must be deposited by the business’s federal income tax return due date, including extensions.
If you are a small business owner and need a 401(k) plan for yourself and your company, only Ubiquity offers flat-fee plans plus free expert advice.
We will fully customize your 401(k) to meet the specific needs of your small business.
Setting up a 401(k) doesn’t have to be complicated. Only Ubiquity gives small business owners access to 401(k) experts in addition to industry-leading, low, flat fees. Each sales expert has over a decade of experience assisting business owners in 401(k) plan design. Take advantage of this free benefit.
Additional Resources for Small Business 401(k)
- Department of Labor (DOL): Choosing a Retirement Plan Solution for Your Small Business
- IRS: Lots of Benefits – When You Set Up an Employee Retirement Plan
- IRS: Operating a 401(k) Plan
- DOL : Meeting Your Fiduciary Responsibilities
- 401(k) Withdrawal
- 401(k) Contribution Deadlines
- Maximum 401(k) Contribution Limits
- 401(k) Benefits
- 401(k) Loan
- 401(k) Match
- 401(k) Cost
- Safe Harbor 401(k)
- 401(k) Rollover
- Roth 401(k)
- IRA v. 401(k)
- 401(k) Calculator
- Solo 401(k)
- 401(k) for High-Earning Individuals
- 401(k) Investments
- Required Minimum Distributions
The simple 401(k) plan for small businesses
401(k) plans are a popular option for small businesses because of the flexibility they offer.
With Simply Retirement by Principal ® , you’ll get that flexibility and more. Our 401(k) plan solution is designed to make plan management easy for you while providing a way for your employees to save for their retirement.
Why consider a 401(k) plan?
A 401(k) plan is a valuable employee benefit that can help you recruit and retain top talent. It’s also an effective way to help your employees save for the future.
What’s a 401(k) plan?
401(k) plans allow employees to set aside a portion of their compensation. Business owners can make contributions to the employees' retirement plans.
Normally, a 401(k) plan is designed to help employees maximize their retirement savings by deferring the payment of income taxes until they withdraw the money in retirement. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don’t have to pay taxes when they withdraw the money as long as distribution requirements are met.
A 401(k) plan offers the flexibility to design a plan with:
- Tax benefits for your business and your employees
- Pre-tax salary deferrals
- Profit sharing with the option to offer matching contributions
- The option for your employees to request a loan from their 401(k) plan balance
- Convenient automatic payroll deductions for employee contributions
Tax credits are available for small businesses just starting a new retirement plan.
New SECURE Act 2.0 legislation could help offset some of your plan start-up costs.
The SECURE Act 2.0 allows small businesses with no more than 50 employees to claim a tax credit of 100% of the qualifying start-up costs for a new employee retirement plan ( up to $5,000 per tax year for the first three years * ). SECURE Act of 2019 allows a tax credit of 50% of the qualifying start-up costs for a new employee retirement plan for 3 years if the employer has 51-100 employees (maximum $5,000 a year).
There’s also an extra tax credit for 5 years of up to $1,000 per employee a year for employer contributions made if employers have no more than 50 employees. For employers with more than 51-100 employees, the credit is reduced by 2% for each employee in excess of 50. Under SECURE of 2019, an employer may also be eligible to claim up to $500 tax credit for including an eligible automatic contribution arrangement, which is an optional feature of the Simply Retirement by Principal ® 401(k) plan. Plus, matching contributions you make to employee retirement accounts as noted above can be tax-deductible. For example, a company with 25 employees can see the 2022 plan start-up fee change from $2,200 per year to potentially offset the expenses by 100% with tax credits. See your tax advisor for guidance on how these credits may apply.
Advantages of a Simply Retirement by Principal ® 401(k) plan
Consistent flat fee
Business owners pay the same flat recordkeeping fee, so you don’t have to worry about pricing that goes up as your plan assets grow or wonder if you’re getting the same rate as others.
You can make all of your plan design selections, sign forms, add employees, and manage contributions in one central online location—when and where it’s convenient for you. And if you have questions, help is just a phone call away.
Payroll provider integration
Ubiquity Retirement + Savings ® supports integrations with select payroll providers like Paychex, ADP, and QuickBooks, helping business owners save time and reduce errors by automating contribution reporting.
