A study shows that 94%1 of employees rank a 401(k) plan second only to health insurance when it comes to workplace benefits.
Most small business owners agree that retirement plan packages help attract and retain quality employees. They also believe setting up a retirement savings plan is too expensive and too difficult to administer.2
Small business owners can use an edge to help recruit and retain top talent in today’s competitive job market. Enter the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the SECURE Act 2.0.
The most significant retirement savings reform in nearly 15 years, the SECURE Acts make it a great time for employers to offer a workplace retirement plan.
Small Businesses Benefit from SECURE Act Tax Credits
The SECURE Acts make it easy and affordable for small business owners to help their employees plan for the future thanks to employer-sponsored retirement savings plans. Current start-up costs for a 401(k) plan range from $500 to $2,000. It doesn’t hurt that if a business qualifies, it may be eligible for up to $16,5003 in potential retirement plan tax credits.
Combining the tax advantages of the SECURE Act with Sure401k®retirement plans, offered through our partner, ePlan Services, Inc., can help make a difference for your employees and for your bottom line. Get Started.
SECURE Act tax credits and other benefits for eligible businesses and their workers may include:
- Potential tax credits of up to 100% of start-up costs for qualifying businesses to establish a retirement plan—up to $16,500.3
- A new Saver’s Match of up to 50% of the amount saved, capped at $1,000 for qualifying individuals, or $2,000 for qualifying couples.4
- Raising the required minimum distribution (RMD) age to 73 in 2023 and then to 75 in 2033, allowing workers the option to save longer in their 401(k) plan.
- Part-time workers have access to contribute to workplace retirement plans after meeting certain requirements.
- Mandating automatic enrollment for certain 401(k) plans, so employees must opt out of saving, rather than opt in.
- … and more.
Many states mandate that small business owners provide employees with a retirement savings option or face potential penalties. Other states are considering mandatory retirement savings legislation or have programs in development.
Small Business 401(k) Primer
What is a 401(k) Retirement Plan?
A 401(k) plan is an employer-sponsored retirement arrangement. Employees contribute a defined amount of pre-tax or post-tax dollars each pay period to help save for their retirement. Employers can match all or part of the employee's retirement contributions or provide a profit-sharing contribution.
How Do 401(k) Plans Work?
A 401(k) plan is a type of retirement savings arrangement sponsored by employers. Employees contribute to the 401(k) account from their own pay checks. An employer may match all or part of the employee’s contributions, creating an opportunity for the contributions to grow—many times tax-deferred—until retirement.
What Are the Different Types of Retirement Plans?
There are several types of retirement plans available to employers, including the traditional 401(k) plan, safe harbor plan, SIMPLE IRA, and SEP IRA, with pros and cons to each type of plan. Many businesses tend to use 401(k) plans because they are flexible and enable employees to save more.
Even with a 401(k) plan, there are different options, including:
- Traditional 401(k) plans allow employees to save for their retirement through payroll-deducted contributions while also providing employers the option to make contributions to their employees' 401(k) retirement plan accounts. However, due to required annual non-discrimination testing—developed to ensure 401(k) plans do not favor owners or highly compensated employees (HCE) more than other employees—HCEs and business owners may have limits imposed on their annual contribution amounts.
- Safe harbor 401(k) plans provide the same features as a traditional 401(k) plan and are exempt from some annual non-discrimination testing. A safe harbor plan requires minimum annual employer contributions using either a matching formula of at least 4% or a fixed annual contribution of at least 3%.
- Solo(k) gives owner-only and family-only businesses the ability to make the maximum allowable contributions to a small business retirement plan. while providing access to accumulated balances through a loan feature. Business owners and their spouses receive the same advantages of a traditional 401(k) plan, including the ability to make pre-tax and/or Roth contributions, and higher annual contribution limits than allowed in a SEP IRA or SIMPLE plan.
What are Employer Contribution Options?
Small business owners can easily make contributions to their employees' 401(k) accounts with a variety of simple options. As permitted by the IRS, the following plan options may be available:
- Employer-matching contributions. If the employer so elects in the plan document, the employer can make uniform matching contributions for employees who contribute elective deferrals (for example, 50 cents for each dollar deferred). Employer-matching contributions can be discretionary (contributed in some years and not in others, depending on the employer's approval) or mandatory, as in SIMPLE plans and safe harbor 401(k) plans.
- Employer discretionary or fixed non-elective contributions. Depending on the elections the employer makes in the plan document, the employer either can or must make contributions other than matching contributions for participants. These contributions are made on behalf of all employees who are plan participants, including participants who choose not to contribute elective deferrals. The employer can also determine not to provide discretionary or fixed non-elective contributions.
6 Considerations When Looking for a Small Business 401(k) Plan Provider
Unless it’s your area of expertise, starting a 401(k) plan for your small business can be time consuming and frustrating. Many small business owners, self-employed individuals or LLCs welcome the opportunity to work with a dedicated 401(k) plan provider.
Consider the following 6 tips when looking for a 401(k)-plan provider for your small business:
- Focuses on working with small businesses
- Takes time to understand your unique needs
- Features flexible and customizable plan investment options
- Provides transparent pricing
- Offers attentive customer service
- Includes options for small business services like online payroll, workers’ compensation, HR management, health insurance and more.
Get Started.
Small business employers can support their employees in building their future by starting a 401(k) plan for their business. SurePayroll® By Paychex can guide you in setting up a Sure401k plan to meet your business needs, whether building a plan for yourself, your business, your employees, or a combination of all three. Plus, SurePayroll can help you discover the potential benefits of offering a retirement plan:
- Tax credits for your small business
- Tax deductible employer matching and profit-sharing contributions
- Pretax contributions reduce taxable income
1 Source: SurePayroll® By Paychex survey of employed Americans, 2023
(Permission on file)
3 Eligible businesses may qualify for a federal tax credit of up to $5,000 annually for three years for administrative and certain other qualifying costs for establishing a workplace retirement plan. An additional annual $500 tax credit is available for three years for qualifying employers offering auto-enrollment.
4 Beginning in 2027, by making annual contributions of up to $2,000 to a 401(k) plan, current law provides that a qualifying individual can receive as much as $1,000 (and a couple can receive as much as $2,000) in Saver’s Match contributions from the U.S. Department of Treasury. The Saver’s Match is phased out above certain income levels.
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