The Complete Guide to 401(k)s for Small Businesses in Seattle
By Sapling Wealth Management
Are you considering a 401(k) for your Seattle small business?
Are you searching for ways to improve your current retirement plan offerings?
You’ve come to the right place.
This is the complete guide to 401(k)s for Seattle small businesses. We’ll start at a basic level, and work through what you’ll need to know to implement and make the most of your small business 401(k).
Here’s are the questions we’ll answer:
- What is a 401(k)?
- What’s the difference between 401(k)s, IRAs, Roth IRAs, and 403bs?
- What are the benefits of 401(k)s for individuals?
- What are the contribution limits on a 401(k) in Seattle?
- What are the benefits of a 401(k) for a small business in Seattle?
- How can you set up a 401(k) for a small business in Seattle?
- What are 401(k) plan sponsor responsibilities?
- What is a 401(k) administrator (and how are they different from a sponsor)?
- What are common small business 401(k) costs?
- What are the best 401(k) plans for Seattle small businesses?
- What is a 401(k) advisor (and how do they help)?
- What Seattle areas do you serve with 401(k) advisory services?
- How can I take the first step?
This is everything you need to know. Here we go.
What is a 401(k)?
First, let’s start with the basics and define our term.
A 401(k) is a retirement savings plan that’s sponsored by an employer. In a 401(k), employees can invest a part of their paycheck before taxes are taken out, and taxes are only paid when money is withdrawn from the account.
401(k)s offer control over how money is invested. Many offer a selection of mutual funds built of stocks, bonds, and money market investments. Typically, because 401(k)s are retirement accounts, selections are designed to become more conservative as the targeted date for retirement approaches.
For employees, 401(k)s are particularly appealing because employers contribute a matching amount to the plan. A 2% match, for example, means that an employer will match up to 2% of an employee’s salary in 401(k) contributions. This approach makes it easier for employees to accumulate wealth inside of the plan more quickly.
What’s the difference between 401(k)s, IRAs, Roth IRAs, and 403(b)s?
Next, let’s clarify the distinctions between a few of the most commonly-compared retirement savings options.
An IRA, or an individual retirement account, is another type of savings account that can be used to make investments. The biggest difference between an IRA and a 401(k) is that IRAs are most commonly opened by individuals, and typically aren’t provided as employee benefits. Obviously, in these cases, there is no matching on deposits.
A Roth IRA functions similarly to a traditional IRA, but instead of contributions being made with pre-tax dollars, Roth IRAs are funded through after-tax contributions. Then, on withdrawal, distributions are tax-free.
Finally, 403(b)s are similar to 401(k)s, but are purposed for nonprofit companies, religious groups, school districts, and government organizations and generally require fewer administrative costs.
Out of all of these options, 401(k)s are nearly always the best choice for Seattle small businesses. If you’re a non-profit, 403(b)s are the way to go.
What are the benefits of 401(k)s for individuals?
The most obvious benefit to 401(k)s for individual employees is employer matching; essentially, employees get “free” money for depositing into their 401(k) account. Again, this is the biggest reason Seattle workers gravitate toward these accounts.
Additionally, though, depositing into 401(k)s can offer tax breaks. Employees receive the benefit of a tax deduction each time they make a contribution with pre-tax dollars – because contributions come out prior to taxes, they aren’t included in taxable income for the year.
Finally, taxes on 401(k) earnings aren’t payable until withdrawal, unlike within standard savings accounts.
What are the contribution limits on a 401(k) in Seattle?
While they’re great plans, there are limits to how much can be contributed into a 401(k). These are federal limits and so apply to Seattle (as well as to the rest of the country.
In 2019, the standard employee contribution limit is $19,000, although participants over the age of 50 may make an additional $6,000 in contributions for a possible total of $25,000.
In combination with employer contributions, the total standard limit is $56,000 in 2019; for participants over the age of 50, the total limit is $62,000.
These limits are reviewed annually by the IRS and are adjusted accordingly.
What are the benefits of a 401(k) for a small business in Seattle?
We’ve reviewed the benefits of 401(k) for individuals, but for Seattle small businesses, offering 401(k)s also results in a variety of tangible benefits.
First, there are often tax benefits. Business owners, like employees, can deposit into 401(k)s to capitalize on tax deductions. And businesses often qualify for additional tax benefits when starting a plan – for example, there’s a fairly-common tax credit of $500 for businesses under 100 employees for the first three years of a plan.
Secondly, 401(k)s help small businesses to compete on the employment market with appealing benefits packages. A small business without a retirement plan is, unfortunately, less-appealing to work for (especially in the long-term) than a similar business with a retirement plan. In fact, a study by Plan Advisor found that 40 percent of employees would leave their current, 401(k)-less company for an employer that offered a plan.
The bottom line is that 401(k)s can help small businesses to attract and retain top talent.
How can you set up a 401(k) for a small business in Seattle?
If 401(k)s benefit both employees and employers, the next question is: how can you set up a 401(k) for your Seattle small business?