How does a 401(k) plan compare to other retirement plans?
If you’re looking for a workplace retirement plan, a 401(k) plan isn’t your only option. See how it compares to other plan types below. This is just an overview, so talk to your financial professional if you’d like more details about each plan option and how they might fit your needs.
401(k) plans allow employees to set aside a portion of their compensation and also allow business owners to make contributions to the employee’s retirement plan if they choose. Loans can be allowed, providing flexibility for employees. Normally, a 401(k) is designed to help employees save for their retirement where they won't pay taxes until they withdraw the money in retirement. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don't have to pay taxes when they withdraw the money as long as distribution requirements are met.
A 403(b) plan is like a 401(k) plan; however, 403(b) plans are used by tax-exempt businesses, religious organizations, school districts, and governmental organizations. The law allows these organizations to be exempt from certain administrative processes that apply to 401(k) plans.
A Simplified Employee Pension (SEP) Individual Retirement Account (IRA) allows self-employed individuals or small business owners to save toward retirement. Business owners who have employees are required to contribute on the employee’s behalf. Roth contributions (after-tax contributions that grow tax-free) and participant loans are not available.
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a simpler version of a 401(k) plan that works like a traditional IRA (Individual Retirement Account). Business owners are required to contribute to the plan, regardless of the employee participation and participant loans are not available. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don't have to pay taxes when they withdraw the money.
A defined benefit (or pension) plan is a form of retirement plan in which the business owner sets aside money for their employee while they are working to provide them with guaranteed monthly income in retirement. Money will then be paid out to the employee, usually on a monthly basis, after they have retired. Employees cannot contribute additional money. A formula is used to determine how much the business owner will contribute to a pension plan.
A 403(b) plan is only available to:
- Employees of tax-exempt organizations established under section 501(c)(3)
- Employees of public school systems who are involved in the day-to-day operations of a school
- Employees of cooperative hospital service organizations
- Civilian faculty and staff of the Uniformed Services University of the Health Sciences
- Employees of public school systems organized by Indian tribal governments
- Certain ministers (see irs.gov for criteria)
This allows employees to defer paying income taxes until they start to withdraw the money in retirement. This also lowers their taxable income for their current payroll.
This allows employees to pay income taxes now and not when they start to withdraw the money in retirement as long as distribution requirements are met. This could be beneficial if your employee expects to have a higher monthly income during retirement.
There is a minimum amount that your business would be required to contribute to your employees’ retirement.
Safe harbor is just a type of 401(k) plan that allows you to bypass some of the compliance testing required by the IRS to make sure the plan is fair. In return, you’re required to help your employees save for retirement by making matching contributions to their 401(k) accounts. With safe harbor, you’ll contribute more money, but there’s less paperwork and administrative hassle. With a non-safe harbor plan, you have the option to contribute less, but you can’t bypass compliance testing required by the IRS. For more details, check out our safe harbor resource page .
* Eligible employees must be notified prior to plan start date.
A loan provides the ability to withdraw funds from your retirement account early but it will need to be paid back based on plan terms. Money is taxed again when withdrawn in retirement, so those who take out a loan are subjecting themselves to double taxation.
A hardship withdrawal is an emergency withdrawal of funds from a retirement plan due to what the IRS calls “an immediate and heavy financial need.” There are certain criteria for why the funds are needed and their amount in order to avoid penalty, but, even if penalties are waived, the withdrawal will still be subject to standard income tax.
A vesting schedule is the time frame it takes for employees to own the assets that a business owner contributes to the employee's retirement plan. This is determined by the business owner and may be used as a retainment incentive.
Automatic enrollment is a plan provision which automatically enrolls participants into the retirement plan at a specified pre-tax salary deferral percentage. This can help increase participation, simplify administration, and help employees save for retirement. Participants in the Simply Retirement by Principal ® 401(k) plan are automatically enrolled, but can change their contribution details or opt out at any time.
A rollover is when you transfer the money in your retirement account to a new plan or IRA. The IRS gives you 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. You’re allowed only one rollover per 12-month period from the same IRA. This one-rollover-per-IRA limit doesn’t apply to plan-to-plan rollovers and some other types of rollovers.
