Should Your Small Business Be Offering A 401(k) Plan?

March 20, 2021

A significant step for any small business owner, are you clear on whether you should offer your employees a 401(k) plan, or do you need a little extra help with the decision?

For those small business owners currently pondering over the pros and cons of offering a retirement plan to their workforce, the following short guide may help you:

What exactly is a 401(K) plan?

An employer-provided benefit that gives employees the opportunity to save funds for their retirement, a 401(k) plan provides financial benefits to all company members, including the owner, and is highly desirable for employees. 

Employees get to keep their contributions whether they leave the employ of the company or not, but employer matches are usually vested over a period of several years.

How do they work?

Determining who is eligible for a 401(k) is crucial, as is choosing the right investment options for the money. This may not be an easy decision to make, let alone understand, and many small businesses seek help from a professional retirement plan provider.

When an employee is enrolled in a 401(k) plan, they set a specific amount to be deducted from their paycheck each pay period, and this contribution that’s not included in their taxable income (except for Roth 401(k)), is withdrawn automatically from their paycheck and invested in a retirement account. Made up of investments such as stocks and shares, the account is selected by the employee.

Employee contributions are capped and the limit is dependent upon the type of plan selected and the salary of the employee; government regulations can also change the limit.

Employers may also opt to match a certain percentage of an employee’s contributions, up to an agreed amount or percentage of their salary.

If the employee leaves the company, they should have remained with it for a certain number of years to be able to keep their employer’s contributions, and they usually gain ownership of these over a vesting schedule. 

Should you offer your employees a 401(k)?

While U.S. law doesn’t mandate 401(k)’s, as a small business owner, there are several benefits to offering this, such as:

enabling you to attract the best, and most talented people for the job - since many employees look for retirement options as one of the primary benefits when deciding where to work. 

increasing employee job satisfaction –when an employee knows that as an employer, you’ve invested in their retirement, they’re typically happier and will undoubtedly feel more valued. As you doubtless already know, a happy employee is usually a more productive one, and they will be encouraged to remain in your employ for longer, too.

tax advantages – the SECURE Act of 2019 allows businesses with up to 100 employees to claim the costs associated with setting up retirement plans, as a tax write-off, while employer contributions to a 401(k) plan might also be tax-deductible.

If you’re still unsure as to whether you should be offering your employees a retirement plan such as a 401(k), or would like help setting them up, reach out to a trusted payroll professional who can give you all the assistance you might need.

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