Starting a 401(k) At Your Business? Here's Food For Thought

How Do I know My Business Is Ready For a 401(k) Plan?

Many small businesses succeed because they grow slowly and smartly. Business owners put personal savings into the business, and rely on their own skills and expertise to drive revenue. With so much at stake day-to-day, something like a 401(k) plan might not be on your radar until profits become steady—or until a challenge arises that could be addressed by offering a good retirement benefit to current and future employees.

So, how do you know when you’ve reached that point?

1. You’re Ready To Focus On Retirement

Because so many small business owners put their own savings into starting their business, they may have to put other goals on hold—like saving for retirement. Starting a 401(k) plan is a great way to kick-start retirement savings, especially because without a 401(k) plan, your only choice is an IRA. In 2024, Contribution limits for IRAs are only $7,000 per year (or $8,000 for those 50 or older), which is far lower than with a 401(k) and may not be enough to save for retirement. Your contributions to a 401(k)-style retirement plan are pre-tax, and you can contribute up to $23,000 per year in 2024 (or $30,500 per year in catch-up contributions for those 50 year or older). You will be taxed on the income you draw from your retirement account in the future, but in the meantime they lower your taxable income today while those dollars grow tax-deferred.

2. You Want To Help Your Employees Save For The Future

You care about your employees and their future, and you want them to succeed and be happy as you work together to build a legacy in your small business. According to a report from the Government Accountability Office, one-third to two-thirds of all Americans will have a lower quality of life in retirement simply because they haven’t saved enough. You have an opportunity as a business owner and mentor to offer your employees a 401(k) plan they can use to help safeguard their future—and further thank them for their hard work and loyalty.

3. You Need Help Attracting and Retaining Top Talent

If you’re competing for talent to provide top-quality products and services to your customers, a 401(k) plan can help. Employees want to work for a business owner that values their wellbeing. Providing a 401(k) can help your company stand out from others in your local community by offering a benefit that others might not. That advantage can grow by partnering with a service provider who understands the need for ongoing employee support. According to research we conducted, 77% of employees would rather work for an employer who offers educational 401(k) support for their employees over a 401(k) with no additional support.¹

Understanding what you hope to achieve by establishing a 401(k) can help you select the right type of plan for your business. It may be difficult for you, busy with day-to-day duties, to have a grasp on the many different plans and plan options available.

What Are The Tax Benefits of Starting a 401(k) Plan?

If starting a 401(k) would be a mostly employee-oriented benefit for your business, check the pulse your workforce to find out what they’re looking for in a retirement plan before establishing one. On the other hand, if the primary reason for starting a company 401(k) is to reduce your personal taxes or your business’s tax burden, you’ll want to carefully review the tax credits, deductions, and other tax benefits you’ll receive. Those benefits may include:

• A $500 tax credit for each of the first three years to help offset administrative and setup costs (as long as your business has at least one employee besides you). The IRS will reimburse 50% of eligible costs that are necessary to establishing a startup plan.
• If you decide to offer your employees a 401(k) contribution of any type (via a safe harbor, profit sharing, or a company match) those matches reduce your business taxes. This includes contributions to your own account.
• 401(k) plans offer the highest contribution limits of any defined contribution retirement plan. Individuals can put away up to $30,500 tax-deferred per year 2024 (including catchup amounts) with a 401(k) plan.
• Adding a Roth feature to your company’s 401(k) plan will allow employees to save additional money, but with different tax benefits: Contributions to Roth accounts have already been taxed, meaning retirement withdrawals will not be taxed again. And 401(k) plans don’t have income limits for Roth features, allowing contributions regardless of income.

Starting a 401(k) Plan

As you look for the right fit for your business and compare potential service providers, here are a few key considerations to help you take the first steps in setting up your plan:

• Clear fees: Get clarity on the fees you and your employees will pay with different service providers.
• 401(k) management help: Look for service providers who will act as fiduciaries and share in your legal responsibility to put your employees’ needs first in making plan management decisions.
• Employee support: Make sure your potential providers offer the kind of educational support your employees are looking for so they will be able to get the most out of their new 401(k) plan.

When the time is right, asking key questions will help you find the right 401(k) provider—one that will take the time to understand your employees and their desires for their future as much as you have.

For more information on getting started, visit our page about Starting a Company 401(k) Plan.

¹Fisher 401(k) Solutions Wellness in the Workplace Study, pg. 8