Any acceptable investment under the plan
Only mutual funds and annuities
Individual stocks, bonds, mutual funds, ETFs, and others
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Intended for plan sponsor use.
*Up to $5,000 per tax year for the first three years: 50% of the qualified startup costs paid or incurred, but limited to the greater of (1) $500 or (2) the lesser of (a) $250 for each non-highly compensated employee who is eligible to participate in the plan or (b) $5,000. Qualified startup costs (1) In general “qualified startup costs” is ordinary and necessary expenses of an eligible employer which are paid or incurred in connection with – the establishment or administration of an eligible employer plan, or (ii) the retirement-related education of employees with respect to such plan. (2) Plan must have at least 1 participant: would not apply if plan does not have at least 1 employee eligible to participate who is not a highly compensated employee. Information about the SECURE Act 2.0 is educational only and provided with the understanding that Principal ® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other financial professionals on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
*Automatic enrollment: Automatic enrollment is a plan provision which automatically enrolls participants into the retirement plan at a specified pre-tax salary deferral percentage. This can help increase participation, simplify administration, and help employees save for retirement. Participants in the Simply Retirement by Principal® 401(k) plan are automatically enrolled, but can change their contribution details or opt out at any time. This credit is for plans that include the eligible automatic contribution arrangement (EACA) feature only.
*19,500: Up to $26,000 for employees age 50 or older. Amounts are for the 2020 tax year.
*19,500: Up to $26,000 for employees age 50 or older. An employee of a “qualified organization” with 15 years of service may be eligible to contribute an additional $3,000. Amounts are for the 2020 tax year.
*13,500: Up to $16,500 for employees age 50 or older; can’t exceed 100% of compensation. Amounts are for the 2020 tax year
Start-up tax credit modification: Small employers with 50 or fewer employees may apply 100% of qualified start-up costs towards the tax credit formula (up to $5,000 per year).
- Applicable to small employers with 50 or fewer employees.
- For employees with 51-100 employees: The credit is phased out by reducing the amount of credit each year 2% for each employee in excess of 50.
1st and 2nd year = 100%, 3rd year = 75%, 4th year = 50%, 5th year = 25%, 6th year = 0%
No contributions may be counted for employees with wages in excess of $100,000 (inflation adjusted). If taking advantage of this tax credit, employer contributions may not also be counted towards “start-up costs” in the start-up tax credit calculation.
*Eligible automatic contribution arrangement: The SECURE Act 2.0 of 2019 provided an automatic enrollment one-time tax credit possible to be up to $500 per tax year for each year of the 3-taxable-year period beginning with the first taxable year for which the employer includes an eligible automatic contribution arrangement. This credit is for plans that include the eligible automatic contribution arrangement (EACA) feature only. Information about the SECURE Acts is educational only and provided with the understanding that Principal ® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other financial professionals on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
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Small Business 401(k)s: How to Leverage the Multiple Employer DOL Rule
Businesses can now share the costs of setting up a joint 401(k) plan
Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.
If you own or are employed by a small business—and are among the approximately 38 million people in the U.S. with no access to a retirement plan at work—you may be interested in the U.S. Department of Labor (DOL) rule that took effect Sept. 30, 2019.
This rule clarified how small and medium companies, as well as individual “working owners,” can participate in a defined-contribution retirement account such as a 401(k) by joining what is known as an association retirement plan (ARP).
- A 2019 DOL rule made it easier and less expensive for small business owners to offer a 401(k) to their employees.
- Self-employed working owners are also eligible to participate in these plans.
- The rule created a new kind of multiple employer plan (MEP) called an ARP that lets companies in different industries join to open a group 401(k) if they are in the same geographic area.
- Companies in the same industry can open a plan no matter where they have a physical presence.
Association Retirement Plan (ARPs) Explained
An ARP is a new form of multiple employer plan (MEP), a retirement savings plan involving two or more unrelated employers. Until the creation of ARPs, MEPs limited members to employers with certain connections, such as a common owner or membership in an industry trade group. In that sense, MEPs are considered “closed.”
The DOL multiple employer rule makes it easier for small employers to offer a retirement plan to employees by expanding the rules to include companies in different industries with a physical presence in the same geographic area (city, county, region, or state) or companies in the same industry even if not in the same geographic area.
