Can Small Businesses Offer 401(k) Plans? Absolutely—and Here’s Why They Should

Published at

December 28, 2024

Finentries

When you think of 401(k) plans, you might picture massive corporations with sprawling HR departments. But guess what? Small businesses can also offer these retirement plans. Not only is it possible, but it’s also a smart move for attracting top talent, retaining loyal employees, and planning for your own golden years.

Let’s break down how small businesses can get in on the 401(k) action, sprinkle in some wit, and use an example to keep things relatable.

What Is a 401(k), Anyway?

Think of a 401(k) as a magical savings account for retirement. Employees contribute pre-tax dollars, which grow tax-deferred until they withdraw the funds in retirement. Employers often sweeten the deal by matching contributions, making it a win-win for everyone involved.

For small businesses, offering a 401(k) isn’t just about employee perks; it’s about leveling the playing field with larger competitors.

Go for a simple option like a Safe Harbor 401(k) to keep things easy. Pick a provider with tools that make setup a breeze. Talk to your team about the perks—because who doesn’t love free money for retirement? It’s affordable, hassle-free, and a big win for your business and employees!

Can Small Businesses Really Do This?

Yes, they can! The IRS doesn’t discriminate based on company size. While large companies might have the resources to manage complex plans, small businesses have options that are both affordable and easy to administer.

Here’s what you need to know:

Traditional 401(k): The classic version with employer and employee contributions, often with matching.
Safe Harbor 401(k): A simplified plan that automatically passes IRS nondiscrimination tests (more on this below).
Solo 401(k): Perfect for one-person businesses or partnerships.
SIMPLE 401(k): For businesses with 100 or fewer employees, with less administrative hassle.

Meet the Johnsons: A Small Business Example

To make this clearer, let’s introduce you to Mike and Sarah Johnson.

The Johnsons run a thriving bakery called Sweet Spot Desserts, employing 12 people, including bakers, baristas, and delivery staff. Business is booming, but Mike and Sarah worry about losing key staff to competitors offering better benefits. They decide it’s time to explore a 401(k) plan.

Why Should the Johnsons Offer a 401(k)?

Attracting Talent: Employees value benefits as much as salary. A 401(k) signals that you care about their future.
Retention: Offering retirement benefits creates loyalty. Nobody wants to leave free money on the table (hello, employer matching!).
Tax Advantages: Contributions are tax-deductible for the business, and matching funds aren’t subject to payroll taxes.

How the Johnsons Set Up Their 401(k)

Chose the Right Plan Type:
The Johnsons opted for a Safe Harbor 401(k). It’s easy to set up, avoids IRS testing hurdles, and requires employer contributions (a small price for employee happiness).
Found a Provider:
They worked with a 401(k) provider specializing in small businesses, offering low-cost plans with online administration tools. Companies like Guideline, Human Interest, or Betterment can help streamline this step.
Set Contribution Terms:
- Employees can contribute up to $22,500 per year (or $30,000 for those 50+ in catch-up contributions).
- The Johnsons offered a 4% employer match.
Communicated with Employees:
They held a team meeting to explain how the plan works,emphasizing the magic of compound interest. A simple chart showing how a $100 monthly contribution grows over 20 years was enough to get everyone excited.

Cost Considerations

Let’s not sugarcoat it—offering a 401(k) costs money. But it’s less expensive than you might think:

Startup Costs: Plans range from $500 to $2,000 annually.
Employer Contributions: The Johnsons committed to 4% of each employee’s salary. For their 12-person team, this totals around $18,000 annually.

Good news: Tax credits can offset up to $5,000 in setup costs for the first three years, thanks to the SECURE Act.

Common Misconceptions

“My business is too small.”
Nope! Even solo entrepreneurs can open a Solo 401(k).
“It’s too expensive.”
With modern providers and tax incentives, 401(k)s are more affordable than ever.
“It’s too complicated.”
Providers handle most of the heavy lifting, including compliance and employee education.