Ubiquity

Author: Dylan Telerski

Dylan is a marketing specialist at Ubiquity Retirement and Savings. A passionate champion for small business, she can be found demystifying the financial industry, advocating for the underdog, and making playlists you did not ask for.

Self Employed business woman at desk

One of the benefits of the Solo 401(k) is that it’s relatively easy to administer, with nothing more than a 5500-EZ form filing due once the total account balance reaches $250,000 or gets terminated.

However, to maximize the tax-exemptions for your small business retirement account, you will also need to claim your Solo 401(k) contributions on your tax return.

Clearing Up Solo 401(k) Confusion

When thinking of your Solo 401(k), it’s helpful to think of yourself as both “employee” and “employer.” Therefore, you will be making two different tax calculations – one for your business’ net earnings and one for your business’ tax-exempt contributions.

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How to Claim the Solo 401(k) Contribution for Pass-Through Businesses

If your business is a pass-through structure like a sole proprietorship, LLC, or partnership:

  • Submit both contributions to the IRS on your personal tax return, form 1040.
  • Calculate your earned income from the business using Schedule C.
  • Report the total employer and employee contribution on line 15 of Schedule 1.
  • Subtract the employer contribution from your taxable income to report adjusted income on line 8a of Schedule 1.

How to Claim the Solo 401(k) Contribution for S-Corps

If your business of one is classified as a corporation, business income and contributions are calculated as a separate entity, independent from your personal income tax return. However, S-corps receive special treatment, as business income may pass through to owners and shareholders.

You will need to file an additional tax return for your business in this case, but you enjoy freedom from any other “corporate tax” obligations.

  • Fill out your S-corp information using Form 1120-S.
  • List your Solo 401(k) employer contribution on line 23.
  • You will also need to fill out Form 5500 or 5500-SF if your account balance is over $250,000.
  • And, on a personal level, you will need to fill out the employee contribution on box 12 of your W2.

Keep in mind: your salary-reducing portion of the Solo 401(k) contribution has already been deducted from your taxable amount in box 1 of your W2.

What If You Have a Roth?

Roth contributions are after-tax, so they won’t be listed on your personal or business tax returns. While you aren’t claiming a deduction anywhere for the money put into your account, you will enjoy tax savings upon retirement as you’re taking the money out.

Have Questions About Claiming a Solo 401(k) Contribution Deduction?

As your 401(k) plan provider, we are always happy to assist our Solo 401(k) contributors at tax time. Use our convenient Solo 401(k) calculator, or contact our on-staff accountants to ensure you meet all necessary filing requirements and fully understand the unique advantages of a Solo 401(k). Contact Ubiquity to learn more.

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One of the benefits of a Solo 401(k) is that your spouse can also participate in the plan. If you both take taxable income from the same sole proprietorship, your spouse can make equal contributions.

A Solo 401(k) is designed for a business owner with NO employees. However, you may add a spouse to your plan as an exception to the rule. You may also employ:

  • 1099 contractors
  • Minors under 21
  • Union workers
  • Nonresident aliens, and
  • Part-time workers who put in less than 1,000 hours per year

If you plan to hire full-time W2 employees, you will need to stop making contributions and rollover your self-directed Solo 401(k) to a self-directed IRA or small business 401k within a year.

What Is the Benefit of Adding a Spouse to a Solo 401(k)?

A married couple with a Solo 401(k) can contribute a maximum of $114,000 per year for retirement as both employer and employees. If you and your spouse are over 50 years of age, total contributions can reach $127,000. Once the plan reaches $250,000 or more in assets, Form 5500-SF will need to be submitted to the IRS.

Get Your Complimentary Guide to Solo 401(k) plans

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How to Open a Solo 401(k)

Starting a Solo 401(k) online with Ubiquity takes only a few minutes. To get started, you’ll need an Employer Identification Number. You can choose your own investments or work with a broker of choice to select mutual funds, index funds, ETFs, individual stocks and bonds, or real estate investments.

Ubiquity handles all the day-to-day accounting and management for a low monthly fee, while you focus on growing your retirement nest egg. You can open your account at any time, but you’ll need to file the paperwork by December 31 to make it count for this year. Any contributions made until April of next year can be used to reduce tax liability for the year.

How to Include Your Spouse in Your Solo 401(k)

If you’re a sole proprietorship, your spouse will receive a W2 as an “employee.” This solution is best if the spouse has minimal duties in the business.

