401k
Right for your small business
By Alan Galatian
The 401k plan is no longer an exclusive product available only to large businesses. Changes made to the tax system over the past 20 years have made it easier for you to secure your financial future and that of your employees. Regardless if you have 100 employees, 10 employees, or if you are the sole owner and operator, there is a 401k plan to fit your needs.
What separates the following 401k plans and those used by large companies is discrimination testing. Discrimination testing looks at the ratio between how many Highly Compensated Employees in the company are contributing compared to the number of Non-Highly Compensated Employees. Basically, the government wants to be sure the bigwigs aren't the only ones getting all of the benefits. Due to the size of most small businesses, the ratio can be extreme, thereby disqualifying the business for a traditional 401k retirement plan.
The plans listed below have no or very little discrimination requirements, and this guide will help you find the best plan to fit your needs.
The Solo 401k Plan: This is the most basic small business 401k plan available. This account is designed for businesses with no full-time employees, with exception for a spouse, or part-time employees who work no more than 1,000 hours per year. This plan helps you to maximize your contributions with higher limits. For those who work for an employer while running their business on the side, you would be allowed to have another 401k account open with your employer.
The SIMPLE 401k Plan: This is another cost effective plan designed for small businesses with 100 or fewer employees. The easy administration process is a big plus for small businesses. As an employer, you must make a matching contribution of up to 3 percent of each employee's pay, or make a non-elective contribution of 2 percent of each eligible employee's pay. There are some limitations to the SIMPLE 401k retirement plan - you cannot have any other retirement plans and no other contributions may be made to the accounts.
The Safe Harbor 401k Plan: The Safe Harbor plan is most similar to a traditional plan, in that it provides many of the same flexible features but does not have discrimination rules. This plan may be used by businesses of any size. Just as with the plans mentioned above, the contributions made must be fully vested for each employee. In order to bypass the discrimination testing, the business must match employee deferrals. The matching levels required are 100 percent for the first 3 percent and 50 percent for the next 2 percent contributed by employees. The business may also elect to make a fixed 3 percent contribution to eligible employees. Should the business decide to discontinue contributions, a 30-day written notice must be provided to employees.
For all of the above 401k accounts you can contribute the first $15,500 of your self-employment income, or $20,500 if you're over 50. You may also deduct up to an additional 25 percent of your income if you're paid through your corporation, or 20 percent if you're a sole proprietor. You may also do IRA or 401k rollover into a new small business 401k, assuming the requirements for the original account have been met.
In addition to securing your future, adding a 401k can add value to your business. Be sure to shop around and compare different providers and consult with your local tax adviser or accountant about any 401k tax deductions that could help your business.
