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401(k) Plan Options for Small Businesses


A 401(k) plan is considered a top benefit to attract and keep talented employees. If you’re a small business owner, you have extensive options to help you and your employees save for retirement. These plans aren’t just for big companies. Here’s how you can offer a plan to your team and the best options.

A financial advisor can help you create a financial plan for your retirement needs and goals.

401(k) Plans for Small Businesses

There are many options small businesses can offer to help employees build their nest eggs. Either a 401(k) plan or an individual retirement account (IRA) could be the right choice for you and your business. Here are six common plans to consider:

Traditional 401(k)One option is to let employees contribute to a traditional 401(k) plan. With this type of plan, you can choose to match your employees’ contributions – although matching is not required. Matching contributions may be made up to an annual maximum. Traditional 401(k) plans can be costly to administer because they must pass non-discrimination testing each year.

Solo 401(k)A solo 401(k) is an option if you are self-employed or a sole proprietor with no employees other than a spouse. However, you may not be eligible for a solo 401(k) plan if you have other employees. The main benefit of this type of plan is that it allows you to contribute a large portion of your eligible compensation. Non-discrimination testing is also not necessary since they only cover an individual and possibly a spouse.

Safe Harbor 401(k)Safe harbor 401(k) plans avoid the nondiscrimination testing requirements to which other types of plans are subject. In return, employees in these plans must receive a certain level of employer contributions. In addition, mandatory employer contributions must fully vest immediately. You can match employee contributions dollar for dollar up to three percent of eligible compensation or 50 cents up to 5% of eligible compensation.

Roth 401(k)A Roth 401(k) is like a traditional 401(k) in many ways. The biggest difference is in taxes. Contributions to a traditional 401(k) are generally pre-tax, while distributions from the plan are taxed as income. With a Roth 401(k), contributions are generally made with after-tax dollars, but distributions from the plan are tax-free.

SEP IRAA simplified employee pension (SEP) IRA is a type of retirement plan that can work well for self-employed individuals, small business owners, or freelancers. Employers can contribute up to 25% of total employee compensation or $61,000 for tax year 2022, whichever is less. For self-employed people, contributions are generally limited to 20% of compensation. Contributions to these plans are deductible and aren’t required every year.

SIMPLE IRAA savings incentive match plan for employees (SIMPLE) IRA may be available to businesses with fewer than 100 employees. These plans can be a good choice because they are exempt from discrimination testing. However, employers must contribute, and contributions vest immediately. These plans also cap employee contributions lower than 401(k) plans.

Choosing Plan Administrators

SmartAsset: 401(k) Plan Options for Small Businesses

Depending on the type of 401(k) or IRA plan you choose for your business, administration of the plan can be extensive. For instance, you may need a plan administrator, an investment manager, a record keeper, reporting, and other services. You can either hire someone to do each part separately or find a firm that will manage everything for you.

Of course, the cost of these services can be significant, especially as your business grows. This is likely one reason some businesses opt for plans that are simpler to administer. If you expect to offer your employees a 401(k) plan, remember that administrative costs can be considerable.

Fulfilling Ongoing Requirements

Again, depending on the type of plan, there might be ongoing maintenance requirements for your 401(k). For example, traditional 401(k) plans are subject to annual nondiscrimination testing. These tests will typically look at the value of employee accounts, employer contribution rates, and other aspects of employee plans.

There may be other yearly obligations involved as well. You might have to file IRS Form 5500 each year, which lets the IRS know key details about your 401(k) plan. Of course, if you work with a plan administrator, they will likely help with this filing.

Bottom Line

SmartAsset: 401(k) Plan Options for Small Businesses

Whether you are self-employed, have a few employees, or run a thriving small business, you have no shortage of 401(k) plan options. For instance, you can opt for a traditional 401(k), solo 401(k), or a safe harbor 401(k). Or you might choose an IRA plan such as a SEP IRA or SIMPLE IRA. Some plans can be costly to administer, while others are less intensive. If you aren’t familiar with 401(k), it may be best to work with a plan administrator who can manage the ongoing maintenance of the plan.

Tips for Investing in Retirement

  • Whatever your time horizon for retirement might be, it’s important to know where you stand. SmartAsset’s free investment calculator can help you estimate how much you will have in 10, 15 or 20 years.
  • A financial advisor can help you decide how to allocate assets in your portfolio for retirement. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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