You can also choose to file as a partnership, where each partner receives a K-1 (Form 1065). The partnership bypasses income taxes, passing profits and losses onto each partner. The IRS views this structure as ideal if both partners contribute materially to the business.

A Qualified Joint Venture may be possible if both spouses work and contribute materially to the business and file a joint tax return. Each spouse reports income gains, losses, deductions, and credits separately on Form 1040 Schedule C.

Spouses can also form LLCs, and C or S corporations.

If you have any additional questions about starting a new Solo 401(k) or adding a spouse to an existing Solo 401(k), don’t hesitate to contact Ubiquity.

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2020 Solo 401(k) Contribution Deadline

Dylan Telerski / 9 Nov 2020 / Business

deadline calendar

There is a new Solo 401(k) contribution deadline for 2020. Previously, you would have had until December 31, 2020, to establish your Solo 401(k) plan, which would allow you until April 15, 2021 (the Tax Filing Deadline) to make contributions. Now, you have until April 15, 2021, to get a new Solo 401(k) account opened for 2020 and make contributions.

New Solo 401(k) Setup for the Year 2020 is Due 4/15/21

Your business must adopt a new Solo 401(k) by April 15, 2021, in order to make 2020 contributions. If you haven’t adopted a Solo 401(k) yet, you should start now so your documents will be completed, and you can spread out your contributions over the next six months. After all, you can contribute 100% of your wages up to a maximum of $19,500 as an “employee” — or to a maximum of $26,000 if you’re over 50.

As “employer,” you can set aside an additional 25% of the business entity’s income (to a maximum of $57,000) as a profit-sharing contribution. If you have a spouse working for the business, the same allowances may be made on his or her behalf to maximize your household retirement savings.

Get Your Complimentary Guide to Solo 401(k) plans

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Deadline Extended for Existing Solo 401(k)s

If you had a single-member LLC or C-corp Solo 401(k) in 2019, the contribution deadline was April 15, 2020. If you had an S-corp or partnership LLC, the deadline was March 15, 2020. Both of these deadlines could be extended another six months (until September or October 2020) by filing an extension request. This is a huge benefit for people who want to make 2019 contributions but won’t have the funds available until later in the year.

What You Should Be Doing Now to Prepare

Even though employer and employee contributions can be extended until the company tax return deadline, you will still need to file a W2 for your “employee” wages by January 31, 2021. This W2 details your wages and deductions for employee retirement plan contributions in box 12. At the very least, you should determine the amount you plan to contribute by this deadline.

Solo 401(k) Contributions Example

Here’s an example of how Solo 401(k) contributions might work out:

Josephine is 33 years old and set up a single-member LLC Solo 401(k) for her Etsy business in 2020. Josephine earned $120,000 in net income for the year — $50,000 in W2 wages and $70,000 in taxable K-1 business profits. She hasn’t made her contributions yet, but she wants to now to reduce her taxable income for the year and save for retirement. She can max out her 2020 Solo 401(k) contribution limit by:

  • Contributing as an Employee

    Josephine plans to save $19,500 by the tax filing deadline of April 15, 2021, which will reduce her W2 taxable income from $50,000 to $30,500. Assuming she is in a 20% federal tax bracket and a 5% state tax bracket, she’d save $4,450 in tax liability for the year AND setup a considerable nest egg that will compound interest for the next 30+ years. Way to go, Josephine!

  • Contributing as an Employer

    Josephine can save up to 25% of wage compensation not to exceed $57,000 as an employer profit sharing contribution. Since Josephine has taken a W2 wage of $50,000, the company can make a 25% contribution of $12,500. The company lists this employee benefit expense on the S-Corp tax return (Form 1120S). If Josephine contributes $12,500, she will report $57,500 instead of $70,000 in net profit on her K-1 form. Assuming the same tax brackets, she would save $3,125 in tax liability as an employer, so long as she made the contributions by April 15, 2021 – the company tax return deadline. If she files an extension, she can have until October 15, 2021.

All considered, Josephine contributed $32,000 for retirement ($19,500 as employee, $12,500 as employer) and paid $7,575 less in federal and state taxes. That’s a pretty great deal!
If you’d like to maximize your savings, then now is the ideal time to begin coordinating with your accountant and 401(k) plan provider.

