Is a 401(k) Right for Your Business?

Retirement used to be simpler. All you had to do was put in your time at work, retire and collect your checks. Between the company pension and Social Security, most retirees figured they had it made.

However, times have changed. For most people in the working world, traditional defined-benefit pension plans have become a thing of the past. And few people seriously expect Social Security to provide the majority of what they hope to spend in retirement.

In short, our ability to save and invest on our own will likely determine whether we realize the retirement of our dreams—or just hope to get by somehow when we’re no longer able to work for a living.

Recognizing the need to save for retirement is the first step. Followed by prudent retirement planning, which includes figuring out when you’d like to retire, how much you’d like to spend in retirement, and how much you need to save and invest now to get there.

Investing in an IRA is one option, but investing in a 401(k) plan could yield the most bang for your buck. Some smaller businesses, however, wonder if it’s even worth it to provide employees with a 401(k) plan to aid their employees in saving for retirement. No profitable business is too small to start a 401(k) plan. Nowadays, anyone can start one, spanning all business models, from self-employed startups to global enterprises.

One out of four small business owners believe there is not a 401(k) plan able to accommodate their company’s needs. Therefore, they forego providing one for their employees. This, however, is the opposite of truth. Businesses of any size—even smaller companies—can get a 401(k) plan that is cost-effective and easy to maintain. This is good news, since the burden of retirement funding now resides on the shoulders of the employee, and the sooner employees start saving, the better.

A 401(k) enables employees to put more money away than they would if they opened an IRA, and the best time to start a plan is before year’s end. For the eighteen million owner-owned businesses in the United States, important retirement saving years are positioned at 45-64 years old. Until 2001, laws didn’t make a 401(k) an effective option for the self-employed. The Tax Relief
Act changed that.

In order to start a 401(k), as a business owner, you must do the following:

• Create an official document to establish the guidelines of
the 401(k)
• Determine who will be covered based on age, length of service and employee status, for instance, if the employee
is full- or part-time
• Know the minimum legal guidelines, outlined on the
IRS’ website, or the US Department of Labor’s Employee Benefits Security Administration website,
• Decide what type of 401(k) you want

Types of plans include Traditional, Safe Harbor and SIMPLE, the latter of which stands for Savings Incentive Match Plan for Employees of Small Employers and was created so small businesses could have an effective cost-efficient way to offer employee retirement benefits. This is available to employers with less than 100 hundred employees. With a SIMPLE plan, employees are completely vested.

A Traditional plan offers the maximum flexibility of the three. Employers can make contributions on behalf of all participants, to match employees’ deferrals, or do both. These can be subject to a vesting schedule. A Safe Harbor plan is similar to a traditional plan but must provide for employer contributions that are fully vested when made. There are fewer tax rules with a Safe Harbor plan.

The self-employed can now decide how much to contribute and, compared to other retirement plans, a 401(k) allows them to contribute more. It combines the convenience of including a traditional IRA into a self-employed plan, and the loan option can be helpful, as well, which offers flexibility to borrow up to fifty thousand dollars.

With business growth and increased staff, a self-employed 401(k) plan will have to be modified and converted to another plan, unless employees are part owner or a spouse.

Maximum advantages to starting a 401(k) include better employee retention, deductible employer contributions on his or her federal income tax return and deferral and investment gains aren’t taxed until distribution. The notion that starting a 401(k) is expensive is pure myth and, in fact, the very opposite is true—many can be started at very little cost. The benefits, on the other hand, can be huge.