Do You Have The Right 401(k) Plan For Your Business?

The right 401(k) plan for your business is one that meets the goals and objectives for both you and your employees.

But, with so much to juggle as a business owner, how can you know if a plan is right for your business?

Here at Consolidated Planning, we understand that the financial future of your business takes the right strategy. With over 40 years of helping business owners address their financial concerns, we’ve learned first-hand what works and what doesn’t work. We offer a process that provides the framework to uncover opportunities, maximize results, and put you on a solid path to achieving your retirement goals.

Here, we will help you understand the benefits of implementing a retirement plan, plan design ideas to help achieve your goal, and address common plan concerns all to deliver you the right plan with implementation and management for the success of your program.

Top Benefits Of The Right 401k Plan

The right plan for you and your employees will boast several benefits.

#1 ATTRACTING AND RETAINING EMPLOYEES

The Society for Human Resource Management (SHRM) reported that on average it costs a company 6 to 9 months of an employee’s salary to replace them. With that being said, it not only benefits you to attract the right people the first time but you also need to be offering a benefit package that helps to keep the right people.

Now, more than ever, employees of all ages are more focused on building savings and yes, you guessed it, building up their retirement.

While 401(k) Plans are not a retention tool (even less so for key employees – maybe link to the retention article here than rank and file employees) they are becoming more of a necessity as part of a competitive benefits offering.  Having a 401(k) plan is a valuable employee benefit that can help keep pace with other companies also looking to hire quality employees.

Candidates you may be interested in recruiting will likely have a 401(k) and would be unlikely to consider switching jobs to a company where a 401(k) is not an option.  Conversely, companies looking to hire your people have an easier time making a compelling case for leaving if they provide a 401(k) Plan and you don’t offer one at your company.  Job seekers often consider retirement benefits when evaluating job offers, and a well-structured 401(k) plan can help your company level the playing field in the job market.

For those employees who choose to participate in your 401(k) plan there are a few notable advantages including:

•       Reducing their taxable income for the year
•       Roth option with no income phase out
•       Employer contributions
•       Automatic savings
•       Portability
•       Compound growth

#2 TAX ADVANTAGES

For business owners, any opportunity for cost savings is an opportunity worth exploring. Contributions to a 401(k) plan offers tax advantages for both the business owner and employees – tax-deductible for the employer, and employees can contribute on a pre-tax basis, reducing their overall taxable income each year.

Speaking of contributions, your 401(k) program can actually help you maximize YOUR retirement. For example, the deferral limit for 2023, is $22,500 but as a business owner who is 50 years or older, you can make a cash contribution up to $7,500. Meaning you can put $30,000 into the plan, offer a match on top of the $30,000, and then profit sharing contribution that gets you to the $66,000 limit.

Cost savings and maximizing your own retirement sounds like a win-win, doesn’t it?

What Are Your Options For Offering A 401(k) Plan For Your Employees?

Your options for offering a 401(k) plan will vary based on cost, administrative complexity, and the level of control and responsibility you want to maintain as a business owner.

While any 401(k) is up to an employee’s discretion, oftentimes, employees will opt in if it’s made to feel important to the business owner. And if there is high participation, that can help fuel the company culture. A strong company culture helps fuel everyone’s retirement…even you, the business owner. Three popular options that might be right for your business include:

401(k) Discretionary Matching

According to Ubiquity, in 2022, the typical American company was matching up to 6% of employee contributions. This offering in terms of 401(k) plans has frankly become expected by a lot of those key employees you’ll want to attract.

While this doesn’t mean it’s necessary to offer a match of up to 6% to your employee’s contributions, matching up to a certain percentage, say 3% is even more standard for businesses. Depending on the terms you establish for your 401(k) plan, you can even opt to match a percentage of contributions based on their total salary. Every so often, business owners even elect to match their employee’s contributions within reason, regardless of an employee’s elected compensation.

Safe Harbor 401(k)

According to the IRS, a safe harbor 401(k) plan is similar to a traditional 401(k) plan except for one huge factor. The safe harbor 401(k) plan is NOT subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.

What does this mean for you?

Because small businesses often have a smaller pool of employees, they are more likely to fail the nondiscrimination test that comes along with a traditional 401(k) plan. This means employees and the business owner alike would get refunded their contributions, giving you more taxable income at the end of the year.

A safe harbor allows owners and highly compensated employees to max out their deferrals without the worry of receiving refunds.

The only notable downside to a safe harbor provision is it must allow for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. Fully or immediately vested contributions is not a strategy for employee retention – your employees can take your contributions even if they leave within 1 year.

Because of the safe harbor aspect – the non discrimination testing, this is an appealing option for business owners who want to maximize their own contributions. With this being said, business owners must make contributions on behalf of their eligible employees, by either matching a specific percentage or employee contributions or making fixed, non-elective contributions.

401(k) + Profit-Sharing

With a profit-sharing provision, employers have the capability to allocate a portion of company profits to their employee’s retirement accounts. This discretionary decision is made at the end of the year based on the performance of the company.

While these contributions can vary year to year based on your company’s revenue, it’s both a generous and tax reducing option for business owners.

In addition, profit sharing can act as a retention strategy either rewarding all employees or your specific key employees.

Here you have four options when it comes to your profit sharing plan:

•       Salary Ratio
•       Integration (or Permitted Disparity)
•       Age-Weighted
•       New Comparability

So at the end of each year, business owners can use their stellar revenue paired with a profit sharing plan to benefit their employees rather than the government. This revenue is paid out to employees via a business deduction.

How To Implement And Manage The Right 401(k) Plan In Your Business

Designing a 401(k) plan for your business is only half the battle. From here, you will need proper implementation and management to maximize the benefit for you and your employees.

Whether you’re transitioning from an existing plan or establishing one for the first time, you can expect 6-8 weeks to get the plan up and going.

When you choose to work with Consolidated Planning, you’ll be working with a dedicated 401(k) team that will help you implement the right plan with the right provisions for your goals. You and your employees will receive ongoing education and support to best understand how to maximize your contributions for a BETTER retirement.

2023-163668 Exp. 10/2025

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.  

This material contains the current opinions of Katie Jamil and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.