401(k) plans: good for employees and owners alike

A 401(k) is how most Americans save for retirement, but many business owners think that a small business retirement plan is too expensive, too hard to manage or not valued by employees. However, more than half of small business owners say offering a 401(k) plan attracts better employees, according to a CNBC small business survey. They also note that nearly 25% of departing employees cite a lack of retirement benefits as part of the reason for leaving.

Attracting and keeping good employees

Retirement benefits have become more important to employees. One study found that 68% of potential new hires ask whether a company has a retirement plan. The majority of potential new hires and existing employees seriously consider the availability of a retirement plan when deciding to accept or to remain in a position.

Tax benefits

401(k) plans may offer tax advantages to both employees and employers. Employees can contribute tax-deferred money into the plan, which lowers their current taxes. The money will not be taxed until the employee takes a distribution, possibly many years from now. Employers have benefits as well. Contributions made to employees through matching or profit-sharing can be deducted as a business expense. Money set aside by employees into a 401(k) does not have FICA tax applied to it, saving the employer even more.

To match or not to match

Employers are not required to match employee contributions but it’s a good idea. Matching contributions create goodwill with your employees and have the benefit of reducing the employer’s tax liability. Vesting schedules can be built in to restrict the availability of employer funds to a departing employee, thus creating “golden handcuffs.” Some companies offer profit-sharing contributions to employees, creating a benefit for hard work and loyalty.

Deferral limits

A big selling point for most owners offering a Traditional 401(k) over a Simple 401(k) or IRA is the higher contribution limits. For 2021, the limit for 401(k) employee elective deferrals is $19,500. If you are over age 50, you can add an additional $6,500 in “catch-up” contributions, for a total of $26,000. Compare this to a Simple 401(k) with limits of $13,500 and $3,000 respectively for a total of $16,500. Contributions to an IRA are limited to $6,000 with an additional $1,000 for those over age 50. Some of these limits may be predicated on IRS testing.

Additional savings for an owner

In most small businesses the owners have the lion’s share of the total invested balance in the plan. As such, if the expenses of the plan are applied to the plan’s assets, the owner’s retirement money pays more of the costs. We suggest owners write a check for the plan expenses instead of deducting the expenses from contributions. This allows for a business deduction today, while not reducing the value of tomorrow’s retirement asset.

Owners need retirement savings, too

Providing a 401(k) is not only beneficial to employees, but also to owners. At this time, nearly half of small business owners are saving less than 10% of their income for retirement. Even more surprising, 25% are not saving anything at all. 

Instead of saving for retirement many small business owners are counting on the sale of their business to fund their retirement. Selling a business to fund retirement runs the risk of being financially under-prepared at the point in time where there is little time left to invest in savings.

Certainly, the sale of a business can be a significant source of retirement savings, if you receive the price you need. However, it can be a risky strategy if you think it will be the sole source of your retirement monies. Choosing a retirement plan is one of the most important financial decisions a business owner will make for their business.

The retirement plan not only allows the employer to claim tax deductions for contributions but also serves as a means of attracting and keeping valuable employees.

If you’re interested in a 401(k) for your business, consider the Golden Rule 401(k). The plan is a cost-effective, easy-to-use retirement program. Contact Chris Chigas of Access Financial Group at (312) 655-8233.

This message was originally published in the Fall 2021 issue of The Independent® magazineClick here to read the entire issue.

Chris Chigas has been helping funeral directors and small businesses be more successful with their retirement planning for more than 30 years. He is the president of Access Financial Group, a registered investment advisor and holds many securities licenses.

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