The decision to add a retirement plan to a company benefits program is a big one. The specifics of the structure of the business can have a big impact on its bottom line and the employee’s retirement accounts.
We aim to help more employees have successful retirement accounts. We find that many small business owners and advisors don’t realize how affordable, simple and beneficial 401(k) plans can be for them.
The Goal for a Company Retirement Plan
In order to set up a 401(k) plan correctly, consider the purposes. The business owners we talk to generally have two big reasons for their decision. For many, it is to reduce their tax bill. Taxes can be a huge liability for companies, and a retirement plan is one excellent way to lighten that burden.
The other main reason is to provide a benefit to employees. A 401(k) is a very useful tool for improving employee retention, attracting talent, and improving company culture and employee morale.
When we design 401(k) plans, we create them with these goals in mind. We then ask business owners three very important questions:
Question No. 1 — How many employees are likely to participate?
While it is not the only factor, knowing the number of employees and the percentage of them who are highly compensated (making $135,000/year or more OR having at least 5% ownership) will help us anticipate the potential problems you might face.
Question No. 2 — Will the owner(s) participate?
Some owners consider the business itself to be their retirement plan or have other retirement arrangements already in place, so will not need to contribute for themselves. But if the owner does plan to participate, we will want to choose a plan design that works for this scenario.
Question No. 3 — Will the business owner provide any matching funds to employees?
This actually can be a difficult question to answer. It is not uncommon for business owners to initially prefer to save the money they would spend on matching, but change their minds when they understand the tax implications. We often ask business owners, would you rather give that money to your employees or the government?
If the intention is to match, decide whether the contribution to employees accounts can be at least 3% of their income.
One Big 401(k) Problem to Anticipate
The biggest obstacle facing businesses and their 401(k) plans is IRS nondiscrimination testing. This is an annual requirement to ensure your retirement plan is not unfairly benefitting some participants at the expense of others. You will fail these tests if your funds are coming primarily from highly compensated employees.
While nondiscrimination testing sounds scary and burdensome, and in fact it can be both if you run afoul of the IRS, it does not have to be. We have one excellent solution.
The Safe Harbor 401(k) Solution
If we determine from the above questions that your company is likely to have a plan that will fail the nondiscrimination tests, that is, if the bulk of the contributions will be from owners or highly compensated employees, we will strongly recommend using a safe harbor 401(k) plan design.
Safe harbor plans allow you to be completely exempt from the IRS testing.
Yes, EXEMPT.
Because small businesses by definition have few employees, having even a few high-earning participants can cause the whole plan to be top heavy. Safe harbor plans are ideal for small companies for this reason.
The tradeoff is that employers are required to contribute to participants each year, either in the form of a matching contribution or a guaranteed contribution. The amount varies depending on the type of safe harbor plan. The details matter, so we recommend speaking to an expert before making any decisions.
Technology to the Rescue
The 401GO platform is brand new technology that makes getting a 401(k) for your small business practically effortless. It takes just a few questions and a few minutes of your time to set up either a traditional or safe harbor 401(k), depending on your needs.
If a safe harbor design is not the best one for your situation, the technology can keep a constant eye on the plan balance, to give you time to rectify any problems that arise. Rather than waiting until the end of the year to check the plan for compliance and then spend days fixing any issues, the 401GO platform performs ongoing compliance tests.
A quick discovery call with the 401GO team can help you determine whether this platform will be game-changing for your business.
Having built several successful businesses, Dan Beck, co-founder of 401GO, understands the plight of small business owners and entrepreneurs. Out of frustration, when he could not find the benefit he wanted at a price he could afford, he put his entrepreneurial expertise to work and built it. Through his obsession to details, his ability to boot-strap and relentless drive, he ensures todays small businesses can offer world-class benefits to employees.
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