Ubiquity is happy to help you set up a new Solo 401(k). We’ve offered a low, flat monthly fee since 1999.

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Best 401k for the Self-Employed

Dylan Telerski / 5 Nov 2020 / Business

Self-employed man working from home and learning about the benefits of a solo 401k

By the end of 2020, there could be 42 million self-employed Americans – accounting for roughly a third of all working professionals.

One of the potential pitfalls of working for yourself is that you don’t have anyone looking over your shoulder to ensure you save for your retirement. It’s all up to you to figure out on your own. Fortunately, the Solo 401k is an excellent option for self-employed workers to build their future retirement nest egg and save on their tax obligations today.

Solo 401k: The Best 401k for Self-employed Workers

Ubiquity recommends a Solo 401k, whether you’re a self-employed entrepreneur or a business owner with no full-time, regular employees. Here is everything you need to know about this great savings opportunity:

  • Who is eligible:

    A self-employed worker or business owner can set up a Solo 401k, so long as there are no “full-time, regular employees.” You can have 1099 freelancers, part-time workers with under 1,000 hours, nonresident aliens, and children under 21 working for you. A spouse working for the business can also participate in your Solo 401k plan to double the household savings amount.

  • How much you can save:

    You’re allowed to set aside up to 100% of your income, to a maximum of $57,000, as an “employee” in 2020. A $6,000 catchup contribution is allowed for those over 50. In your capacity as an “employer” (of yourself), you can contribute up to 25% of net self-employment income (net profit – half your self-employment tax + plan contributions you made for yourself). The maximum employer + employee total for 2020 is $285,000. If your spouse is in the plan, you can double this figure. You may also elect not to make any contributions if finances are tight this year.

  • Tax advantage:

    A Solo 401k works like any employer-offered 401k with pre-tax contributions. Distributions can be taken without penalty after age 59.5 and must be taken at age 70.5 – at which point taxes are paid on the amounts withdrawn.

Get Your Complimentary Guide to Solo 401(k) plans

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Alternatives to the Solo 401k for Self-Employed Workers

Other retirement savings options for self-employed include:

  • Traditional or Roth IRAs – ideal for those just starting out to save up to $6,000 a year, plus a $1,000 catchup contribution for over 50. Tax deductions are available for traditional IRAs, whereas Roth IRAs allow for tax-free withdrawals in retirement.
  • SEP IRAs – allow up to 25% of self-employment earnings to a maximum of $57,000. This amount can be deducted on a personal tax return. Distributions in retirement are taxed as income. If you have employees, you must contribute an equal percentage of salary for each one.
  • SIMPLE IRAs – are good for larger businesses with up to 100 employees, allowing up to $13,500 in 2020, plus a $3,000 catchup contribution. Money put into the account is deductible, but distributions are taxed in retirement. Employee contributions are deductible as a business expense. You may contribute matching contributions up to 3% or fixed contributions of 2%.
  • Detailed Benefit Plans – are fit for self-employed individuals with no employees who have a high income and want to maximize savings on an ongoing basis. Also called a pension plan, contribution limits are based on the benefit you’ll receive at retirement, your age, and your expected investment returns. These plans are expensive to administer and require ongoing funding commitments. If you need to stash $50,000 to $80,000 more, it makes sense to pursue a pension – but, otherwise, there are better options.

How to Set Up a Solo 401k

You can open a Solo 401k quickly and easily online with Ubiquity. Compared to other types of 401k accounts, a Solo 401k is simpler to administer. Some self-employed business owners tackle their own administrative duties – making contributions, keeping records, and filing tax returns and IRS documents. This approach requires organization, financial knowledge, and assumed liability for keeping your books straight. You may need a broker to help orchestrate specific investments unless you take a DIY approach and trade online.

Another option is to hire a Certified Public Accountant. These professionals charge, on average, over $450 just to help you prepare the annual Form 1040 with Schedule C.

At $18/month, hiring Ubiquity to oversee your plan administration provides much more value for your money. We’ll file your plan documents, inform you of new plan tax credits, and keep up with Form 5500 every year once your account balance exceeds $250,000.

We can automate deductions for you if you wish, keep detailed records of your contributions, monitor your account to make sure that you aren’t depositing too much, facilitate loans, and pay out distributions. Our administration is available for a low flat monthly rate. Connect with a Ubiquity retirement expert to get started.

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Curious how much you can invest toward your retirement in 2021?