First, you’ll need to determine the party that will establish and maintain the plan. You can do this yourself, or you can work with a professional to guide you through the process.
Regardless of whether you choose to do it yourself or work with a professional, the next step in setting up a 401(k) will be to create a written plan to delineate the terms and conditions of the program. This will be a legally-binding document, so professional help is probably a good idea. It’ll include information like what type of 401(k) you’re offering, what features the plan will have, which employees will be eligible, how matching will work, and how funds will be collected and distributed.
With the plan documented, you’ll need to arrange a trust for the plan’s assets. This involves the selection of a trustee who will handle contributions, plan investments, and distributions to ensure that funds are only used by participants and their beneficiaries.
As the plan is made active, you’ll also need to keep records to track employee and employer contributions, earnings and losses, expenses, distributions, and investments.
Finally, you’ll need to manage employee enrollment by informing employees of the plan and its details and onboarding eligible participants.
Here’s my advice: setting up a 401(k) can be intimidating, and there are a lot of variables to consider. It’s almost always worth it to work with a professional to make the setup process run more seamlessly and ensure that your plan is designed in a way that best serves your business.
What are 401(k) plan sponsor responsibilities?
The Seattle small businesses that set up and sponsor a 401(k) do take on a set of responsibilities that are outlined by the IRS.
Importantly, sponsors are responsible for keeping plans in compliance. Compliance management may involve reviewing a plan’s written construction, its administration, or making necessary adjustments due to updated terms and laws.
In support of this, the IRS highly recommends frequent communication with plan service providers and administrators.
What is a 401(k) administrator (and how are they different from a sponsor)?
While a sponsor is the organization ultimately responsible for the 401(k), a 401(k) administrator is the party that manages its function.
Often, this is a hired organization or professional that manages the day-to-day aspects of the plan.
This party will do things like restating plan documents, preparing benefits statements, assisting in processing distributions, compliance testing, and more.
What are common small business 401(k) costs?
The most common deterrent that keeps Seattle small businesses from setting up 401(k)s are costs. The good news is that, today, 401(k)s really aren’t cost-prohibitive – I can set up a plan for a small business with 10 employees that is lower cost and higher performing than my 401(k) was 15 years ago at a Fortune 500 company.
That said, there are some costs. Typically, these can include:
- Asset-based expenses that are charged based on the amount of assets in the plan.
- Per-person expenses that are charged based upon the number of participants in the plan or eligible employees.
- Transaction-based expenses for the execution of a service or transaction.
- Flat rate costs that are fixed regardless of plan factors.
Obviously, the hard cost numbers vary greatly from plan to plan and from business to business, but, with the right approach, many small businesses can afford to setup a high-quality plan. I frequently see plans that can reduce their administrative fees by $800 each year by eliminating features that aren’t used.
What are the best 401(k) plans for Seattle small businesses?
There are a variety of providers offering solid 401(k) plans for Seattle small businesses – here are just a few.
- ADP offers 401(k) plans with investment options from more than 130 investment managers.
- Betterment is a robo-advisor that uses proprietary algorithms to reduce management and administrative costs.
- Fidelity Investments offers consulting and payroll integration for small business owners.
- T. Rowe Price offers a wide range of investments and a plan sponsor resource center.
Personally, though, while these options can work, I believe that many well-known financial service companies are not competitive in the small business 401(k) arena, because they have higher fixed administrative costs than other options.
Ultimately, the best 401(k) plan for your Seattle small business will depend on your needs. Working with an investment advisor can help to ensure that you choose the plan that’s best-suited for your business.
What is a 401(k) advisor (and how do they help)?
A 401(k) advisor is basically an expert who helps guide businesses in setting up, maintaining, and getting the most out of a 401(k). It’s what I do at Sapling Wealth.
I break it down this way: advisors organize, formalize, monitor, and implement 401(k) plans for small businesses to help them get the results they deserve.
At Sapling Wealth, for example, I work closely with plan sponsors and strategic vendors to design thoughtfully structured retirement benefit plans for your small business and help you minimize fiduciary risk. Together, we take into consideration the objectives of the company and select from the myriad of choices available in a state-of-the-art 401(k) plan.
Once the plan is designed, I’ll formalize a process to review, implement changes, and monitor performance, then personally educate and support participants on how to make more intelligent investment decisions.
What Seattle areas do you serve with 401(k) advisory services?
At Sapling Wealth, we offer 401(k) advisor services for small business throughout the Seattle region, including within the following areas:
Downtown Commercial Core
North Rainier / Mount Baker
South Lake Union
West Seattle Junction
Westwood Village / Roxhill-Highland Park
23rd & Union/Jackson
And more. In other words, if you’re within the Seattle region and you’re looking for small business 401(k) advisory services, we can help.
How can I take the first step?
I hope that the information above has been helpful as you’ve investigated the function of 401(k)s for small businesses like yours.
Are you ready to set up or improve a 401(k) for your Seattle small business?
All it takes is a quick call. Take the first steps toward a solution that benefits your business and your employees by getting in touch today.