Small Business 401(k)

Set yourself—and your company—apart from the majority of people who are under-informed or under-prepared for retirement. Creating a company 401(k) plan offers long-term benefits for your personal life and peace of mind in the future, but you will also start to see savings for your small business as well.

GuidedChoice has helped over 1.5 million customers build a future based on trust. Today, we’re helping by providing everything you need to know before setting up a small business 401(k), including costs, comparisons, benefits, and basics.

Why a Small Business 401(k)?

If you’ve considered setting up a small business retirement plan, you’ve probably learned that there are a variety of options to choose from. So why opt for a 401(k) over an IRA or pension plan? Let’s take a look at some of the pros and cons of each to better demonstrate the reasons a 401(k) for small business owners is appealing.

  • Individual Retirement Account (IRA) An IRA is a government sponsored, tax-deferred personal retirement plan. Setting up an IRA is easy; simply enlist an independent advisory firm like GuidedChoice to act as a fiduciary. Once the account is open, select the plan’s investments, and begin making contributions—up to $5,500 ($6,500 if you’re age 50 or older) per year for Traditional IRAs.

Individual retirement accounts are popular among young or part-time workers who aren’t offered retirement benefits through an employer. Some employers elect to offer a Simplified Employee Pension (SEP) IRA or Savings Incentive Match for Employees (SIMPLE) IRA to their employees because they’re relatively simple to set up and offer tax breaks and benefits.So how do IRAs stack up against 401(k) plans? Employers can glean many benefits from SEP IRAs or SIMPLE IRAs; however, while both forms of IRA are inexpensive and easy to set up, they do come with drawbacks. Most IRAs have an increased number of investment options vs a 401(k). Depending on what investment or stock options are included in the IRA, it might be necessary for an individual to actively manage their retirement plan. In today’s volatile market, watching your account value rise and fall can be incredibly stressful.  In addition, having so many options can create pressure and stress over making the right choice, which might make a professionally managed account seem more appealing.

Both IRAs and 401(k)s make wide use of mutual funds. Some individuals might appreciate the flexibility of an IRA, while others might find it cumbersome. Ultimately, the pros and cons go back and forth, and it depends on your tax bracket and circumstances to decide which retirement plan is better for your small business.

  • Pension Plans A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker’s future benefit. The pool of funds is then invested on an employee’s behalf, and the earnings on the investments generate income for the worker once they retire. Pensions are defined benefit plans, meaning there is no flexibility with respect to the disbursement of funds, as payouts are established at the time the pension is created.

The guaranteed income comes with a caveat: whereas IRAs are actively managed by the account holder, pensions are maintained by the plan’s provider. This places the investment risk on the provider versus the account holder, eliminating an individual’s control over a poorly performing, pre-chosen portfolio, placing the investment risk on the plan’s provider. Pensions are much more expensive to set up, maintain, and administer than a 401(k) for small business owners.

401(k) Plans for Small Businesses        

A 401(k) is an employer-sponsored, defined contribution plan. Employees can decide how much they want to contribute to the company 401(k) plan. Just like IRAs, contributions and earnings in a 401(k) account are tax-deferred, meaning you don’t pay taxes on the money until it’s distributed during retirement. Unlike pensions, a company 401(k) plan offers more flexibility and control to both you and your employees. There are several different 401(k) plans for small business owners:

  • Traditional 401(k)
    Under a traditional small business 401(k), employees contribute portions of their wage before taxes to their retirement plans. As their employer, you get to decide whether or not you want to contribute. You can either contribute for all participants, make matching contributions based on an employee’s elective deferral, or both. You can also make your contributions subject to a vesting schedule.
  • SIMPLE 401(k)
    A SIMPLE 401(k) is designed with small business owners in mind. You can only qualify for this plan if your company has 100 employees or fewer. These plans are not subjected to the non-discrimination rules that apply to traditional 401(k)s. It offers a straightforward benefit formula for easy administration, and all employees are automatically and fully vested. Moreover, you and your employees can withdraw loans from the account in the event of hardship.
  • Self-employed or Solo 401(k)
    If your small business has no employees, this could be the right plan. A solo 401(k) offers the largest possible contributions because it recognizes that self-employed people wear two hats—as an employee and as an employer. A plan participant under the age of 50 can make a maximum annual employee deferral contribution of up to $18,000, under the current Self-Employed 401(k) contribution rules. By contributing to this account as both an employer and employee, you will shelter both your personal and business incomes, saving yourself money around tax season. The plan also allows catch-up contributions of up to $6,000 for those who are age 50 or older in 2018.

Small Business 401(k) Cost

Some small companies don’t offer retirement plans in their benefit package due to fear of costly start-up, maintenance, and administration expenses. If your business decides to offer a 401(k), remember that you assume ongoing fiduciary duty. Many retirement plan sponsors are under-informed about this important responsibility. The Tibble v. Edison International Supreme Court case affirmed that plan sponsors have ongoing fiduciary responsibilities including:

  • Making decisions that are in the best interest of the plan’s members
  • Following the summary plan description
  • Diversifying investment options within the plan
  • Monitoring the plan’s performance and replacing investments that are no longer appropriate for the portfolio
  • Monitoring all contributions made by both the employer and employee(s)
  • Educating all plan members on investment options within the plan
  • Making sure thorough documentation is provided and regularly updated to include any changes

Employers can outsource these fiduciary responsibilities and delegate these cumbersome tasks by appointing them to a qualified financial professional under Section 3(21) or Section 3(38) of the Employee Retirement Income Security Act (ERISA). Although we don’t sell 401(k) plans, we can act as your 3(38) fiduciary to help shoulder that burden. GuidedChoice offers our 401(k) management services at incredibly affordable price point to accommodate your small business needs. If you think you can’t afford an employer-matching contribution, keep in mind that matching programs vary widely and are entirely optional, and we can help you navigate these choices.

Small Business 401(k) Savings

There are a variety of factors to consider when thinking about the savings a retirement plan could bring your small business. In addition to the tax advantages you can save now, and the funds you can save for later, a 401(k) can save you on additional business expenses. Offering a retirement plan is an excellent way to attract and retain employees, cutting down costs on new hire trainings. Showing your employees some love by giving them benefits is one of the best ways to make them happy, and happy employees contribute to higher profits—as much as 22.2% higher.

Setting up a small business 401(k) offers numerous tax advantages. The money inputted into the company 401(k) account is sheltered from taxes until its disbursed; when it is disbursed, it’s taxed at an income rate, which is far better than a capital gains rate. If you’re setting up your company’s 401(k) for the first time and have at least one employee, the IRS will give you a $500 tax credit to offset start-up costs. Plus, small business owners benefit from 401(k)s because they can deduct any contributions made to the account as a business expense on their tax return. The end result is sizable savings, now and in the future.

If you do decide to offer a 401(k) plan, remember that it comes with the responsibility of compliance to ERISA standards. GuidedChoice can help your organization shoulder the fiduciary liability with our managed account service. With our easy-to-use platform, each participant within your 401(k) plan will get the advice he or she needs to better manage their account. Keep in mind, if you offer your employees a 401(k) plan, they might turn to you as their employer for help with account management. Legally, you can’t offer much assistance without taking on a hefty liability. GuidedChoice is happy to take on that fiduciary responsibility at a very low cost to employees.

Whether you decide to offer an IRA or 401(k) in your small business benefits package, you’re taking a step towards creating a future that your employees want. Whichever plan you choose, contact GuidedChoice to find out all the ways we can help.

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