Download the Ubiquity Retirement + Savings 2021 Contribution Guide

The IRS has announced the 2021 contribution limits for retirement and health savings accounts. This includes contribution limits for 401(k) and 403(b) plans, income limits for IRA contribution deductibility, and the salary threshold to classify “key” and “highly compensated employees”

While contribution limits won’t increase from 2020 to 2021, there is still some good news for retirement savers. The maximum income levels allowed to make deductible contributions to traditional IRAs and to contribute to Roth IRAs, have both increased for 2021.

Let’s take a look at the updated limits below:

2021 401(k) and 403(b) individual contribution limits (IRS 402(g) Limit)

Age 49 and under

$19,500

Age 50 and older

Additional $6,500

The IRS has also set limits for the total amount that may be contributed to your retirement savings 401(k) account from all sources combined (IRS section 415 limit). This includes any employer matching or profit-sharing contributions, and any employee after-tax contributions. For 2021, this limit has increased from $57,000 to a new maximum of $58,000.

Every plan is different, so it’s important to refer to your Plan Document for any compensation or other applicable limits.

Cut through the complexity of choosing and customizing the right 401(k) for your small business. Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

2021 Highly Compensated and Key Employee definitions and limits

Key Employee Officer Compensation

$185,000

Highly Compensated Employee

$130,000

Annual Compensation Limit

$290,000

2021 Roth and Traditional IRA contribution limits

Age 49 and under

Up to $6,000 (must have earned income)

Age 50 and older

Additional $1,000

2021 Traditional IRA modified adjusted gross income limit for partial deductibility

Single

$66,000-$76,000

Married – Filing joint returns

$105,000-$125,000

Married – Filing separately

$0-$10,000

Non-active participant spouse

$198,000-$208,000

2021 Roth IRA modified adjusted gross income phase-out ranges

Single

125,000-$140,000

Married – Filing joint returns

$198,000-$208,000

Married – Filing separately

$0-$10,000

2021 Simple IRA contribution limits

Age 49 and under

$13,500

Age 50 and older

$16,500

2021 Health Savings Accounts (HSA) contribution limits

Individual (employer + employee)

$3,600

Family (employer + employee)

$7,200

Age 55 or older**

Additional $1,000

**Catch-up contributions can be made at any time during the year in which the HSA participant turns 55.

If you need more detailed guidance, see IRS Notice 2020-79.

Dollar folded like a boat promoting that you can "Keep taxes at bay" with a Safe Harbor 401(k) plan

Deciding to offer employees a 401(k) savings plan is a huge stride toward making your business more competitive and preparing yourself for retirement. But which type of 401(k) is right for you and your enterprise?

A Safe Harbor 401(k) is one popular choice, particularly for small businesses, as it allows you to bypass many of the administrative hassles associated with a Traditional 401(k) – most notably the auditing and annual nondiscrimination testing.

Why Choose a Safe Harbor 401(k) for Your Small Business?

Here are ten reasons that a Safe Harbor 401(k) might be the right choice for your business:

Skip Annual Auditing and Nondiscrimination Testing

Nondiscrimination testing ensures that all employees receive the same fair tax advantages, whether they are highly compensated or rank-and-file members of the organization. Plans that fail testing must be remedied immediately or face substantial penalties and risk having the entire plan balance refunded. If regular employees aren’t putting enough into savings, the highly compensated employees may need portions of their contributions refunded to them. An alternative – though costly – solution would be for the business owner to make increased contributions to regular employees to bring them up to par – thus adding an unexpected and potentially exorbitant expense.

A Safe Harbor 401(k) allows employers to disregard the nondiscrimination checks and balances, so long as they agree to make a guaranteed contribution to all employees. Options include:

  • A Nonelective Contribution worth 3% of every employee’s salary, regardless of participation in the plan
  • A Basic Match worth 100% of the first 3% of employee contributions and 50% match on the next 2%
  • An Enhanced Match worth 100% on 4-6% of employee contributions.

Prepare for Your Own Retirement and Increase Personal 401(k) Savings

Like a Traditional 401(k), a Safe Harbor 401(k) is an ideal way to save for retirement with pre-tax income. In 2020, you can contribute up to $19,000 a year or $25,000 if you’re turning 50 or older this year. A 3% contribution to all employees gives you the freedom to maximize payments for yourself, highly-compensated employees, and key executives, regardless of what others choose to do.

