Small Business 401k
A 401(k) plan is a valuable vehicle for planning financial security for retirement. A small business can choose to implement these plans to offer added benefits for their employees. A 401(k) allows for flexibility by letting participants decide how much to contribute, and the money can be dedicated to investments such as stocks, bonds, mutual funds, money market funds, savings accounts and other investment options.
Setting up a Small Business 401(k): Qualification Criteria
Virtually any small business qualifies to set up its own 401(k) as long as it follows the basic steps required. The company may want to hire a professional or an institution like a bank, mutual fund or insurance company to set up and manage the plan. The initial steps include: (1) Writing out an official plan, (2) setting up a trust fund to hold the plan’s assets, (3) implementing a recordkeeping and (4) preparing plan information to give to employees who participate.
As far as eligibility goes, any employee, owner or manager can participate in the plan as long as they are over 21 years old, have over one year of service with the company, and are not covered by a restrictive collective bargaining agreement. Otherwise exclusion based on age, sex, gender, race, religion or sexual orientation is prohibited.
A small business has many options in regards to how to manage its 401(k) plan. It can be decided to match employees’ contributions. For example, for every dollar they put into their account the company adds a percentage, let’s say, up to 100%. In this example for every participant dollar the company adds a dollar. There are different limits to consider if the company offers a traditional, safe harbor or Roth type plan and it is best to consult with a financial expert regarding the differences.
There is an overall limit to total contributions per year. The limit is the lesser of 100% of the employee’s total compensation or $49,000 (as of 2011).
Other rules and responsibilities are based on how the monies will be invested and whether or not participants will have a say in the investment process. This is a complex undertaking and essentially requires consultation with a financial expert.
Benefits of 401(k) Plans
A 401(k) plan makes for a more attractive benefits package and helps attract and retain good employees. Also the company can take a tax deduction for monies contributed to employees’ accounts.
Benefits for participants include the up front matching bonus (if the plan includes one) as well as plan earnings free of tax until distributions are made. Participants can begin to withdraw from their plan after 59 ½ years of age without additional tax penalty. After that age there is a 10% tax.
Comparison to other retirement plan options
Another option to choose from in retirement package planning is a profit sharing plan. In this case the employer makes all the contributions based on a percentage of profit. The 401(k) plan is superior, however, due to the tax advantage as well as giving the employee shared responsibility in planning for his or her retirement. There are also 403(b) plans available to health care, academic and tax-exempt organizations. 457 retirement plans are offered by state and local government entities such as public schools.