The DOL created the rule by interpreting previously unclear guidelines under the Employee Retirement Income Security Act (ERISA) of 1974. It’s important to understand that, even with the new interpretation, an ARP is still not an “open” MEP, in which the only thing employers have in common is participation in the plan.
The National Compensation Survey of Employee Benefits in the U.S. in March 2020 revealed that 71% of all workers surveyed, or 139.6 million workers, have an employer-sponsored retirement plan available to them.
Breaking Down the Multiple Employer Rule
Under the DOL rule, an ARP can be offered and administrated by a “bona fide” group or association of employer members, such as a chamber of commerce , or by a professional employer organization (PEO). PEOs are human-resource companies that take on certain employment responsibilities for member businesses.
Banks, insurance companies, broker-dealers, record keepers, and companies that provide retirement plan products are not currently permitted to participate.
A bona fide group or PEO acts as a single employer for all employees of member companies for purposes of sponsoring and administering the ARP. The only types of retirement plans allowed are defined-contribution plans, such as a 401(k). In addition to employees and owners of member companies, qualified self-employed working owners may also join the ARP.
Bona Fide Group or Association
To qualify as a bona fide group or association, an organization must act in the interest of member companies or working owners and agree to establish a benefit program. It must control the amendment process and plan termination and perform other functions on behalf of members. It must also have a close economic or other connection unrelated to the 401(k) plan or other benefits.
In other words, it must be a bona fide business organization that shares a common interest with member businesses unrelated to benefits.
The DOL further requires that employer members of the organization exercise control over the benefit plan, both in form and substance. Examples of bona fide organizations include a local chamber of commerce or other local, state, or national professional organization or trade group.
Professional Employer Organization (PEO)
A PEO acts “in the interest of” client companies to provide a variety of financial and human resources services to client companies including federal tax withholding, Internal Revenue Service (IRS) reporting, payroll functions, employment responsibilities, and more. Many PEOs already offer MEPs. The DOL rule essentially provides a safe harbor for “bona fide” PEOs to continue or begin taking on that responsibility moving forward.
To be considered “bona fide,” a PEO must meet four requirements: that it perform substantial employment functions on behalf of its clients, have substantial control over the MEP or ARP, ensure that each client company has at least one employee who participates in the plan, and offer the plan only to those clients and their employees.
Qualified Self-Employed Working Owners
If you are a self-employed working owner, the rule allows you to join an ARP established and maintained by a bona fide group or organization (such as a local chamber of commerce) but not one maintained by a PEO. To be considered qualified, you must work at your business at least 20 hours per week or 80 hours per month, on average, or earn income at a certain level.
In the case of earned income, the requirement is that you earn enough to cover the cost of an association health plan (AHP) provided by the ARP. It’s worth noting that you don’t have to participate in the AHP, just earn enough to pay the cost of coverage if you decide to use earned income instead of hours worked as your metric.
The SECURE Act
In deciding whether to join an ARP or employ a PEO under the new DOL rule, you may also want to consider relevant portions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act .
This legislation goes much further than the DOL rule when it comes to access to MEPs by unrelated employers. It created “open” MEPs that allow companies that are not in the same geographic area and aren’t part of the same trade, industry, or profession to join the same MEP. The act also permits MEPS to be administered by a “pooled plan provider,” such as a financial services firm.
The SECURE Act also eliminated the “one bad apple rule.” The Act also says the provider must be the named fiduciary and plan administrator and register with the DOL or IRS.
What You Can Do Now
If you’re an employer or self-employed “working owner,” consider potential existing organizations you belong to that might qualify as a bona fide group or association for purposes of offering an ARP. At the top of your list should be the local or state chamber of commerce. Trade and industry groups could form other opportunities. Remember that local organizations can include companies or businesses in any industry. National groups must be related to your specific industry.
As a small business owner (self-employed worker-owners aren’t eligible), you may want to consider hiring a PEO that meets your business needs and offers an ARP as part of the package. To find out more about PEOs, check out the National Association of Professional Employer Organizations (NAPEO)’s Guidelines for Choosing a PEO .