Incentivize Highly-Compensated and Key Employees

A 401(k) Safe Harbor Profit Sharing Plan allows employees to retain control over what they personally set aside for their own retirements, while allowing employers the ability to make vested contributions that will pass nondiscrimination testing even if some employees want to invest to the max. By adding profit-sharing plan contributions, you can adequately reward the company’s most-prized talent up to the individual maximum of $56,000.

Boost Employee Engagement and Benefits Usage

What good is it to offer an employee benefit that no one uses? Lack of participation can be a major problem for small businesses, especially if employees feel the benefits are too costly or difficult to understand. Worse yet, some employees may be uneducated as to the benefits of a 401(k).

Regardless of the reason for low participation rates, you can remedy the situation by choosing automatic enrollment during the Safe Harbor setup. Unless employees specifically opt out, a standard deduction will be put into their retirement accounts.

Making Safe Harbor matches is another way to get employees participating in their own plans. At worst, the 3% nonelective contribution will ensure adequate participation levels to allow you and HCEs the opportunity to maximize savings.

Satisfy and Retain Employees with Mandatory Contributions

The vast majority of modern 401(k) plans include an employer match, so you’ll need one anyway if you want to compete for talent and retain your workers. By opening a Safe Harbor plan, you’re incentivizing employees to remain committed to the company. You’re demonstrating that you are likewise committed to their financial security and wellness, too.

Save Money at Tax-Time

As the employer, you receive additional tax savings for making Safe Harbor contributions. All contributions can be deducted as a “business expense” on your federal income tax return and are free from your payroll tax obligation.

Gobble Up Juicy Tax Credits

New 401(k) plans (regardless of Safe Harbor or not) can be eligible to receive up to $16,500 in small business tax credits over a three-year period to offset administration expenses. The SECURE Act allows employers to write off up to $5,000 per year or 50% of the plan’s startup costs, each year for the first three years. Administrative cost write-offs include plan setup, annual maintenance, and employee education.

Enjoy Maximum Plan Flexibility

No business year is the same. At some point, you may wish to make more or less generous contributions to the plan. Safe Harbor 401(k)s can be amended at any time during the year. You can alter the match formula or remove a Safe Harbor provision entirely with 30 days’ notice. The Safe Harbor can be later reinstated or ramped up, as economic conditions permit.

Reduce Administrative Burdens

A Safe Harbor is not the only way to avoid nondiscrimination rules, but it is the easiest, from an administrative standpoint. While Safe Harbor plans do come with a lot of requirements, they aren’t any harder to administer than Traditional 401(k)s. In fact, plan administration is a lot easier without the time-consuming expense of auditing and testing. At Ubiquity, we are happy to ensure your contributions, notice requirements, and participant disclosures are all on schedule.

Since 1999, Ubiquity has been a low-cost small business 401(k) plan provider with a genuine stake in your company’s success. We are happy to discuss the benefits of a Safe Harbor vs. a Traditional 401(k) and provide you with a Safe Harbor free consultation to explore all your benefits options. When you’re ready, we can have you set up in just a few minutes to start enjoying tax and retirement savings right away.

Recessions can bring financial hardship, whether it’s unemployment, rent increases, sudden alimony and child support payments due to divorce, or the increased price of goods. It can be tempting to think of your 401(k) as “a big pile of money sitting there, ripe for the taking” – particularly if you’re facing rising household debt and the pressure of job loss. Before you throw away future security for greater peace of mind today, consider all your options for managing a 401(k) wisely during a recession.

Manage Your Minimum 401(k) Distributions

If you would normally be required to take minimum distributions because you are over 70.5 years old, you can now forgo the distribution and let it grow another year, so you won’t have to sell your investments at a time of lower return. Reducing the distribution can also reduce your income tax liability for 2020.

Ready to benefit from the tax benefits of an IRA or 401(k)?

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Pull Back What You Add from Each Paycheck

Another option to increase the amount of cash you have on hand during the recession is to pull back on what you add to retirement from each paycheck. While you are legally allowed to contribute up to $19,500 (or $26,000 if you’re over 50) into your 401(k) account, you don’t have to contribute that much if it doesn’t suit your needs and goals right now.

You want to at least contribute enough to get the maximum employer match, as the matching funds are not counted toward the IRS limit. Before you adjust, think about what you might need.

