401k plans for small business
401Ks plans for small business were created by the Economic Growth and Tax Reconciliation Act (EGTRA) of 2001. Prior to the changes enacted by EGTRA of 2001, 401K plans were cost prohibitive for most small businesses. Some estimates project that over 17 million people will be able to utilize 401K plans for small business.
Unlike traditional 401Ks, small business 401Ks are not subject to strict rules and regulations. For instance, small business 401Ks are not subject to complicated discrimination tests, allowing for smaller administration costs. The large administration cost was one of the prohibitive factors regarding small businesses utilizing the 401K plan. 401K plans for small business are cost efficient tools when planning for retirement.
Small Business 401Ks Are Highly Flexible with Higher Contributions
Small business 401Ks are more flexible than other retirement funding vehicles like the Keogh plan. Contributions to small business 401Ks are completely discretionary whereas they are mandatory for Keogh plans. Funding amounts may vary from year to year for small business 401Ks. Since profitability margins of many small businesses vary from year to year, flexible contributions are an attractive aspect of these plans. Small business 401Ks may allow for contributions up to $41,000 annually in some instances. Compared to $13,000 annually for a traditional 401K, these plans can provide quick accumulation of funds. The funding limit varies from situation to situation depending on profitability of the business. A financial consultant experienced with small business 401Ks will be able to help determine your specific contribution limit.
401K plans for small business are an attractive retirement funding vehicle for small business owners. 401K plans for small business are quality benefits that may attract potential employees to your business. They also have tax benefits for the owner and the business. Employee retention is an important factor for a businesses success. The loss of employee experience and the excess costs involved with acquiring and training new employees has a negative effect on your business. One of the tools that businesses can use to increase employee retention is that of 401K plans for small business. 401K plans let an employee save for their own retirement by putting away a portion of their salary.
An employer can offer a matching benefit with their 401K plans for small business. The employer matches the employee's contribution up to a percentage of income. Most businesses that offer matching programs match between 4 to 6 percent of an employee's annual salary. The matching benefit with 401K plans for small business is an attractive feature to offer employees. Contributions to 401Ks by the business for an employee are tax deductible.
Small Business 401K Plans for Owner Operated Businesses
Owner operated small businesses can take advantage of individual 401Ks. These plans are funded by contributions from the owner's salary and profits from the business. Since the individual 401K is intended for businesses that are owner operated, they allow for the profit sharing to equal the matching program with traditional 401Ks. The contribution is tax deductible from both the owners' salary and the business's profits. These plans have a high annual maximum contribution, offering an added incentive for owning your own business.