On August 23, we presented a webinar called Strategies to Maximize Your Retirement and Tax Savings in 2017, hosted by 401(k) consultant David Bass. With over 20 years of experience related to 401(k) plans specifically designed for small businesses, David has spent most of his career focused on breaking down the different retirement plan options available to small business owners so they can choose the right approach for themselves and their employees. This webinar outlined 401(k) basics, the differences between the plans available, and how Sure401(k) can help you and your small business.
A 401(k) is an employee benefit program that is put in place for employees to contribute to their retirement funds. A big question small business owners have is how to fund a 401(k) and there are three sources: employee contribution, employer match, and employer profit sharing.
For employee contribution, the employee is largely responsible for how much they are saving for retirement. They are in control of their own savings and the funding for the account comes directly from the employee, typically in the form of a percentage deducted from their paycheck. Employer match and employer profit sharing contribution are the two employer-sourced options that are often offered as supplements to the individual employee contribution. In companies where employer match is available, the employer will give a match, typically ranging between 3% and 6%, against what the employee is saving for retirement on a per pay period basis. This is the most common method of employer contribution. Another, though less widely used, employer contribution source is profit sharing. In a profit-sharing plan, the employer will contribute a onetime lump sum payment at the end of the fiscal year.
Types of 401(k) Plans
There are three common types of 401(k) plans.
Solo(k) - This is the 401(k) plan option for a single business owner with no employees besides themselves.
Traditional - The traditional 401(k) plan is what you most commonly see adopted by larger organizations with larger pools of employees. This plan has the maximum flexibility in terms of employer match and vesting schedules. The catch with this plan is the testing requirements. The 1st required test is the velocity test, which determines the rate at which employees are putting in their own money. The 2nd test is the top heavy test, which speaks to the pool of assets in a company's 401(k) plan. These tests can land you in hot water if the results don't pan out the way they should, and they require time, money, and human resources to carry out, which is why the traditional plan is often not the best fit for a small business.
Safe Harbor - While similar in nature to the traditional 401(k), the Safe Harbor plan is designed to alleviate the testing burden for small businesses. With this plan, testing requirements are automatically satisfied. However, when you adopt this plan there is a required employer contribution. The most popular plan is to offer a 4% match and have the vesting period be immediate. This plan is popular with small business owners because it gives you the ability to maximize pre-tax contributions, avoid the hassles of satisfying IRS 401(k) plan testing, offers tax savings and tax credits for starting a plan, and provides small businesses the opportunity to provide a valuable benefit to employees.
Why turn to Sure401K for help?
Similar to our payroll services, the Sure401k service was designed to help small business owners save in a low cost, easy to use, and efficient way. Another large aspect of a 401(k) is having an investment plan. Sure401k is partnered with Mesirow Financial, which is a company that helps put together mutual fund plans. Mesirow Financial is a major player in the 401(k) business and works with well-known companies in the mutual fund world; Sure401k's partnership with Mesirow removes the burden of tracking and changing out the investment menu from the small business owner—plan investment portfolio decisions are handled directly by an expert.
If this information doesn't have you quite convinced to start saving for your own retirement or offering a retirement plan for your small business, maybe this final piece will help: small businesses with less than 100 employees who adopt a plan for the first time are eligible to receive 50% of the costs associated with setting up and maintaining a 401(k) plan back in terms of a tax credit. The first $1,000 you spend this year and the next two years will result in you earning up to $1,500 back thanks to the small business tax credit.
Offering a 401(k) plan to your employees is a great way to stand out from the competition and keep your talent from wandering elsewhere. It also never hurts at an individual level to be financially prepared for your future--taking the right steps now will help you be ready when it's time for your next big life adventure.
This website contains articles posted for informational and educational value. SurePayroll is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, SurePayroll. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant. If you require legal or accounting advice or need other professional assistance, you should always consult your licensed attorney, accountant or other tax professional to discuss your particular facts, circumstances and business needs.