How much you’ll need in retirement depends upon when you plan to retire, how much of your current income you’d like to replace, and how much you trust that Social Security funds will be available. A good rule of thumb is to invest enough to get the employer match and bump it up 1-2 percent a year. If there is no employer match, you can start with the IRA contribution limit of $6,000 a year as a minimum guide.

Consider Loans and Hardship Withdrawals Carefully.

If money is extremely tight right now and you’re under 59.5 years of age, you may contact your plan provider to discuss the possibility of taking an early withdrawal from your 401(k) distribution.

In 2020, the 10% penalty for early distributions has been waived. You can take out up to 100% of your vested balance up to $100,000. Payments can be delayed for up to one year, but you’ll want to pay yourself back within three years. The taxes can be evenly spread out over 2020, 2021, and 2022, but you can claim a refund on those taxes if you repay yourself in full.

Most people who borrow from their retirement accounts end up with an outstanding balance after five years. You could be on the hook for a huge tax liability and a penalty charge while you’re still struggling. Worse yet, you won’t be making new contributions while the balance is outstanding, so the value of your plan shrinks considerably during that time.

Talk to a Retirement Expert

There is no substitute for professional financial advice if you’re worried about your present and future. A diversified, long-term strategy is the best way to weather a recession, as time has proved. Chart your course, but stay your course.

Ask your employer how to get in touch with a financial advisor through their plan, as this conversation can take place at no cost to you. Ubiquity is a low-cost 401(k) plan provider that caters to the needs of start-ups, small businesses, and solopreneurs. Talk to us today for affordable, flat-fee plans.

Today, we’re excited to announce the launch of Simply Retirement by Principal® with plan services by Ubiquity Retirement + Savings®–a 100% digital retirement solution for financial professionals and their small business clients looking to start retirement plans.

 

Simply Retirement for Financial Professionals

Simply Retirement by Principal® is an online 401(k) plan designed to be the most straightforward, budget-friendly approach to setting up a retirement plan—with education and resources to help businesses with 100 employees or less feel more confident along the way.

Since our inception in 1999, Ubiquity’s mission has been to empower small businesses and their employees to create a more secure financial future and peace of mind, by leveraging technology with affordable and effective retirement solutions, and world-class customer support. Principal has a time-honored legacy of helping people and companies around the world build, protect, and advance their financial wellbeing.

We’re proud to be working with Principal, pairing their 75+ years of experience with the simplicity and cost-effectiveness of Ubiquity’s online platform. By working together, we can bring greater retirement plan access to the 5 million U.S. small businesses not currently offering their employees this essential benefit.

Click here to read today’s press release introducing Simply Retirement by Principal® or visit simplyretirement.com/financial-professionals to learn more.

Why Now is a Good Time to Start a 401(k)

Dylan Telerski / 4 Aug 2020 / Business

4 coworkers look at financial paperwork together, wearing PPE to prevent the spread of coronavirus

It may seem counterintuitive to put money into a 401(k) amid Stock Market volatility, but that’s just what financial advisors are recommending. It’s not just a matter of doing your part to keep the American economy afloat, but historically speaking, it’s a matter of good investment.

Here’s why:

It’s a buyer’s market.

“Buy low, sell high” is the conventional wisdom. The opportunity to buy a greater volume of stocks at rock-bottom prices is now! Beginner 401(k) investors can put a small, fixed amount – say $1,000 – into their account every month, regardless of how bleak the situation appears. They can invest in undervalued stocks that pay dividends. By contributing to an employer-sponsored 401(k) plan, retirement savers can choose a diverse portfolio of stocks, bonds, and alternative investments to invest in.

The economy will bounce back.

Here’s the good news: since 1900, the average economic recession has lasted 15 months with an average cumulative loss of 38 percent, while the subsequent expansion has lasted 6.5 years, with returns averaging 339 percent. While you can never guarantee what will occur this time around, history indicates “what goes down must come up.”

There are short-term savings to consider.

If you’re an entrepreneur, the cost of starting a small business 401(k) is deductible on your taxes. In fact, thanks to the SECURE Act passed last year, you may be eligible to receive a tax credit of up to $5,000 per year for the first three years of the plan.

On top of that, if you sign up your employees using auto-enrollment, you can add an additional $500 tax credit per year for the first three years. PLUS, you are eligible to write off 100% of the matching contributions you make to employee plans AND 25% of whatever your employees put into their own plans as well.