The Bottom Line
Despite the advantages, there are reasons for caution when considering joining an ARP. Also, you may discover non-ARP alternatives using new technology and software that may make setting up your own retirement plan less expensive than you think.
All that said, the DOL rule makes it possible for small businesses to access competitive benefits packages at potentially lower costs and without much of the paperwork that typically comes with such ventures. At the very least an ARP may be worth exploring to see if it makes sense for you and your company.
Federal Register. " Definition of “Employer” Under Section 3(5) of ERISA-Association Retirement Plans and Other Multiple-Employer Plans ."
Department of Labor. " Fact Sheet: Final Rule on Association Retirement Plans (ARPs) ."
Bureau of Labor Statistics. " Employee Benefits in the United States, March 2020 ," Page 3.
U.S. Government Publishing Office. " Further Consolidated Appropriations Act, 2020 ," Section 101.
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- 401(k) and IRA Contributions: You Can Do Both 4 of 38
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- Small Business 401(k)s: How to Leverage the Multiple Employer DOL Rule 17 of 38
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More From Forbes
Demystifying the cash balance/401(k) plan combo for small-business owners.
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Well-designed retirement plans can generate enormous wealth for a business owner at retirement. Unfortunately, complex rules, confusing terminology and mathematically driven formulas tend to scare off many who could benefit from them. One such example is a cash balance plan . Here, I'll explain, in a nutshell, the features and advantages of a cash balance plan, and how it can help build wealth when combined with a 401(k) plan.
What Is A Cash Balance Plan?
A cash balance plan is a defined benefit plan that, in some ways, resembles a 401(k) plan. Like 401(k) plans, typically cash balance plans credit a participant's hypothetical account annually with a "pay credit" (such as 5% of the employee's compensation) and an "interest credit" (this rate can be fixed or variable linked to an index). The plan participant account is referred to as a "hypothetical" account because the plan administrator maintains the accounts for each participant. Unlike 401(k) plans, those hypothetical accounts are then used to determine the monthly benefit the eligible employee will receive at retirement. Also, unlike 401(k) plans, changes in the actual value of the plan's investments are the employer's responsibility and do not directly impact the amounts participants receive.
In a cash balance plan, the rules do not limit the annual contribution amount but instead limit the ultimate benefit payable from the plan. The current maximum benefit is a life annuity of $230,000 per year payable beginning at age 62, subject to adjustments based on age, years of service and participation. The lump sum equivalent of that benefit at retirement age is over $2 million. So you can see cash balance plans offer the potential to generate considerable retirement savings that can be several times that of 401(k) profit-sharing plans alone.
The primary advantage of establishing a cash balance plan is the ability to generate high annual tax deductions and create long-term retirement wealth through the power of tax deferral. However, there are several disadvantages to establishing a cash balance plan. The first is cost. A cash balance plan typically costs more than a 401(k) plan to set up and administer. In addition, cash balance plans do not offer employees the right to direct their own investment choices. Each year, the employee would receive a statement of their contributions and return on investment.
How Does A Cash Balance/401(k) Combo Plan Work?
For those business owners who are seeking to make annual plan contributions in excess of the stated 401(k) limitations , sponsoring a cash balance plan, in addition to a 401(k) plan, is an option. For example, for a 50-year-old business owner with annual compensation of $285,000 or more, combining a cash balance plan with a 401(k) plan increases the potential maximum annual tax deductible plan contribution from $63,500 up to $207,000.
The ideal candidate for a combo plan is a highly compensated business owner who is seeking larger contributions and greater tax deductions. The business should anticipate consistent profits and strong cash flow for a number of years for a couple of reasons. The first reason is because retirement plans are supposed to be permanent. Although there is not an objective standard of permanency, three to five years appears to be sufficient time to satisfy the permanency requirement. Secondly, cash balance plans are not profit-sharing plans. Annual plan contributions are required and are calculated by an actuary in order to cover top heavy, minimum gateway and non-discrimination testing requirements.
Here is an example that illustrates the power of a cash balance plan combined with a 401(k) plan.
ABC Inc. has two owners and four employees:
• Owner A is 60 years old and earns $285,000.
• Owner B is 45 and also earns $285,000.
• Employee 1 is 40 and earns $75,000.
