When to Start a 401(k) as a Small Business

It’s never too soon to start a small business 401(k).

There is no time like the present for providing a strong benefits package to attract top talent and gain a competitive edge. Why wait to take advantage of the tax benefits and start accumulating wealth for your retirement?

Researching new plan options can be daunting, which prompts many small business owners to drag their heels. However, depending on where you live, you could be forced into a subpar option through state-mandated plans if you delay offering a small business 401(k).

If you want to take advantage of tax savings for 2023, there are important IRS deadlines to consider.

States with Automatic Enrollment Retirement Plans

As of 2022, 11 states have automatic enrollment in state-mandated retirement plans if employers fail to offer a plan of their own for employees, and five more states are on their way. Most of these programs are structured as Roth Individual Retirement Accounts (IRAs). They are taxed now, allowing employees to avoid paying taxes in retirement.

While these plans are undoubtedly better than nothing, they fall short of the generous benefits you could offer as an employer to attract top talent, retain your workforce, boost productivity, and maintain a top-caliber reputation.

Here are the states where mandatory retirement enrollment applies:

• California – The Secure Choice Retirement Savings Program, a state-managed IRA, applies to businesses with five or more employees that do not sponsor a retirement plan, contributing 5%.
• Connecticut – The Connecticut Retirement Security Program applies to employees who are over 19, making at least $5,000 a year, with an employer who has over five employees and no 401(k) plan.
• Illinois – The Illinois Secure Choice Savings Program Act says employers must offer this program if they have been in business at least two years, have 25 or more employees, and do not currently offer a plan. Employees who do not opt out will be auto-enrolled at a 5 percent contribution rate.
• Maryland – The Maryland Small Business Retirement Savings Program Act is offered to employees whose employers do not currently have a plan and who have 10+ workers (with 30+ hours/week).
• Massachusetts – The Massachusetts Secure Choice Savings Program auto-enrolls employees of businesses with 25+ employees who have been in business at least two years and have no plan. Options include pre-tax and Roth 401(k), as well as Safe Harbor. Default savings is 6%.
• New Jersey – The New Jersey Secure Choice Savings Program applies to employers with at least 25 employees, two years of business, and no plan provided. Auto-enrollment contributes 3%.
• New York – The New York Secure Choice Savings Program is voluntary and doesn’t require employers of any size to participate. Participants must choose an automatic payroll deduction of 3%.
• Oregon – OregonSaves is a state-run option that all employers not offering a retirement plan must provide for their employees. Small businesses with four or fewer employees had until January 15, 2021, to adopt the plan or sponsor one of their own.
• Vermont – The Vermont State Retirement System depends upon service credit, age of retirement, and average final compensation. There are plans for law enforcement officers, judges, classified state employees, and exempt state employees.
• Washington – The Washington Small Business Retirement Marketplace is voluntary for employers and employees, but only applies to companies with less than 100 employees.

IRS Deadlines to Start a Small Business 401(k) and Get Tax Credits for 2023

Even if you’re not in one of these states, you may be considering a new 401(k) plan to alleviate some of your tax burden for the year, while offering a great benefit for your much-appreciated employees and setting aside retirement capital for yourself.

You can set up a plan at any time, but if you want it to count sooner rather than later, you’ll need to speak with a plan administrator by the following deadlines:

• October 1 – Start a new Safe Harbor 401(k) plan 90 days before the start of the new calendar year.
• December 1 – Add a Safe Harbor Match provision for 2023 30 days before the new year.
• December 1 – Add a 3% Nonelective Match provision applying to 2023, thanks to the SECURE Act.

Profit-sharing or cash balance plans are no longer subject to the New Year’s Day tax return deadline for setting up a plan and making deductible contributions for 2022. Small businesses may now take advantage of extensions and have until the due date of their 2022 company tax returns to apply their company contributions.

Keep in mind this does not pertain to 401(k) deferrals; they cannot be made retroactively. However, the extra time provides an excellent opportunity for companies to snag tax savings at a time when they need it most.

Don’t Delay! Start Today!

Ubiquity has helped savers contribute over $3 billion toward retirement since 1999. Contact us to learn more about starting a small business 401(k). We take care of setup and ongoing administration for one low monthly fee–no hidden expenses, and you can work with whatever investment broker you prefer!