Set up a 401(k) for Your Small Business

Dec 12, 2013 12:02:48 PM / by Jason Shaw

small business 401k

As a small business owner, you may believe that your company can’t afford a 401(k) plan.  You are not alone.  According to Forbes, although 99% of businesses with over 500 employees offer a 401(k) or comparable plan, only 24% of businesses with fewer than 50 employees do so.  The truth is, however, that even the smallest business, including a sole proprietorship with no employees, can implement a cost-effective 401(k).  For a business with employees, offering a 401(k) can help to attract and retain quality hires.  According to a study by ADP, 80% of employees view retirement benefits as a key factor for accepting a position. Below is some basic information about two of the most popular options available to meet the retirement plan needs of small business owners.  Others options are also available. Boelman Shaw Tax & Financial Planning can help you select the right 401(k) to suit the needs of your Des Moines small business.

SIMPLE 401(k)

The SIMPLE 401(k) is specifically designed for small businesses.  In order to qualify, a company must have fewer than 100 employees and not maintain any other retirement plan.  Unlike a traditional 401(k), the SIMPLE 401(k) is not subject to potentially costly nondiscrimination testing to ensure legal compliance.  This cost-saving feature makes the SIMPLE 401(k) particularly attractive to small organizations.

Although an attractive option for many small employers, the SIMPLE 401(k) does have some limitations.

  • While a traditional 401(k) allows for a vesting period, which can encourage employee retention, all contributions to a SIMPLE plan (including contributions from the employer) must vest immediately.
  • Unlike under a traditional plan, a SIMPLE 401(k) requires employers to make contributions to employee plans in the amount of either (1) matching contributions of up to 3% of the employee’s annual compensation, or (2) nonelective contributions of 2% of compensation for eligible employees who earn at least $5000 from the company during the year.
  • Contribution limits are lower than traditional 401(k) limits.  In 2013 and 2014, contribution limits to a SIMPLE 401(k) are $12,000 per year, with an additional $2,500 a year in catch-up contributions for those 50 and over.  Traditional 401(k)s allow contributions of up to $17,500 and catch-up contributions of $5,500 for the same tax year.  The SIMPLE 401(k) limits are still higher than those for an IRA, however, which are at $5,500 per year with an additional $1000 allowed for catch-up contributions for 2013 and 2014.

Traditional 401(k)

A traditional 401(k) offers a greater range of choices for employers.   As a business owner, you may choose whether to contribute to all of your employees’ plans, to match employee contributions, to do both, or to do neither.  You may also implement a vesting schedule to encourage employee retention.  As mentioned above, a traditional 401(k) allows a higher contribution limit.  It is also subject to nondiscrimination testing, which adds to the cost of administering the plan.

Tax Advantage

Whatever qualified retirement plan you choose, as a small business owner, you may be able to claim a tax credit for the first three years the plan is offered to offset set-up and administration costs.  The credit is for 50% of costs up to $500 per year.  Additionally, because employees' overall taxable income is reduced by pre-tax 401(k) contributions, overall employer payroll taxes may be reduced as well.

Boelman Shaw Tax & Financial Planning offers professional 401(k) advice for your small business.  Contact our Des Moines office to discuss retirement plan options to benefit your small business.

Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.

Topics: Financial Planning

Written by Jason Shaw