First, let’s take a closer look at the 401(k) landscape. For business owners launching a 401(k) program, there are several plans to be aware of. Here are the three you’re most likely to come across and a brief explanation.
Types of 401(k) plans
This is one of two basic employer-provided, tax-advantaged tax-advantaged 401(k) savings accounts. In a traditional 401(k) plan, your contributions and investments are not taxed until you withdraw funds from the plan. If you’re established in your career or in your peak earning years, a traditional 401(k) may be a wise decision.
The second of the basic types of employer-provided, tax-advantaged 401(k) savings accounts, a Roth 401(k) plan allows you to pay taxes now but benefit from tax-free withdrawals in retirement. If you’re early in your career and expect to earn more in the future, you’re typically in a lower tax bracket now, and a Roth 401(k) may be best for you.
Safe Harbor 401(k)
A safe harbor 401(k) plan is a tax-advantaged retirement plan that ensures employees have minimum contributions to their individual 401(k) plans, regardless of their title, compensation, or length of service. Employers must make contributions on behalf of their employees without a vesting period. In exchange, safe harbor plans bypass annual IRS nondiscrimination testing.
Why businesses should invest in a 401(k)
Given the options above, some business owners put off the decision of selecting a 401(k) plan due to concerns around complexity and setup processes. Thankfully, implementing a program can be especially simple with a partner like Merritt Business Solutions. We partner with Human Interest to make it easy and affordable to help your employees save for retirement.
There are also additional benefits beyond just boosting employee retirement prep for employers. Here are four key perks associated with investing in a 401(k) plan for your employees.
1. They Lower Your Taxable Income
Offering a 401(k) qualifies your business for tax credits and deductions that ultimately lower your business’s taxable income. The SECURE Act offers credits up to $5,000 per year for the first three years of a 401(k) plan, designed to offset setup and onboarding costs. Then, any employee match contributions into a 401(k) plan are tax-deductible, further incentivizing plan setup.
2. They Increase Employee Retention and Productivity
Since many small businesses don’t offer 401(k) plans, having one in place can help keep your employees within your organization over time. A 401(k) plan is a unique bonus that can help recruit and retain top talent among small businesses.
Thanks to your 401(k) plan, employee productivity is also likely to increase. There are two reasons for this. First, long-term employees often have more industry expertise, job training, and solid relationships that enable them to get work done effectively and efficiently. It takes new employees time to get up to speed and master their role within the company, so retaining employees long-term helps eliminate the onboarding learning curve.
Additionally, employees who feel financial stress carry that burden into the workplace, hurting their ability to focus on the job at hand. A 2019 Visa report found that 84% of employees worry about finances while at work, and having a retirement plan can ease these worries.
3. They’re Simple to Manage
Today’s 401(k) providers know that small business owners don’t have the time or resources to add 401(k) management to their to-do lists. Fortunately, the management process for most 401(k) plans is quick and easy. As you explore plans, ask about ongoing upkeep and management tasks to select the right fit for your business.
4. They Allow You to Save for Your Own Retirement
Finally, don’t forget that offering a 401(k) plan for your employees allows you to contribute to a 401(k) plan for retirement. Since 401(k) plans are tax-advantaged and allow for higher contribution totals than other plans (like IRAs), they’re ideal if your retirement planning is on the line. Providing the perk for your employees ultimately unlocks a new bonus for you too!
If you’ve put off the idea of a 401(k) plan for your employees, now is the perfect time to explore your options and kickstart the process. Contact our team at Merritt Business Solutions for more hands-on support, and we’ll set you up with the perfect plan for your needs.