When it comes to offering benefits to employees, small businesses have traditionally been at a disadvantage over large corporations. Due to a recent federal tax break for 401(k) plan startups, small businesses with less than 100 employees that start a new 401(k) plan can claim a federal tax credit of up to $500 per year for the first three years of the plan. The credit covers up to 50% of administrative costs.
Recruit more qualified employees
The most qualified candidates are in demand, often entertaining offers from several companies. If they're considering multiple job offers, they will compare on company culture, opportunity for advancement, and benefits packages. If potential employees know that you're committed to helping them save for retirement, they'll be much more likely to accept your job offer.
Possible tax savings
If you offer a company match to employees who contribute to the 401(k) plan, all of your matching contributions (up to applicable limits) are tax deductible. Not only will you make your employees happy by helping them save for retirement, you'll also save money on your next tax return.
Retain valuable employees
On occasions a valuable employee is approached with a job offer. Give your employees an extra reason to stay committed to your company by offering an additional match contribution after a vesting period. When your employees know that you reward their loyalty with additional retirement savings. Making it a more difficult decision to jump ship.
The owner can participate too
You are eligible to participate if you are an owner or an employee of the company that sponsor's the 401(k) plan. Plan participants can contribute up to $18,000 of their income on a pre-tax basis. That means that in addition to your tax savings for offering the 401(k), and providing matching contributions, you'll receive another tax savings for participating in the plan.
The recession of 2008 - 2010 many large companies cut their 401(k) plan benefits suspending the employer match was an easy fix for many corporations to overcome the downturn. For those firms that have been able to reinstate the match, it is often at a smaller dollar or requires larger contributions by the employee to receive a similar company match. While the recession has clearly had a negative affect on businesses of all sizes, it has helped to create a more level playing field for small businesses when it comes to 401(k) benefits and the ability to attract and keep top employees.
The match is where many Small Business Owners are often separating themselves from the large employer and employees are taking notice. While matching is not a requirement in a 401(k) plan, it sends a very positive message to employees. There are other reasons too. By choosing not to match, it limits how much owners and other highly compensated employees can contribute to their 401(k) account, and low employee participation in the plan if no incentive.
A lot of Small Businesses are offering a Safe Harbor match or contribution. This type of 401(k) allows the business owner to contribute the maximum to the plan. It provides immediate vesting of the company's contribution to employees, the plan automatically meets the government testing. While, there are several ways to design employer contributions with a safe harbor 401(k), a 100 percent match on the first four percent of salary for those employees that choose to contribute to the plan is the most common. This creates a win-win for both the business owner and employee.
Tiered Profit Sharing for an Even Bigger Advantage
Another benefit that's becoming a popular choice for small businesses is Advanced Profit Sharing (Tiered Profit Sharing 401(k).) High earning small businesses, especially partnerships, with less than fifty employees use this structure. It allows them to differentiate profit sharing percentages based on specific job function, tenure or age. Typically used by Doctor and Attorney offices and will classify employees by groups such as partners, doctors/attorneys, and staff. This type of plan awards levels of benefits that can be linked to goals of the practice, which group is most important or at risk, and other important business factors.
A 401(k) is a way for an employee to contribute money to an account, most often pre-tax. You can choose different plans and options to invest your money, and often your company will contribute money to your plan as well.
What Is Matching?
Matching is the best thing that ever happened to your retirement savings. Many companies will match (Free Money) whatever contributions you make, up to a certain percentage. The company often matches 100% of your contributions up to 3% of your income.
Your contribution: $5,000
Employer's match: $1,500
Total into 401(k): $6,500 (a great return!)
What Is Vesting?
Vesting is if a company matches your contributions, it will often require you to wait a few years before you're fully vested. But what does that mean? It means gaining full ownership over your employer's contributions to your retirement account.
What happens to my 401(k) contributions if I leave?
They are yours and you keep them, plus any vested contributions from your employer. The question is how you keep them. One option is to cash out, but you will pay taxes, as well as a 10% penalty for taking the money out early. More common options are to leave the money where it is (if your employer allows) and allow it to continue to grow. You could also roll it over into your new company's 401(k) or into an IRA.
Do I Have to Pay Taxes on My 401(k)?
The year you contribute to your 401(k) is tax free. Your investment will yield earnings during most years, and you won't pay taxes on that money until withdrawal. This allows you to grow your money without annual penalties. And when you start making withdrawals after age 59½, you will pay the standard income taxes on your funds, instead of more costly capital gains taxes.
Is There a Limit to How Much I Can Contribute?
2015 the annual limit is $18,000 and additional $6,000 if 50+. The employer's contributions don't count toward that limit. The combined contribution limit for 2013 is $51,000. Remember, these contributions are tax-deferred; thus, the reason for the limit.
Why Should I Start Investing Now?
The sooner you start contributing, the more money you'll gain in the long run, due to compounding growth. You earn profits on both the money you put in and on the returns from your original investments. Which helps the value of your plan to grow over time, the longer it is in the fund the greater your return.