Have you considered a 401(k) for your business? A 401(k) is a retirement plan that business owners can opt to offer their eligible employees. It allows employees and their employers allocate a specific portion of their income to a separate retirement account, free from taxes. In addition to great benefits employees can enjoy, there are also many advantages for the business itself.

Eligible employees must least 21 years old and be employed by the company for a minimum of one year. Employers may not discriminate against employees based on their age or salary. Specifically, 401(k) plans cannot be given in favor of highly compensated employees who earn $115,000+ a year or own 5% or more of the company. Employees covered by a collective bargaining agreement may legally be excluded.

How to Set up a 401(k) Plan

There are a few basic steps that must be taken before establishing a 401(k) plan for your employees. Before getting started, it is important to determine whether you want to set up the plan on your own or consult a professional.

You can seek the help of a bank, mutual fund provider, insurance agency or any other financial institution to help set up and maintain the plan. Regardless, there are 4 crucial steps that must be followed. Employers must execute a written plan, create a trust for the assets of the plan, enact a system to keep records and provide the plan information to the eligible employees.

A written plan covers the everyday operations of the plan as well as what specific plan your business will offer – a traditional, safe harbor or automatic enrollment plan. To ensure assets are used solely for the benefit of employees, the plan’s assets must be held in a trust and have a trustee.

A system that monitors and records contributions, earnings, losses, distributions and other details of the plan must be established to help prepare and file annual reports with the Federal Government. Each eligible employee must be notified of the benefits and features of the plan and be given a summary plan description. The summary plan description provides employees with the plan details and information on how it works.

Tax Savings

There are many different kinds of 401(k) plans that offer different tax benefits. Employers are permitted to deduce tax contributions made to employees’ accounts as soon as they’re made. Businesses are also eligible to receive a $500 tax credit for the first 3 years that can sometimes offset set up costs.

Contributions made to the plan are tax deductible until withdraw from. There is a limit however to how much employers can contribute to their employees’ plans – 25% of the employee’s payroll.

Skilled Employees

A good way to attract highly skilled and talented employees is by offering them a nice 401(k) plan. Highly motivated and skilled employees not only boost productivity but also lead to a successful business.

By offering incentives, such as an attractive 401(k), that your competitors don’t, you will be more likely to employ talented individuals. With controversy surrounding traditional Social Security benefits, individuals seeking financial stability will find comfort in a 401(k) plan.

Therefore, enticing potential employees with attractive and beneficial retirement plans can be like honey for a bee.

Boost Morale

Expressing your appreciation to anyone yields benefits, but what happens when you show your employees how much you appreciate them? Specifically, when you show your appreciation with a retirement plan? Typically, an increase in morale.

A boost in morale and employee satisfaction eventually leads to higher productivity and a desire to stay with the company. Employees who feel appreciated and respected are more likely to put more effort and heart into their work and remain loyal to the company.

There are many additional rules and requirements that regulate 401(k)s. Before taking any step, consult a professional who can help guide and consult you regarding important details that may be missed. Visit The United States Department of Labor for more information on regulations and different plans.

It’s important to note that  the size of your business is irrelevant when deciding whether or not to offer a plan. You don’t have to run a large corporation or LLC to provide your employees with 401(k) plans. Regardless of what you choose to do, do your research and make sure you choose the best plan for your business.

Topics: Business Tips, Small Business, Startups, Tax