Your employees will be able to deduct up to $19,500 off their income tax burden if they elect to contribute up to the 2020 maximum. Those over 50 who got a late start can throw in an extra $6,500 on top of that. If you are contributing to your own 401(k) as both business owner and employee, you can put away up to $57,000 in tax-free income this year to reduce your liability to Uncle Sam.

There are long-term benefits, too.

For business owners, a 401(k) is one of the most competitive benefits you can offer your employees – not to mention, it is less expensive to run than a health care program. Providing workers with financial security boosts the morale of younger workers and enables older workers to leave when they are mentally ready, rather than sticking it out long after their motivation has dwindled because they can’t afford to retire.

For individuals, saving money for the future in a tax-deferred 401(k) account allows any profit and interest gained to compound over the years. The average return over a decade has been a steady 7 percent, which outpaces inflation and sets you up for a comfortable monthly stipend when you stop working. So, for a younger worker, a $5,000 balance today could be worth $57,900 in 35 years.

It’s best not to try to time the market.

The Stock Market is unpredictable at best. As Heraclitus opined, “The only constant in life is change.” Investments generally tend to boom during bull markets and shrink during bear markets, but there are still safer places to park your money during a slide.

Most investors will look at a middle-ground defensive strategy that involves rebalancing the portfolio with more put into stable, large-cap companies that are less affected by economic downturns or a long-term target-date fund. After all, Americans are still buying toilet paper, food, and other necessities. Shifting money away from less-secure growth companies is equally wise, as many of these upstarts lack the financial security to survive.

If you have any questions, contact Ubiquity, a leading 401(k) plan provider that small businesses have relied upon for flat-rate service with no hidden fees since 1999.

Due to the economic downturn sparked by the coronavirus pandemic, many employers have suspended 401(k) match contributions for their employees. Cutting out company matches can have enormous repercussions to diligent savers who counted on this employment perk to help build their financial futures. Here we discuss how the COVID-19 crisis has affected 401(k) matches so far, how it will likely affect businesses great and small in the coming months, and what you can do if your employer suspends its match.

Very Small Businesses Suspend Employer 401(k) Matches

Plans with 25 or fewer 401(k) plan participants stopped matching contributions at 5x the rate of companies with 100+ participants between January and May, according to the latest reports. Drawing on data from over 116,500 retirement plans, researchers found employer contributions decreased overall by 11.4% from March through May. The move was driven by business interruptions and closures. Industries like health care, social assistance, accommodation, food service, and retail were particularly affected.

SMB 401(k) Providers Stay the Course

As of June 2020, nearly 90 percent of plan sponsors said they made no change to employer contributions, according to a Plan Sponsor Council of America survey. Only 5% of plan sponsors suspended their match, 1% reduced them, and another 2.9% were actively considering some type of change.

PSCA Research Director Hattie Greenan explained, “Employers, doubtless helped by support from the Payroll Protection Program, are responding to current conditions by largely staying the course.”

Corporations with Over 5,000 Employees More Likely to Slash Retirement Matches

On the other hand, large firms employing more than 5,000 workers were more likely to pause 401(k) matching, with 11.6% doing so. Amtrak, Best Buy, La-Z-Boy, Sabre Corp, Marriott Vacations, Choice Hotels, Lands’ End, Tenet Health, Quest Diagnostics, Macy’s, and Norwegian Cruise Lines have all pulled back on matching contributions in the wake of the coronavirus pandemic.

The Fallout May Continue

Willis Towers Watson surveyed 543 companies in June and found that 15 percent had suspended or reduced their match. Another 10 percent said they are considering action. Further, 7 percent suspended nonelective contributions, and another 7 percent are considering it.

When Will Employer 401(k) Matches Resume?

We’ve seen employer matches fall by the wayside in the past. The 2008 financial crisis also prompted companies to scale back on their employee benefits. From 2007 to 2009, about 10% of 401(k) plan sponsors stopped making matching contributions, and another 10% ceased elective profit-sharing or nonmatching employer contributions. Five years after the matches dried up, the Chicago Tribune reported the contributions were “making a comeback.”

Thirty-four percent of employers who cut benefits during the current crisis said they had “no set date” for reinstating benefits, but may “at some point.” Eleven percent weren’t sure what the future would hold. Another four percent indicated the change could be permanent.

