In order for small business owners to more effectively compete for great talent in this challenging labor market, offering an attractive benefits package is essential! One such benefit is a 401(k) plan. Retirement plans, like a 401(k), in addition to other employee benefits, not only attract better talent, but create more “stickiness” to keep existing employees. The even-better news is that recently passed legislation has created incentives for having a 401(k) plan more attractive than ever.
A 401(k) plan is a retirement savings plan offered by many large and small U.S. employers that has tax advantages for the saver. Employees who sign up for a 401(k) agree to have a percentage of each paycheck paid directly into an investment account. Employers may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds. 401(k) plans provide a great way for employees and business owners alike to reduce their individual tax burden and sock away money for retirement.
However, starting a 401(k) Plan or changing recordkeepers (for existing plans) can be a daunting task. Once you begin scratching the surface, it can feel like learning a new language, but Focus HR and our strategic partners are here to help you sort through the maze of selecting or changing providers.
There are many questions and considerations to ponder prior to making these big decisions, including the following:
- Are there any tax credits to help offset the cost of starting a 401(k)?
- Should I offer a match?
- Will I have enough time to handle the administrative burden?
- Is my company big enough to start a 401(k)?
- How much does this cost?
- Should I consider a 401(k) or other type of plan?
- Does this expose me to additional liability as a business owner?
To get the conversation going, we’ve addressed these FAQs below and are here to assist your business, no matter where you may be on the journey of providing a retirement plan solution for your business.
For new retirement plans, companies with up to 50 employees can claim up to 100% of the start-up administration costs (max $5,000). And for the employees who make less than $100,000, employers can claim an additional $1,000 per person, in which employers could apply the credit toward a matching contribution (max $50,000). In short, the government wants to help you get started and you have meaningful tax incentives to move forward.
These tax credits provide many employers the opportunity to start and operate a plan at close to zero net cost after utilizing these tax numerous tax benefits!
Most employers choose to offer employees an incentive for participating in the 401(k) Plan by matching some portion of their contributions. This tool encourages long and loyal service for existing employees and helps attract and retain top talent.
Matching contributions are tax deductible for employers. Most employers match between 3% to 6% of employee’s contributions, but that amount varies by industry. Common matching formulas include a dollar for dollar amount up to a given maximum or 50 cents for every dollar an employee contributes.
Focus HR and our team of consultants are here to help you determine the right matching formula that works for your business.
There are several administrative aspects that accompany starting a 401(k) including:
- Processing contributions
- Tracking eligibility
- Handling loans and distributions
- Tax filings (Form 5500)
- Nondiscrimination testing
- Enrollment and education for employees
Normally, this heavy administrative burden falls squarely on the shoulders of the plan sponsor (you as the employer). The good news here is that the Focus HR 401(k) solution solves this problem! We take on the “heaving lifting” of these administrative duties so you and your team can focus on revenue producing endeavors. Combined with our HR, Payroll and Employee Benefits services, Focus HR provides a truly integrated solution that saves your business money, time and risk.
Is my company big enough?
No company is too small to consider a retirement plan. In fact, smaller companies can garner larger tax benefits for owners and key employees. Even solo entrepreneurs can start a retirement plan and receive significant tax benefits while growing their retirement nest egg.
Our team of experts can help you find the right fit for you and your company.
The Focus HR retirement plan offers reduced rates for startup and ongoing plan operation. First year costs in many instances can be $3,500 or higher. However, given our size and scale, Focus HR offers a Multiple Employer Plan 401(k), with compelling pricing for employers of all sizes. Please contact us to learn more.
401(k) vs SIMPLE IRA
Some smaller companies (100 employees or fewer) may consider utilizing a SIMPLE IRA instead of a 401(k). Below are some key differences between the two plan options:
- Mandatory employer contributions for SIMPLE IRA and limited customization.
- Lower contribution limits for SIMPLE IRA Plans.
- Usually, SIMPLE IRA Plans offer lower up-front cost and less administrative duties.
- 401(k) Plans allow for vesting schedules, profit-sharing contributions, and other features that can be customized to fit your business and goals.
Please contact our team to schedule an introduction call to discuss which plan type is right for your business.
Fiduciary and Liability Considerations
Offering a retirement plan to your employees comes with fair degree of liability and fiduciary responsibilities. A fiduciary is someone who acts on behalf of another person and that role comes with the duty to act with care and prudence.
At Focus HR, our administrative and financial partners help alleviate a significant portion of this responsibility and liability from your plate by shifting most of these fiduciary responsibilities away from you and into the hands of skilled and trusted professionals.
At the end of the day, starting a 401k can be a smart move. Better employee morale and increased retirement readiness are just a few of the benefits along with the competitive advantage in our tight labor market.
If you are ready to learn more about how Focus HR can help you enhance your position as a competitive employer in every respect, please contact Focus HR today to begin exploring your best options for starting a new 401(k) plan or simplifying your existing Plan.
About the Authors
MBA, SHRM-SCP, Business Development Manager
Clint Parry has a passion for business growth and personal development. In his current role as Business Development Manager for Focus HR, he helps small business owners accelerate their growth through HR outsourcing.
Blake Davelaar, CFP®
Financial Advisor, Allworth Financial
Blake Davelaar, CFP®, is an Allworth advisor serving the Tucson, Arizona, area and the greater Southwest Region of the United States. A native of Seattle, Blake is a proud graduate of the University of Arizona. A CERTIFIED FINANCIAL PLANNER™, when he’s not working with clients to help them achieve their investment and retirement goals, Blake enjoys spending time with friends biking Mt. Lemmon or playing golf.