4 Types of 401(k) Plans Available for Small Businesses

401(k) Plans for Small Businesses

A 401(k) plan is a type of employer-sponsored retirement plan that is provided as a perk to employees. The amount of money that an employee contributes to their retirement plan each pay period is entirely up to them.

The employee will be eligible to make withdrawals from their 401(k) once they have reached a particular age or fulfilled certain criteria. 

401(k)s provide certain tax advantages to the account holder. Some contributions to 401(k) plans are pre-tax, while others are post-tax. You, as an employer, can also make contributions to your employees’ 401(k) plans.

As a matter of fact, employer contributions are required for certain plans. However, the IRS has a cap on how much an employer or employee can put into a 401(k), and this cap can change every year.  

Whether it is a state-mandated requirement or a voluntary decision, there are numerous benefits to setting up a 401(k), for instance, attracting and retaining top talent. In fact, 81% of employees consider retirement benefits a crucial factor during a job search. 

But before setting up a 401k plan for your small business, you should conduct thorough research to learn the ins and outs of this retirement plan and find the right 401(k) provider.

For best results, choose a provider that caters specifically to the needs of small businesses and offers affordable 401(k) plans. 

But in order to make an informed decision, you first need to know about the different 401(k) plans available to small businesses. Read on to learn more about the four most common types.

Traditional 401(k) plan

With the traditional plan, employees contribute a percentage of their pre-tax earnings, which their employer can choose to match or not, up to an annual limit.

Traditional 401(k) plan

Keep in mind that with a traditional 401(k), you will be required to conduct a nondiscrimination test annually to make sure that contributions don’t only benefit highly compensated employees. 

Traditional 401(k) plans need the creation of a plan document that complies with IRS regulations, the establishment of a trust for the plan’s assets, the maintenance of good 401(k) records (such as contributions and valuations), and the dissemination of information to employees who will be participating in the plan.

Roth 401(k) plan

The Roth 401(k) shares certain similarities with the traditional 401(k). However, if you opt for a Roth 401(k), you will deal with post-tax rather than pre-tax deductions. So before you transfer an employee’s compensation to a 401(k) plan, you will have to withhold taxes from their gross pay. 

Withdrawals from a Roth 401(k) are normally tax-free when an employee retires. You are required to conduct yearly nondiscrimination testing on Roth 401(k) plans, just as you are required to do so on traditional 401(k)s. Bear in mind that in addition to offering a Roth 401(k), you are required to also provide access to a standard 401(k).

Safe Harbor 401(k) plan

With the safe harbor 401(k) plan, you get to avoid the annual nondiscrimination testing, which can save you both time and money. However, to set up this plan, you must either match contributions from your employees or make mandatory contributions for all eligible employees, regardless of their job positions, salaries, or years of service. 

Safe Harbor 401(k) plan

The safe harbor 401(k) not only makes it easier for business owners to comply with government regulations, but it also assures that employees get minimal contributions toward their retirement.

Consequently, both companies and employees benefit from the circumstance, creating a win-win scenario for all parties concerned.

SIMPLE 401(k) plan

The SIMPLE 401(k) plan is basically a simplified version of the traditional 401(k) and an ideal option for businesses with fewer than 100 employees. Your contributions to a SIMPLE 401(k) plan are nonforfeitable.

Participants in a SIMPLE 401(k) plan, on the other hand, cannot receive contributions or accruals from any other employer-sponsored retirement plan. 

You must make contributions to your employees’ SIMPLE 401(k) plans. The contributions made by the employee and the employer are made before taxes are deducted.

Final thoughts

Now that you know the different types of 401(k)s available to small business owners, nothing should stand in your way of choosing the best one for your specific needs.

Offering retirement benefits to your employees can help you not only improve your employer’s reputation, but you may also be eligible for tax credits.

Be sure to find the right 401(k) provider to guide you through the process and set up your employees for a carefree retirement.

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