In 401(k) Plans for Small Business

Why choose a 401(k) plan? If you’re a small business owner, you probably don’t have a vast reservoir of resources to draw from in providing your employees with benefits. But you also want to serve your employees well – and retain them, too.

In light of that, the reality is that small businesses must make deliberate decisions on maximizing the limited resources they have available to spend on benefits. What options should you pursue that will satisfy your employees without dragging your business down with unreasonable costs? At Sapling Wealth Management, we frequently recommend choosing a 401(k) – it’s a great option in nearly all small business contexts.

401(k)s can make employers and employees happy. Here are 11 reasons why choosing one makes sense.

11 Reasons to Choose a 401(k) Plan for Your Employees

1. 401(k)s Allow Small Businesses to Attract and Keep Talent

The current labor market makes getting the right talent difficult, especially for small businesses competing with big corporations. Offering a 401(k) can help.

A well-designed 401(k) can help attract and keep talented employees. Certain employee contributions can be set up to be subject to a vesting schedule, which can create a financial incentive for the employee to stay at the company in order to receive their full benefit.

2. New Hires can be Temporarily Restricted from Plan

While 401(k)s can help to draw and retain talent, that doesn’t mean that they necessarily add to the risk of hiring new talent.

In fact, eligibility for the 401(k) benefit can be restricted to employees that have been at the company for over 12 months. This enables the small business to see if a new hire works out before giving them this valuable benefit.

3. 401(k)s Allow for Individual Participation

Another benefit of 401(k)s is the level of individual control that they empower.

Employees decide for themselves how much to contribute to their accounts. This is a benefit program that employees can opt into; in other words, it’s not mandatory. And if employees choose not to participate, employers may not bear certain costs.

4. Employers Can Receive Meaningful Tax Deductions

Employers often choose a 401(k) plan to receive tax deductions – which is always a plus.

Employers receive a tax deduction for contributions to employees’ accounts. All told, this can be meaningful way for small business owners to avoid or defer paying taxes, as they are often paying these benefits to themselves by contributing (as an employer) to their own retirement accounts.

5. Employee Tax Deduction

The tax benefits don’t stop at the employer, though. Employees can also reap tax deductions through participation in 401(k)s.

Here’s how it works: when an employee chooses a pre-tax deduction, this amount reduces their W2 earned income and it’s not taxed until the funds are withdrawn. Just giving employees a chance to reduce their own tax burden is a significant benefit.

6. 401(k)s Promote Fairness

At a small business, the differences between management levels are obvious; because people work together and know each other more personally than the masses of employees at a corporation, any disparities in benefits can be more grating.

401(k)s are a great way to offer an equal-opportunity benefit that promotes fairness. All employees are eligible for the basic 401(k) benefit package. It’s not an exclusive executive perk.

7. Incentives to “Think Like an Owner”

When employees have a vested stake in a business’s success, they tend to perform their jobs more effectively.

Profit sharing features can be added to the 401(k) plan design, which allow employees to also participate in the profitability of the business. This is an easy way to create financial incentives to “think like an owner” while retaining control of the equity.

8. Tax-Free Growth

401(k)s are especially notable for the way they empower tax-free growth.

Monies that are invested will likely, over time, grow in value, depending on the level of investment risk.  A broad and diversified line-up of investments will appeal to many types of investor profiles.

9. Portability

Additionally, while 401(k)s do encourage employee retention, they also offer some portability.

Plan participants can take their 401(k) financial assets with them by rolling over to a new 401(k) or personal IRA. These options can provide peace of mind for employees.

10. Retirement Safety and Security

It may seem unlikely, but creditors can compromise individual’s financial plans in unfortunate situations. Fortunately, 401(k)s can’t be compromised. These financial assets are held in a trust, only for the benefit of the participant. Therefore, these financial assets are off limits to a participant’s creditors. Choose a 401(k) plan to give employees additional financial security.

11. Financial Support

Pre-screened investment line-ups can set employees up for success in investing for retirement.  Many financial advisers also offer financial wellness programs, which can benefit employees who are not in a position yet to begin saving for retirement but need to focus on other personal financial issues first.

Ready to Choose a 401(k) for Your Small Business?

As these 11 benefits attest, 401(k)s can be valuable benefits packages for small business owners and employees.

Ready to choose one for your business?

Although 401(k)s can provide myriad benefits, setting one up can be intimidating – because there are a variety of factors to consider in fitting a plan to your business. At Sapling Wealth, I work closely with plan sponsors and strategic vendors to design thoughtfully-structured retirement benefit plans and help you minimize fiduciary risk. Together, we can take into consideration the objectives of your company – employee retention, personal retirement wealth creation, profit sharing methodologies – in selecting from the myriad of choices available in a state-of-the-art 401(k) plan.

Ready to capitalize on the benefits of a 401(k) for your small business? Get in touch for a free consultation, and let’s review your needs today.


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