Start the New Year off right by launching a retirement plan for your small business to help you and your employees meet savings goals for your golden years. A 401(k) can help you attract and retain employees in the coming year and starting a plan on January 1 has numerous benefits.
Here’s why ringing in 2023 with a 401(k) makes so much sense:
401(k) plan contribution limits are going up
Every year, 401(k) contribution limits tend to rise with inflation. After a year of record-setting inflation, we’re poised for a record-setting 401(k) limit increase as well. For 2023, individuals can set aside $2,000 more in personal retirement savings (up to $22,500); this is up from $20,500 in 2022.
As a small business owner in 2023, you can contribute to your own account as both employee ($22,500) and employer ($43,500) to save a total of $66,000.
If you’re over 50, you can submit a $7,500 catch-up contribution—up $1,000 since 2022—on top of the $66,000 maximum, bringing the grand total to $73,500.
With a traditional account, that means you can deduct up to $73,500 off your taxable income for the year. If you’re making contributions on behalf of your employees, you can deduct those amounts off your business tax liability for the year as well.
Another option—if you think you’ll be in a higher tax bracket after you retire—is to pay your taxes up front with a Roth account and pull tax-free money out in retirement.
You have more time than you think
December 31st used to be the deadline for businesses to adopt a new 401(k) plan, but the SECURE Act has brought about positive changes and generous extensions. Now you have until March 15th, 2023 to adopt a traditional 401(k) plan for 2022 if you’re taxed as a Partnership or S-Corp or until April 15th, 2023 if you’re taxed as a Sole Proprietorship or C-Corp. If you file an extension, you can have until September or even October to adopt a plan and invest for the previous year. The caveat to this is, when opening a 401(k) plan for 2022, while in 2023, you are only allowed to contribute discretionary Profit Sharing however this could get you up to $61,000 in employer contributions that can be deducted on your 2022 taxes.
You also have until December 31st, 2023, to convert a traditional 401(k) plan into a 4% nonelective Safe Harbor plan dating back to the 2022 plan year. This comes in handy if your plan fails nondiscrimination testing for 2022 and you want to avoid corrective refunds.
Additionally, if you start a plan in 2023 without Safe Harbor and decide that you would like to add it in the middle of the 2023 plan year, you can! You have up until December 1st, 2023, to add a 3% nonelective Safe Harbor for the full 2023 plan year allowing you to maximize your employee contributions without worrying about certain non-discrimination tests.
Kicking off a new 401(k) plan in January solves that problem
There is one silver lining to a late setup. While your employees may be unable to make all these salary deferrals for 2022, you can still have more time to decide whether to make a year-end profit-sharing contribution without worrying how you’ll pass IRS nondiscrimination testing.
That said, there is some administrative work to tackle, so it’s best to start sooner rather than later.
To set up a small business 401(k) in 2023, you’ll need to decide whether to assume full responsibility for the 401(k) in-house or work with an experienced plan provider who can help set up and maintain the plan. Most small businesses choose the latter.
You’ll need to decide on matters like:
- 401(k) plan types
- Eligibility requirements
- Vesting schedules
- Business contributions
- Loan administration
- Nondiscrimination testing
- Investment decisions
On average, it takes 30-45 days to get a new 401(k) rolling, so there’s no time like the present to get started. Amid the Great Resignation, offering a 401(k) in 2023 is more important than ever; 84% of employers believe1 offering financial wellness tools like 401(k)s increases employee retention. Given that just 58% of small businesses offer 401(k) benefits2, it’s still a differentiating factor in attracting talent.
Interested in 401(k)s for your small business? Contact Ubiquity to learn more.
Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.
1 Bank of America, 12th Annual Workplace Benefits Report, “Navigating a New Era of Financial Wellness,” 2022.