What Is A Small Business 401k Plan?

A small business 401k plan can allow businesses with fewer than 100 employees to

offer their staff a retirement plan that will provide security for the future. Traditionally, 401k retirement plans have been seen as the preserve of larger companies, but it is possible for smaller businesses to take advantage of the benefits of a 401k plan. It is even possible to set up a 401k if you are a sole proprietor with no other employees.

Every 401k retirement plan shares the same basic features. Participants contribute money into their retirement plan, while their employer may choose to match these contributions and increase the amount that is saved. The participant's contributions are made prior to payment of tax. The money that is placed in the 401k plan will be invested. A range of different investments can be used as part of a 401k plan in order to make the invested money grow and provide the participant with financial security when they retire.

Since the contributions that are made by the participant into their 401k are taken before tax is paid, the participant's taxable income is reduced and they are not required to pay tax on the money that goes into their 401k. In fact, they will not pay tax on this money until they begin to make withdrawals from the 401k. Their employer will also be eligible for tax credits when they set up the 401k retirement plan.

The costs of running a traditional 401k retirement plan can be high. These plans can also require a lot of administration. Businesses running 401k plans are also required to undergo discrimination testing to check that the contributions made by their higher earning employees are not too much larger than those made by employees with lower salaries. Failing this test will result in penalty fees for the business. It is possible to avoid discrimination testing by choosing a safe harbor 401k, although matched contributions are mandatory with these types of 401k.

The SIMPLE 401k provides a better option for smaller businesses. It is more cost effective and does not require discrimination testing. The employer must make matched contributions for all eligible members of staff. The participants will enjoy the same benefits as those contributing to a traditional 401k, but their employer will experience lower costs and less administrative work.

A solo 401k is available for sole proprietors who have no employees, other than their spouse. This plan has high contribution limits and is designed to help business owners prepare for their own retirement. Solo 401k plans are the easiest to administer.

by: Jon Thomas.

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