If you are stuck choosing between the many 401k plans for small businesses, you need to consider your business size and employee needs. Your employees are focused on making enough money to pay their bills right now, but how will you ensure they’ll have enough to cover their expenses after retirement?
The Different 401k Plans for Small Businesses
As a small business owner, you want to make sure you’re attracting the top employees to your company and keeping them on board for years to come. Even if you offer the highest salary and unlimited vacation days, you still could lose a prospective employee to a company with a better 401k retirement plan.
In a world where life expectancies are increasing and monthly expenses are high, employees are becoming more concerned about saving for the future. There are many 401k plan options for business owners to choose from, so it’s important to know what you’re getting with each. Three popular options are the traditional 401k, SIMPLE 401k, and Roth 401k.
A traditional 401k allows plan participants to pull untaxed income from each paycheck and automatically invest it for retirement. An employer can choose to match their employees’ contributions or not contribute to employee plans at all. When an employee retires at age 55 or later, they can remove money from the account without penalty. However, this money is taxed upon withdrawal. Employers who offer traditional 401k options are also subject to IRS nondiscrimination tests to prove their plan doesn’t disproportionately favor executives.
SIMPLE (Savings Incentive Match Plan for Employees) 401k
With a SIMPLE 401k plan, small business owners must contribute to their employees’ retirement accounts, and they can have a maximum of one hundred employees. Because employees are more likely to participate in a 401k if their employer matches contributions, the IRS grants these plans “safe harbor” status from nondiscrimination tests. This option is ideal for small companies who already plan to contribute to employee accounts and fear they might have difficulty passing nondiscrimination tests with a traditional 401k.
One of the downsides of a traditional 401k is that withdrawals are subject to taxes. A Roth 401k invests income that was already taxed, so once an employee reaches retirement, they can withdraw funds completely tax-free. Just like a traditional 401k, employers can choose whether or not they will contribute to employee accounts. Employers must already offer a traditional 401k if they wish to offer a Roth 401k. Individuals can also open their own Roth IRA, which is not employer-sponsored and imposes stricter contribution and income limits.
The Types of 401k Plans That Benefit Business Owners
You may be concerned about the amount of money you’ll be spending each year by matching employee retirement contributions. Luckily for small business owners, there is a tax credit for introducing a new 401k plan or adding automatic enrollment to a new or existing plan.
If a company with one hundred or fewer employees adopts a new traditional 401k or SIMPLE 401k plan, they can claim a startup tax credit to cover qualified startup costs up to $5,000 for as long as three years. When introducing a new automatic enrollment 401k feature to a 401k plan, a small business can claim a $500 tax credit for the first three years the feature is in effect.
Not Sure Which Option To Choose?
At Southpoint, we understand that retirement plans are complex. Let us find the best 401k options so you can feel confident in your decision.
Once you’ve decided on a 401k plan for your employees, you may be wondering exactly how to implement the plan. 401k plans for small businesses come with significant tax incentives, but IRS compliance can be tricky. That’s why Southpoint has a team of 401k experts who can walk you through the best plan option for your business size and employee needs and work with you throughout the year to ensure tax compliance.
Southpoint only partners with the best benefits providers like Principal Insurance Company so you can be sure you’re getting top-tier coverage. We know that every penny counts, and we’re here to help you find the best deal and claim the tax incentives you deserve. Contact us today to learn more.