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How to maximize your business’ 401(k) plan offering

How to maximize your business’ 401(k) plan offering

April 05, 2021

A 401(k) is how most Americans save for retirement. If your business offers your employees a 401(k) plan then you already have an advantage over a company that doesn’t provide one.

Why offer a 401(k)? 

Are you taking full advantage of your plan’s offerings in these areas?

Many job-seekers view 401(k)s as more robust than other types of retirement plans, so offering a 401(k) plan can provide your business with an edge in hiring. Additionally, 401(k)s can help you retain your employees through gradual vesting. A vesting schedule that requires employees to work for several years before employer contributions become fully vested is a great option for employers who are worried about employee retention.

According to a Human Interest report, How the SMB Workforce Saves, after health insurance, work-sponsored retirement plans are the most-requested benefit amongst employees.1 In fact, 40% of employees working for small businesses say that they would leave their current company for another that offers a 401(k) plan.1 And a 401(k) could be even more important for businesses competing for younger talent… 90% of employees 18 to 34 years old say they would prefer benefits over a raise.1

Business owners have flexibility when establishing a plan. In addition to setting contribution matching or profit-sharing levels, plans can have different eligibility requirements or vesting options. With profit-sharing plans, the business is able to retain the freedom to choose how much they contribute to their employees' retirement accounts depending on the profits the business sees in a given year. There are several types of profit-sharing plan options. Capital Financial Solutions, LLC can do a plan analysis to see if this is a good option for your plan and guide you in the benefits.

401(k) plans generally provide more options and flexibility than other types of retirement plans, such as a SEP IRA or Simple IRA. But you need to be aware of your options to identify what plan is the best for your situation.

A 401(k) plan can provide business owners with several tax benefits. If a business owner completes salary deferrals on a pre-tax basis, they can greatly reduce their taxable income.  Company matching and profit-sharing contributions, including those made to the business owner’s own account, are also tax-deductible to the employer.

Are you taking advantage of the several 401(k)-related tax credits available to business owners? 

  • When starting a new 401(k) plan for the first time, small businesses with 100 employees or less can qualify for a tax credit for each of the first 3 years.
  • Another tax credit exists for plans that provide for auto-enrollment of new hires, incentivizing small business owners to add automatic enrollment as a feature of their plan.
  • Lastly, plan management/administrative expenses paid by the business may be deducted as a business expense.

Are you paying too much for your 401(k)?

Costs can vary greatly based on plan features, provider, investment choices, number of employees, and overall assets in the plan. Have you done an audit to clearly identify your expenses associated with your plan? In order to effectively manage your business, it is important to establish a retirement plan that is appropriate for your organization. Assessing the right-fit retirement plan is an area in which we frequently advise among our clients who are business owners. As many of our clients grow their businesses, we have helped them replace their existing company retirement plans with 401(k) plans that better fit their needs. 


Are you meeting the plan requirements?

Additionally, because of the significant tax-saving benefits of 401(k)s, plans need to follow strict IRS guidelines and undergo annual compliance testing. This required testing ensures that all participants are being treated equally. This means that if less-compensated employees are not putting much into the plan, this will limit what owners and highly-compensated employees can invest for themselves.

As your plan administrators, we will test annually to determine if the plan meets the required guidelines and suggest possible strategies to increase owner contributions, such as establishing a Safe-Harbor 401(k). A safe harbor 401(k) is a great way to reward your employees with higher retirement contributions. It also provides an alternative to costly plan testing and opens the doors for much higher contributions to owners and highly compensated employees.  

In terms of ultimate costs, it is also worth noting that annual testing and administration costs can be paid as a business deductible expense or allocated among employee accounts. 

Establishing a 401(k) plan is a long-term commitment to your business and your employees. Planning, building, and managing a 401(k) plan involves many choices that can directly impact your employees’ financial security and satisfaction with their job.


Set up a plan analysis

Our advisors have the knowledge and experience to provide you with an un-biased outside review of your retirement plan. CONTACT US if you would like insight and assistance navigating your retirement plan options.


1. What business owners need to know about 401(k) plans: