401(k) Benefits for Small Business Owners
posted by Alex Queen March 19, 2019
I’ve written recently about many different reasons individuals should embrace their company 401(k) plans, but what about business owners? The same benefits employees enjoy from a retirement plan can extend to business owners—and then some. Truly, a small business owner's 401(k) plan is something like a multi-purpose tool for business owners. Depending on their need, employers can use a 401(k) as a tool to lower their taxable income, to grow their savings for retirement, and even to manage the future of their companies.
Lower Your Taxable Income
“Who here likes paying more taxes than they need to?” This might sound like a silly question, but it’s one I ask whenever I meet with employers and employees to talk about retirement. It probably doesn’t surprise you that I never see a hand go up. But, nevertheless, I still meet people who choose not to participate in the company plan but could still afford to. In my opinion, this is a bit like sending extra dollars to the tax man every paycheck.
Annual pre-tax contributions limits are $19,000 a year as of 2019, with an extra $6,000 in catch-up contributions allowed for individuals over 50 years of age. That means anybody, including business owners, could be reducing their taxable income by as much as $25,000 per year! It’s especially easy for employers to maximize their contributions if they adopt a Safe Harbor 401(k) plan, which involves making a standard contribution to all employees, regardless of how much they contribute to the plan. There are also other plan types, like profit sharing, which allow business owners to save as much as $56,000 per year before taxes—or $62,000 per year with catch-up contributions.
But tax benefits don’t stop there for business owners. There’s also a tax credit available for many small businesses with less than 100 employees starting a small business 401(k) plan for the first time. If you qualify, you can get a $500 credit for each of the first three years of a new plan. You can also deduct any plan management expenses you pay and any matching contributions the business makes to employees participating in the plan.
Employee Retention Strategies: Recruit Talent, Retain Talent, And Get Better-Qualified Employees
Hiring is a real challenge for many employers in today’s job market. As of February 2019, the national unemployment rate is only 3.8%, which means it’s particularly difficult to recruit the skilled employees any business needs.1 The most qualified job candidates are in high demand, and they generally garner interest from many companies when they’re “on the market.” Many highly-skilled or specialized workers are more likely to take the position with a more robust retirement plan, as retirement benefits are cited as the second most important perk behind health insurance.
But a 401(k) isn’t just about attracting new employees, it’s also about keeping the ones you already have. Many companies lose highly-skilled individuals to competitors with better benefits. Nearly every valuable employee scours the job market for a better career opportunity at some point, and better retirement benefits might be a difference maker.
Increase Retirement Readiness
I recently met with a company that had several owners, most of whom were participating in the company plan. One owner had chosen not to contribute at all, preferring to save his profits in cash and wait to invest them in a future business venture. This is surprisingly common, even among employers who do offer a 401(k) plan. Many business owners believe they’ve got enough money from their business, and they don’t need a retirement plan. Others might plan to sell their business someday to build their nest egg. Others still plan to draw income from their businesses after retirement—but I can speak from experience that you can’t always count on your business remaining profitable for years after you leave it.
For the owners of profitable businesses, a 401(k) is a great way to secure a retirement with the same standard of living they enjoy today. There are many creative ways for business owners to save a lot of money into a retirement account without having to break the company’s bank, like profit sharing 401(k) plans with cross testing. These plans allow employers to put employees into different groups, allowing higher employer contributions to some—like the business owners—while still providing a valuable benefit to every employee. That way, employers can work towards a higher maximum contribution of $56,000 or more.
Help Employees Retire
Four-out-of-five Americans prefer to work for an employer who offers a 401(k) plan.2 Offering this benefit could mean the difference between keeping that key employee or losing them to the competition. But this benefit also applies to the future of your business. Many companies are finding that 401(k) matches are playing a significant role in their ability to set employees on a track to retire when the time comes. Helping your employees retire makes it easier to pave the way for the next generation of talent for your business, while also containing payroll costs. After all, younger workers generally cost less than veteran employees, so it’s in the best interest of any employer to make sure their employees are prepared to enjoy their retirement at the appropriate time.
401(k) for Small Business Owners: A Powerful Tool
As you think about what the future holds both for your business and for you personally, remember that a 401(k) plan can play a significant role in making your visions a reality. With its potential for lowering your taxable income, offering you a chance to grow your retirement savings, and helping you manage the future of your employee base, a small business 401(k) plan is a tool no business owner can afford to ignore.
2 Fisher Investments 401(k) in the Workplace Study. October 2016.