Amidst a range of large enterprises, small businesses are struggling persistently to recruit the most talented professionals. Considering the financial and health benefits that giants offer, employees are hardly interested in applying to startups and small companies. In such scenarios, retirement benefits are considered the third most popular factor after salary and health care to retain and attract employees.
Being a small business owner, you can offer enticing retirement benefits like 401(k) to connect to aspirants and staff members, conveying to them that you care about their future.
We are living in an era where compensations are the ultimate go-to option to allure young talent and a 401(k) plan is one of the perks with a value that grows with time. Moreover, the changes introduced in 2001 made the plan more flexible, thereby earning it immense popularity. According to studies, only 50% of Americans meet their retirement saving goals while others seek reliable methods to secure their future.
Therefore, 401(k) comes as a blessing to employees, assuring them life after retirement that they can look forward to. It also sends a message to employees on behalf of employers that they are valued by the company. This financial investment by small businesses to add security to the life of their workers can have a huge impact on the way they think about the company and contribute toward its goals.
This extra mile by business owners certainly boosts their engagement, productivity, and quality of work. However, implementing 401(k) benefits in an organization needs extensive knowledge about the plan and its features. So, we have come up with some answers to the most asked questions about this scheme.
We will also take you through major factors that you need to consider before introducing the plan to your employees. Without further ado, let’s start with the main question:
What Is a 401(k)?
A 401(k) retirement plan is a defined contribution retirement account established by employers for their employees. The contribution is made from the salary of beneficiaries on a past-tax or pre-tax basis. This tax-advantaged scheme is named after the U.S. Internal Revenue Code and stands for sub-section 401(k).
The workers enrolled in this plan contribute the amount through automatic payroll withholding and employers can either match the same amount or give the whole contribution. The earnings made in this investment are not liable to any tax deductions until the employee withdraws the money after retirement. When one is enrolled under a Roth 401(k) plan, the withdrawal amount is tax-free too.
Although this scheme has got a federal acronym, many financial institutions are not content with the name. Hence, they have come up with their own names but 401(k) is the most common one. Some of the other names include:
- The Individual(k)
- Solo 401(k)
- Uni-K Plan
- One-participant K
- Self-Employed 401(k)
What Are the 401(k) Plan Options?
There are several 401(k) options available to business owners but they need to pick the one that fits their needs and company the best. Each one has different aspects, deductions, and conditions that an employer needs to fulfill. So, here is a detailed analysis of the plans that you can select from. Go through them and evaluate which is the perfect one for your company.
Traditional 401(k) Plan
A traditional 401(k) is an employer-sponsored benefits scheme with a choice of investments to employees. Apart from the contribution made by workers from the salary before taxes, employers must also decide whether to match the employee’s contribution, give a portion of the income, or both.
The primary advantage is that business owners have the power to ensure that only loyal staff members benefit from the contribution made by them. In case an employee quits or leaves the job before the specified date, the matching amount provided by an employer will be forfeited.
However, this plan also ensures that employers do not discriminate between the workers, and the amount contributed by him/her has to be the same for everyone. There is an option of altering the amount each year but it has to be done according to business conditions.
Safe Harbor 401(k) Plan
A Safe Harbor 401(k) includes a non-forfeitable employer contribution. This employee benefits plan is not subjected to annual nondiscrimination tests and allows employers to maximize their share in the scheme. This is a tax-deductible plan where employers can contribute on behalf of every member irrespective of compensation, title, or duration of service.
Even the workers who do not make personal deferral contributions are entitled to employers’ contributions. However, the share of employers cannot go beyond 5% of the employee’s compensation. In case an employer wishes to increase his share, he can reach up to 50% of the elective deferral contribution made by the worker in excess of 3% of the salary but still, it cannot be more than 5% of an employee’s total compensation.
For non-elective, a business owner can make a contribution of 3% of compensation to each account. The best perk of this plan is that companies can easily pass the IRS non-discrimination test which is one of the conditions of the IRS to ensure that there is equality amongst all the staff members.
Simple 401(k) Plan
This plan is exclusively for small business owners as the eligibility criteria demand there should be 100 or fewer employees in the office. If the number of members grows in the future, companies get a two-year grace period to switch the plan. Businesses can qualify for the grace period only when they have a Simple 401(k) for a minimum of one year and the reason to change the scheme should be the growing business.