• Employee 2 is 35 and earns $50,000.
• Employee 3 is 30 and earns $40,000.
• Employee 4 is 25 and earns $30,000.
ABC's owners want to make high annual retirement contributions above the 401(k) plan allowances, and after speaking with a third-party administrator, they decided to establish a combo cash balance/401(k) plan. Here is an estimation of how much the owners of ABC Inc. will be able to defer in 2020:
Owner A can contribute a maximum of $63,500 to the 401(k) plan, which is the maximum amount for 2020 based on his age. This includes $26,000 for the employee deferral, a 3% contribution in a safe harbor plan of $8,550 and an employer contribution of $28,950. He will then receive a cash balance credit of $266,848 ( based on actuary calculations ) for a grand total of $330,348.
Owner B can contribute $19,500 to the 401(k) plan as an employee, with the same safe harbor and employer contributions as Owner A, plus a cash balance credit of $126,492 for a total of $183,492.
The employees will have varying safe harbor and employer contributions based on their salaries. In addition, they would each receive a $700 cash balance credit.
The total retirement savings for each employee is as follows:
• Employee 1: $6,145
• Employee 2: $3,330
• Employee 3: $3,604
• Employee 4: $2,878
In this example, both Owners A and B will be able to max out their 401(k) plan and make high annual cash balance contributions, while creating significant tax deductions and incurring minimal cash expenses for cash contributions made to their four employees. The actuary will determine the minimum and maximum defined benefit contribution and deduction allowed under the plan.
Choosing the right retirement plan for your small business can be a $2 million decision. If you are highly compensated and your financial goals include saving as much as you can for retirement, the cash balance/401(k) plan combo might be the solution for you. However, it's important to work with a cash balance plan specialist who can design the best retirement plan for you and your business.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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Should You Offer a 401(k) Plan, and if so, to Whom?
An employer-sponsored 401(k) retirement plan can have many benefits for your employees and your business.
- Offering a 401(k) plan can help small businesses meet increasing employee expectations and retain top talent.
- Companies that offer 401(k) plans are eligible for significant tax breaks and deductions.
- Both businesses and employees benefit from optional employer contributions to workers’ 401(k) accounts.
- This article is for business owners who want to know why they should offer a 401(k) plan.
If you’re like many small business owners, you’ve probably asked yourself whether you should offer a 401(k) plan as part of your employee benefits package . You’ve probably also asked yourself what you and your company stand to gain from such a move and which employees will benefit from it. We’ll break down how 401(k) retirement savings plans provide advantages for both employers and employees.
Editor’s note: Looking for the right employee retirement plan provider for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
What benefits do employers get from offering a 401(k) plan?
401(k) plans are funds that allow employees to contribute a portion of their wages to save for retirement.
“Any business can set up a 401(k), a salary deferral plan to which employees can contribute part of their salary and have it not count as income on their W-2,” said Christian Brim, CEO of financial firm Core Group. “And oftentimes, businesses with fewer employees benefit most from them.”
Here are some of the advantages for employers:
Attractive benefit to recruit and retain talent
Retirement benefits are increasingly important to job seekers. Many workers ask during the job application process whether a company has a retirement plan such as a 401(k), and they seriously consider the availability of such a plan when deciding whether to accept or remain in a job.
“There can also be big financial benefits from a 401(k) in helping to retain and attract top talent and the associated cost savings and productivity gains,” said Stuart Robertson, CEO of ShareBuilder 401k.
Robertson’s research shows that replacing an employee costs 29% to 46% of an employee’s annual salary, depending on whether that team member is in a managerial position.
“It’s estimated that an employee who earns $50,000 a year can cost $14,500, on the low end, to replace,” he said. “A 401(k) plan is a small price to pay, not only for retirement but also for building and keeping a great team.”
While a 401(k) is a retirement vehicle, employees can also borrow against a 401(k) as an asset, giving them some leverage should they need an infusion of liquid cash without incurring tax penalties.
Better work ethic
Brian Halbert, founder of Halbert Capital Strategies, said his clients have reported significant increases in worker loyalty and productivity when they have added a 401(k) plan to their employee benefits packages.
