The Impact of 401(k) Plans on Your Small Business’s Future

Author: Robby Forsythe / Reviewer: Callie Adams Farnsworth, QKA, CAFCA
9 May 2023 / 401(k) Plan Information, Small Business 401k

CEO. Human resources manager. Marketing lead. As a small business owner, you wear many hats. One you may not have considered is the role of retirement plan administrator.

However, as your business grows, offering a 401(k) plan stops being a nice-to-have and starts becoming essential to taking your business to the next level.

Benefits of Offering a 401(k) Plan

Attracting and retaining employees

In today’s job market, employees are looking for benefits beyond just salary. A 401(k) plan can help to set your business apart from the competition and show that you value your employees’ long-term financial security.

Impact: Tax benefits

1. Tax deductions

Small business owners who offer their employees a 401(k) plan may be eligible for a few different types of tax deductions:

• Employer contributions you make to your employees are tax-deductible
• When you open a new plan, you can qualify for up to $5,000 per year for the first three years¹
• Qualify for another $500 per year for those same three years when you add automatic enrollment

2. Tax deferral

Small business owners as well as employees can take advantage of contributions are made on a pre-tax basis. This means they are deducted from your taxable income for the year, which can lower tax liability and increase take-home pay.

Taxes on contributions are not due until the funds are withdrawn from the plan.

3. Tax-free growth

401(k) plan funds grow tax-free until they are withdrawn in retirement. This means that any investment gains or dividends earned on the funds are not subject to income tax, which can help the funds in the account to grow more quickly over time.

Impact: Increased retirement savings

Perhaps the most obvious benefit of a small business 401(k) plan is the ability for employees to save for retirement. The pre-tax and potential matching contributions can help employees save more for retirement than they might be able to on their own.

Don’t forget that as a small business owner, you are also an employee. You can make contributions to your own 401(k) account as both – meaning you can put away up to a maximum of $66,000 in 2023 (or up to $73,500 if you’re age 50 or older).

This is a significant advantage the 401(k) offers over other retirement plans such as an IRA, which offers very limited savings maximums.

What to Look For in a 401(k) Plan

Plan design

You’ll want to evaluate many components of the plan, including how you’ll be able to set up:

• Matching contributions
• Eligibility requirements
• Investment options

And more. This can be a lot to think about, so It’s important to work with a qualified plan specialist to select a plan that meets your business’s and your employees’ needs.

Plan administration

401(k) plans also require ongoing administration, including compliance testing and recordkeeping. This can be a complex and time-consuming process, so many businesses choose to work with a third-party administrator like Ubiquity to handle these tasks.

Fiduciary responsibilities

The plan sponsor also has fiduciary responsibilities to ensure that the plan is operated in the participants’ best interests. This includes selecting and monitoring plan investments, ensuring that fees are reasonable, and providing disclosures to plan participants in a timely manner.

It’s a good idea to choose a provider that offers low fees and transparent pricing to ensure you get the most from your money, too. For help in choosing the right provider, check out our article about that.

 

1 Eligible employers can receive a tax credit of up to $5,000 over three years for starting a 401(k) plan, subject to IRS requirements. Employers with 50 or fewer employees qualify for a 100% tax credit, while those with 100-50 employees can receive a 50% tax credit. Additional eligibility criteria include having at least one non-highly compensated employee, an employee who received at least $5,000 in compensation in the preceding year and having substantially the same employees receiving contributions or benefits from another plan sponsored by the employer, a member of a controlled group, or a predecessor within the three tax years prior to becoming eligible. Employers with automatic enrollment plans can receive an extra tax credit of $500 per year for a three-year taxable period.

Ubiquity is not a registered investment advisor, and the information provided herein should not be considered legal or tax advice. We recommend consulting with your financial planner, attorney, and/or tax advisor for personalized advice.