They have to compensate at least $5000 individually and the contribution is essentially fully vested. A Simple 401(k) scheme is a combination of simple IRA and Traditional 401(k) as it offers the features of both the plans. The contribution is nonforfeitable once the amount is paid and there is no need for nondiscrimination tests which only burdens employers with more paperwork and expenses. The employer’s contribution can either:
- Match 3% of an employee’s salary if he/she opts to defer a portion of the pay.
- Non-elective contribution of 2% of each eligible worker’s salary no matter what his/her contribution is.
Solo 401(k) Plans
A Solo 401(k) is exactly like a Traditional 401(k) plan but designed exclusively for sole proprietors with no employees. Also known as self-employed or Individual 401(k) plan, it does not require any annual nondiscrimination testing.
As you will be contributing both as employer and employee toward your retirement savings, you can make a bigger amount than what is possible with other plans. Your spouse is also allowed to participate in the plan with the contribution limit of $18, 500 each plus 25% of net income but should not exceed $53,000.
How to Set Up a 401(k) Plan?
Once you are convinced that you want to implement a 401(k) plan in your company, the next question is how to get started with it. There are many factors to consider, including the documentation that you need to complete, a consultant that you have to hire, a financial advisor that you need to consider, and whatnot.
So, here are some basic steps that you have to go through while introducing the retirement plan. Have a look:
Adopt a Written Plan
Now that you know the employee benefits scheme you want to select, it’s time to write all the details in a document that will guide you through day-to-day operations. This written plan will be an insight into how the benefit will work along with describing the agreement and necessary information.
Apart from this, there are other features too that will be included in the document, such as employer contribution, eligibility criteria of employees, distribution process, vesting schedule, and contact details of all the parties. This written benefit plan will come in handy in critical situations and demonstrate compliance during an audit.
Create a Trust for the 401(k) Plan’s Assets
There should be a trust account that ensures that employees’ money is solely used for the benefit of participants and beneficiaries. The amount must be kept in the safe custody of the trustees who are responsible for collecting the money, investing it, and disbursing it at the right time. Yes, you can appoint a plan administrator for the task but the ultimate duty to check whether he is doing the job right or not rests in the hand of the trustee.
Educate Employees About the Plan
A summarized description of the plan is crucial to inform the employees about the employee benefits administration plan and its advantages. Your staff members should be notified 30 days prior to its features and any changes made in the scheme.
For features like Safe Harbor, automatic enrollment, etc., an additional notice must be issued. Prepare a presentation to promote financial literacy and eliminate any misconceptions that your employees might have regarding the benefits package.
Remember Compliance Obligations
You simply cannot set and forget a retirement plan. There has to be a constant check to update the terms according to government rules and meet the deadlines to avoid any penalties. Also, if your company is growing or changing, then you must revise the features accordingly. Along with the nondiscrimination test, employee’s account and employer’s matching also come under scrutiny.
Is Investing in 401(k) a Smart Decision?
Being a small business owner, it is imperative that you stay competitive by attracting high-quality employees to your company, and a 401(k) retirement benefit plan is the perfect way to achieve that. Moreover, if you are starting the scheme for the first time, you can get a $500 tax credit for the first three years of implementing the plan.
Saving for the future is important and a benefits scheme like 401(k) opens a path to secure and convenient life after retirement. Furthermore, it not only helps employees lead a happy and stress-free life but also aids small businesses to get top talents on board and keep pace with large companies. So, don’t delay to introduce 401(k) in your office now and reap the benefits for the long-term.
In a nutshell, a 401(k) plan is a retirement plan introduced by the organization so that their employees can save and make investments for their declining years, However, only employers are eligible to contribute towards the retirement plan of their workers. This plan is used for employees in their declining years so that they can have financial stability.
According to the latest report, in the ongoing year of 2021, the contribution for employees who would participate in their retirement plan would be increased to $19,500, However, this is the same figure as 2020. The latest fact regarding the 401(k) plan is that California has introduced the 401(k) Multiemployer Plan Alternative to Replace CalSavers.
This plan will manage the issues related to the $125K+ Wage-earners that CalSavers don’t mention or they leave out entirely. It will also help in returning more default investments with smart investment standard care.
However, if you are a small business owner, the 401(k) plan will be a bigger opportunity for you. It is because the large enterprise and small business owners have the same business strategies to follow and the 401(k) plan is neatly placed among them. It is a retention plan to attract more top performers and also helps in allowing tax benefits to both employees and employers.