“The single largest benefit coming from a 401(k) is financially wise employees that have a zeal for working hard for their company,” Halbert said. “Oftentimes, we see the ROI in productivity and loyalty.”
Lower tax liability
Business owners with employees can contribute a hefty portion of their own salary to their personal 401(k) account (the one associated with the plan they offer to workers), possibly putting them in a lower tax bracket. In 2022, that sum is up to $20,500 tax-deferred for employers under age 50 and up to $27,000 for employers age 50 or over.
Business tax credits
The SECURE Act (Setting Every Community Up for Retirement Enhancement), signed into law in December 2019, increases tax credits for businesses implementing a first-time 401(k) plan. The act increased tenfold the tax credit companies with one to 100 employees can claim for qualified setup and administrative costs associated with startup 401(k) plans .
Before the SECURE Act, the tax credit for the first three years of an employee 401(k) plan was 50% of qualified startup costs, not to exceed $500. Those costs included – and still include – the cost to set up and administer the plan and to educate employees about it.
Under this law, however, small businesses now get a 401(k) startup credit whose limit is either the greater of $500 or (a) the lesser of $250 multiplied by the number of non-highly compensated employees (HCEs) eligible for plan participation or (b) up to $5,000.
The IRS defines an HCE as an employee whose salary was more than $130,000 in 2021 and more than $135,000 in 2022. Robert Pyle, owner of Diversified Asset Management, said the more HCEs a business has, the higher the tax credit. The maximum tax credit, which can be claimed for three years, is $5,000.
Adding an automatic contribution feature to a new or existing 401(k) plan yields another tax break: $500 for each of the first three years in which the feature is available. This feature, also known as automatic enrollment or auto-enroll, lets employers automatically enroll eligible employees in the plan unless the employee affirmatively elects not to participate in it.
Business tax deductions
Many employers make matching contributions to employees’ 401(k) accounts. These contributions may qualify as ordinary business expenses, in which case they are tax deductible up to the annual corporate deduction limit on all employer contributions (25% of covered payroll). Profit-sharing contributions to employees’ 401(k) accounts are also deductible, further reducing the tax liability for small businesses.
Providing a 401(k) plan can help companies recruit employees and save on business taxes. Self-employed 401(k) plans allow independent contractors and sole proprietors to save for retirement as well.
What are the advantages of 401(k) matching?
While businesses aren’t required to offer a 401(k) contribution match for employees , it’s still a good idea. Robertson said matching contributions can boost employee morale and, because they are deductible, drive down a business’s tax liability.
If you want to offer a matching program but you’re afraid some employees will just take the money and run, consider a vesting schedule. With this arrangement, employees can’t take the employer’s contributions until the employees have participated in the retirement plan for a certain length of time.
For example, employer matching contributions might not fully vest for three years. If an employee leaves for another job before those three years are up, they aren’t entitled to all of the contributions the employer has made on their behalf. Of course, they do get to take all of the money they have personally contributed. [Read related article: Employee Retirement Plans: A Buyer’s Guide ]
Some companies opt for profit-sharing contributions to employees’ 401(k) accounts when business is good. As mentioned above, these contributions are also tax deductible.
“The typical 401(k) match is called a safe harbor nonelective match of 3% of [the employee’s] salary,” Pyle said. “This means the employees get 3%, whether or not they participate in their employer’s 401(k) plan. Other match types are 100% on the first 3% of salary deferred and 50% on the next 2% of salary deferred.”
Some of the best payroll software providers , such as ADP and Paychex, offer 401(k) plan services as part of their packages.
How to start offering a 401(k) plan
Once you’ve decided to offer a 401(k) plan to employees, you’ll need to follow these steps to ensure compliance:
1. Document the 401(k) plan.
The first step you’ll need to take once you decide to offer your employees a 401(k) plan is to document the plan details. This process can be tedious, and small business owners often outsource this task.
Your plan should include details about contribution amounts, benefits payment timelines and eligibility information. Once you create the plan, you’ll have to submit it to the IRS for approval. Also, remember to review this plan annually to remain in compliance.
2. Open a trust.
Once your 401(k) plan has been approved, you’ll need to set up a trust account where all plan assets will be held. At this point, you’ll also need to select a trustee who can oversee all plan activities, including contributions and distributions.