Other employers had a more concrete timetable in mind – 16 percent planned to reinstate matching “sometime this year,” 32 percent cited “the first or second quarter of 2021,” and 3 percent cited “the second half of next year.”

Specifically, Hewlett-Packard announced a temporarily suspended match from July 1 through December 31, 2020. Allegheny Technologies suspended their company contributions from June 1 through “no later than December 31, 2021.”

On a positive note, Ascensus found that 7.5 percent of the businesses that cut 401(k) matches in March had reinstated them by May.

What to Do If Your Employer Match is Suspended or Cut

If you can afford it, ramp up your own contributions temporarily to compensate for the missing matched funds. Financial advisors recommend most people setting aside 12 to 15 percent of their gross income for retirement each year, so you’ll want to bridge the gap if you can. If you’ve gotten off to a late start, you should invest 18 to 20 percent. You can justify the expense, as you won’t be vacationing, eating out, or spending as much during the pandemic. Remember, what you put in this year will reduce your tax burden.

If finances are really rough this year, let yourself off the hook and pledge to ramp up as soon as you can. Ask your 401(k) plan provider about options like taking out early distributions or borrowing from your 401(k) if you’ve exhausted other options.

Getting insight into how much companies are matching on 401(k)s in 2020 will help you know how well your employer stacks up and whether you’re in the right ballpark with your contributions.

Long gone are the days where a full pension or government stipend will guarantee you a secure future. These sources of income typically comprise less than half of what you would need to live comfortably in retirement. A 401(k) investment account is one of the best strategies to bridge the gap and save enough money for your post-retirement years.

In addition to the contribution deducted from your paycheck, about 51% of employers offering a 401(k) agree to match a certain amount of employee contributions. This generous bonus is literally FREE MONEY that employers add to your retirement savings that will gain interest and compound over time to help you reach your goals faster. There is, however, one caveat to the employer match – in most cases (with the exception of a Safe Harbor nonelective match), how much you receive depends on how much you put in.

Why Do Employers Match 401(k) Contributions?

Why would employers match 401(k) contributions? Perhaps the foremost reason is that employers view the matching contribution as a means of attracting and retaining top talent so that they don’t have to continually hire and retrain a revolving door of workers.

It’s also in their best interest to encourage as many eligible employees to participate in the plan and save as much as they can so the highly-compensated employees and business owners can contribute the maximum amounts to their own plans without failing annual IRS tests for fairness and nondiscrimination.

Favorable tax benefits make it even easier for companies to offer this benefit to their workers. Employers can deduct 100% of their matching contributions on their federal income tax returns, as well as 25% of what all eligible employees contribute.

What Is the Best Possible 401(k) Employer Match?

Employers rarely match 100% of employee contributions. Even if they do, there is a limit mandated by the IRS. For 2020, employees can contribute up to $19,500 to their 401(k) accounts. Employers can contribute up to $37,500 to reach a combined employee/employer total of $57,000. Employees over 50 can add $6,500 in “catch-up contributions” as well. So that would represent the best possible match – an extra $37,500 put toward your retirement.

How Much Do Companies Typically Match?

More commonly, companies follow a formula to determine their matching contribution. A “50% match” means that for every dollar an employee puts in, the employer adds 50 cents. A “100% match” means the employer puts in a dollar for every dollar the employee contributes. On average, companies donate an extra 4.3% of a person’s pay into their retirement accounts as a bonus.

A 2019 Vanguard study identified the most common 401(k) match scenarios:

  • About 71% of companies choose: 50% match, up to 6% of the employee’s pay
  • Another 21% of companies prefer: 100% match on the first 3%, 50% match on the next 2% (Safe Harbor)
  • 6% of companies selected: A single or multi-tiered formula, capped at a certain amount (like $2,000)
  • 2% of companies opted for: A variable formula based on age, tenure, and other variables.

The Bottom Line:

Financial advisors recommend contributing enough to receive the maximum employer match, though you can always contribute more as long as you don’t exceed your $19,500 limit. Turning down free money doesn’t make sense unless your 401(k) performance is so poor it’s not generating returns. Consulting with the 401(k) plan provider can help you ensure you’re on track to reaching your savings goal. Just be sure you’re signed up with a fee-only small business 401(k) provider like Ubiquity who doesn’t erode your savings by charging for Assets Under Management or Per-Participant fees.

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Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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