A 401(k) plan is a defined contribution plan that enables both you as the business owner, and your employees, to save for retirement by making tax-deferred contributions into a self-managed investment account. It’s a “qualified” plan, meaning the plan is eligible for special tax treatment, including current tax deductions, plus investment earnings that grow tax-deferred (or in the case of the Roth 401(k), tax-free) until withdrawal.
A competitive 401(k) plan can benefit your business in several ways:
- Recruitment and retention. Virtually all businesses with over 500 employees offer some kind of retirement savings benefits. But according to a 2017 report by the Pew Charitable Trusts, 44% of the 1,639 small- and medium-sized businesses surveyed do not offer a retirement savings plan. That means nearly half of your small business competitors cannot entice prospective employees with a retirement benefit. If you set up a 401(k) plan, not only can you help level the playing field with larger firms in the search for talented and experienced workers, you’ll have a leg up on other small businesses.
- Tax credits. You may qualify for a federal tax credit of up to $500 a year for three years to help offset the startup costs for your qualified plan. Your employees may qualify for a retirement savings contribution credit of up to $2,000, depending on their salary.
- Flexible plan design. Features such as employer matching contributions, loans, online account management, and investment options can be tailored to your needs. Administrative responsibilities and fees vary, with many low-cost solutions available.