top of page
  • Writer's pictureAntonise De Wet

How to Start a 401k for My Small Business

Large corporations often have an advantage when it comes to hiring top talent, especially when it comes to the generous benefit packages they can provide. Retirement benefits rank third in importance for small businesses in terms of keeping employees, behind pay and health benefits. Offering retirement benefits like a 401(k) to your current and prospective employees, then, will help you demonstrate to them that you care about them and their future.

What advantages come with giving employees access to a 401(k)?

A qualified employer-established plan known as a 401(k) allows employees to contribute from their salaries on a post-tax and/or pre-tax basis. 401(k) stands for the Internal Revenue Code section that defines the account, which is subsection 401(k).

Retirement benefits can aid in attracting and keeping top talent. Small businesses can also be eligible for an annual credit of up to $500 for the first three years they offer a 401(k) plan, which can help offset setup and administrative costs.

Additionally, you are eligible to participate in the 401(k) plan as the owner of your company. It's natural to want to invest all of your money and savings in expanding your company. However, enrolling in the 401(k) plan yourself will ensure that you are also making savings for the future.

What kinds of 401(k) plans can small business owners choose from?

Depending on the size of their company, some of the many retirement plan options available to small business owners may be more suitable than others. Examples comprise:

  • Traditional 401 (k)

Up to an annual maximum, employees may make pretax contributions from their earned wages; their employer may or may not decide to match these contributions. Because these plans must pass stringent anti-discrimination testing, they necessitate a sizable amount of administrative resources.

  • 401k Safe Harbor Plan

The only difference between this and a "Traditional 401k" is that the employer contribution is required. Some companies favor this choice because it enables them to avoid the government testing mandated to guarantee that all employees are treated equally under their specific 401(k) plan.

  • Personal or solo 401 (k)

A solo 401(k) is designed for small businesses and sole proprietors who don't have any other employees besides their spouses. These plans enable participants to contribute a higher percentage of their income than would be possible with some other types of retirement plans through a combination of elective salary deferrals and profit sharing.

  • Simple IRA

A SIMPLE IRA might be available to companies with fewer than 100 employees. Because there is no discrimination testing, it is typically simple to manage, but employers are required to contribute and participants immediately become fully vested. Additionally, SIMPLE IRAs have lower employee contribution caps than 401(k) plans.

  • Plan 401(k) Roth

In addition to a regular 401(k) contribution that is made pre-tax, the Roth 401(k) plan enables employees to contribute money they have already paid tax on. This means that when they withdraw the Roth portion in their retirement years, they won't have to pay taxes on it (because they already have).

What are the advantages of a solo 401(k) plan for a small business owner?

The main advantage of a solo 401(k) is that it enables small business owners to maximize their retirement savings by contributing significant amounts of their eligible compensation to the plan. Additional benefits include:

  • Participants may be permitted to borrow from the plan up to a certain amount.

  • Depending on the balance of the plan, filing Form 5500, Annual Return/Report of Employee Benefit Plan, may not be necessary.

  • Discrimination testing is unnecessary because these policies typically only cover one person.

Disadvantages of a solo 401 (k):

Small businesses that intend to grow and hire staff in the near future may not be a good fit for a solo 401(k), as doing so would probably make them ineligible for the plan. Furthermore, because modified net profits are necessary, figuring out profit-sharing contributions for sole proprietorships and partnerships is frequently difficult. IRS Publication 560 contains the equation needed to perform this calculation.

What additional information about 401(k) plans are needed by small business owners?

Small business owners who provide retirement savings plans may qualify for tax benefits. For instance, matching employee contributions is typically tax deductible as a business expense. Employers may also be eligible for tax credits for the first three years of the plan, up to $5,000 ($250 maximum per non-highly compensated employee) and 50% of the start-up and administration costs, as well as a $500 automatic enrollment credit each year.

If you need any help, well you know who to call! Willingly, Paavan Kotini


6 views0 comments


bottom of page