Why a Defined Contribution Plan might be the most flexible retirement plan for your small business
posted by Fisher 401(k) April 1, 2016
WHY A DEFINED CONTRIBUTION PLAN MIGHT BE THE MOST FLEXIBLE RETIREMENT PLAN FOR YOUR SMALL BUSINESS
If you’ve already set up your company retirement plan, there’s a good chance that you’re generally aware of some of the different options available to you and your employees. You may also feel like your current 401(k) plan isn’t doing all it could to benefit you and your staff, and that might be the case. The good news is it’s not too late to make a change—and it could be as simple as altering or adding a few key features to your company’s 401(k). And if your company offers a retirement plan, there’s a good chance it’s a defined contribution plan.
A defined contribution plan is a retirement benefit in which the employer, employee, or both contribute to the employee’s individual account, the sum of which can then be accessed once the employee retires (currently age 59 ½). The employee can contribute pre-tax money from each paycheck, and traditional plans are then taxed at the federal, state, and local level once you retire. Employers may choose to match employee contributions up to a certain percentage of pay, another specified amount—or nothing at all.
What kind of enhancements can be added to a company’s defined contribution plan?
Take a look at the ways a company’s 401(k) can be an even more impactful benefit for you and your employees:
- Automatic Enrollment in your 401(k). Automatically enrolling your employees in your company 401(k) helps your company jump over one of your plan’s biggest potential obstacles: low enrollment rates. And if employees are against saving for retirement using your company’s plan, they’re allowed to opt out—but very few do once they’re already enrolled. More contributions to your company’s plan can help accelerate the growth of your employees’ defined contribution plan account balances, depending on market conditions.
- Safe Harbor 401(k). A Safe Harbor designation allows your company to reward your employees with automatic contributions to their 401(k) account, with options for how you’d like to award these matches (based on salary or a percentage of the employee’s own contributions). These plans are popular with small businesses, and for good reason: They allow business owners to contribute the maximum deferral amount to their account (currently up to $18,000, or up to $24,000 for individuals over 50) and Safe Harbor plans automatically satisfy IRS non-discrimination testing—a government audit of your plan that ensures fairness for all employees.
- Profit Sharing Plan. Profit sharing plans allow your company to contribute a portion of company profits to employee retirement accounts. The amount or percentage of profit shared is up to you as the business owner, making it one of the most flexible retirement plan options. Typically, contributions are adjusted or grouped based on levels of employee compensation, the importance of their role, or their performance in the business. Law firms and other small, private businesses with high profit margins—perhaps a private practice in the medical field—can offer this type of plan as a good way to manage the cost of sharing profits. It’s also common for profit sharing plans to offer a safe harbor employee contribution to help pass government discrimination tests.