3. Implement a recordkeeping system.
The next step is to implement a system to track plan values and employee contributions. If you need assistance with this step, consider hiring a recordkeeper.
4. Update participants on plan changes.
The IRS requires all business owners to consistently update 401(k) participants on changes, investments and associated fees. Business owners are also required to provide employees with a summary plan description, including detailed information about how the plan operates.
Tips for implementing a 401(k) plan
If you decide to offer a 401(k) plan, keep these tips in mind:
1. Consider outsourcing the administration.
Bringing in an in-house expert can be very costly, and doing so without experienced personnel could lead to mistakes or inefficiencies. By outsourcing, you improve efficiency and reduce liability.
Professional employer organizations (PEOs) are third-party companies that handle human resources, payroll, benefits and 401(k) plans for small businesses. Thousands of small businesses nationwide partner with PEOs to access competitive benefits and 401(k) plans.
Choosing a PEO can be complicated, but several types make sense for small businesses. The best PEOs have industry accreditation, minimal requirements for coverage, and great features, including short-term contracts.
2. Provide competent, qualified financial advisors.
It’s very beneficial for your employees to have someone to consult when they have questions about how to invest in their account and how much they should contribute. An advisor takes the burden of providing financial advice to your employees off of you. Be sure to properly vet your applicants for the financial advisor position, because poor financial advice can have serious financial and legal consequences.
3. Provide good investment options.
Ensure your company offers a good range of investment options. Your mutual fund options should represent different markets, such as U.S. stocks, international stocks and bonds. A good rule of thumb is that 75% of your mutual funds should have an expense ratio of less than 1%.
Also, keep track of how the funds in your plans are doing to see whether they are underperforming, matching or outperforming their benchmarks. You want to ensure your employees are happy with their options. It should be simple and free to swap fund options.
To run your 401(k) program in a compliant, budget-friendly manner, consider outsourcing benefits administration , provide reliable consultants and offer good investment options.
What are the best small business 401(k) options?
Not every 401(k) plan is built for large corporations. As a small business owner, you have options for plans that fit your budget and business goals. Here are some of our top picks:
Guideline is a top employee retirement plan provider that handles all of your 401(k) plan needs, including plan administration, investment management and recordkeeping. The company charges a monthly base fee and a per-participant fee.
ShareBuilder 401(k) is a great option for employers offering a safe harbor 401(k) plan. The company provides small businesses with a plan administrator, custodian, investment advisor and recordkeeper. Contracts are not required, so you can cancel at any time.
Paychex Employee Retirement
Paychex offers 401(k) plans that integrate with its HR, payroll and employee benefits services. Business owners can choose their own 401(k) plan, IRA, 403(b) and investment options to offer employees, as well as add their preferred financial advisor or plan design. Paychex makes it easy to set up your plan and integrate with automated payroll to handle employee enrollment and contributions.
Human Interest offers user-friendly 401(k) plans and provides cost-effective employee retirement options to small businesses. Human Interest’s benefits start at just $120 per month, plus $4 per employee per month, including full recordkeeping, administration tools and seamless payroll integration.
American 401k is a small retirement benefit services provider that offers highly personalized service combined with the backing of a large national insurance company (MassMutual). Small business owners who want a no-frills, no-fuss employee retirement package can work with American 401k to design the perfect plan for their needs.
ADP Employee Retirement
ADP’s employee retirement benefits complement the company’s payroll services through an all-in-one platform. The employee retirement benefit accounts are cost-effective and easy-to-use solutions for small businesses with at least a couple dozen employees.
Vanguard is best for entrepreneurs who want a solo 401(k) plan. There are no setup fees, and you can choose from more than 100 investment options. The company’s website includes various tools to help you decide where to invest your money.
The 411 on 401(k) upsides
Retirement plans are a great way for employers to attract and retain top talent. Employers should also consider the tax benefits of offering a 401(k) plan, particularly the advantages of matching employee contributions. To ensure compliance, businesses must evaluate the hours of full- and part-time employees when determining who is eligible for company-sponsored retirement plans. But by following the tips above, you’ll reap the rewards of offering this valuable retirement benefit to your employees.
Kimberlee Leonard contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.
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