How Small Businesses Can Enjoy The Benefits Of A 401k Plan
By John R Thomas (Guest writer)
Small businesses can enjoy the benefits of their own 401k plan, despite the commonly held belief that these only work for large businesses. Traditionally, 401k retirement plans have been seen as the preserve of larger companies, but it is possible for smaller businesses to take advantage of these benefits as well. The retirement plans that are available for small businesses can ensure that employees working in these businesses can enjoy a secure and comfortable retirement long after they have retired or left this particular company.
Every 401k retirement plan shares the same basic features. Participants contribute money into their retirement plan, while their employer may choose to match these contributions and increase the amount that is saved. The participant’s employer may also choose to make matching contributions into the 401k. The money that is placed in the plan will be invested so that it grows and will provide a good income during the participant’s retirement.
The participant benefits from reduced taxes because the money that goes into their fund is taken before tax is deducted from their earnings. This means that their taxable income is reduced. The money that is placed in the 401k will not be taxed until it is withdrawn. Tax credits are also available for employers who establish an employee retirement plan.
Businesses running traditional 401k retirement plans often have to take on large amounts of administrative work. They may also have to cover high costs, including the expensive discrimination testing, which is required for all traditional 401k plans. Discrimination testing compares the amount that is being contributed to the plan by the higher and lower earning participants. If the balance is not right, then the business will be penalized. Safe harbor 401k plans are an alternative that allow businesses to avoid discrimination testing, although unlike the normal 401k, matched contributions are required.
Small businesses may be better served by a Simple 401k plan administered by the provider or administrator. The employer is required to make matched contributions for all employees who are eligible for the plan. An individual 401k is available for sole proprietors who have no employees, other than their spouse. This plan has high contribution limits and is designed to help business owners prepare for their own retirement. Solo 401k plans are the easiest to administer.