# The Beginner’s Guide to 401(k) for Small Businesses
Every employee deserves the opportunity to save for their retirement and plan for their financial future. However, according to the GAO, only 14% of small businesses offer some form of retirement plan. With almost 30 million small businesses in the United States, there are many hard-working business owners and employees who do not have access to the most tax-incentivized, employer-sponsored retirement option: a 401(k).
In the past, small companies typically hesitated to offer additional employee benefits beyond health insurance due to misconceptions or valid reasons such as perceived high costs, administrative burden, and lack of employee interest. However, given recent advances in technology and financial literacy, consumers are demanding more accountability, accessible pricing, and ease of use from financial institutions. This means that a 401(k) has become a more realistic and appealing option, even for very small businesses.
With year-end planning around the corner, it is time for small businesses to think about implementing a 401(k). In this beginner’s guide, we’ll explore the tax benefits for employers and employees, how 401(k) plans can be set up without an HR department, the trend of lower fees, and what to consider when choosing a 401(k) plan.
## Tax Benefits for Employers and Employees
Setting up a 401(k) benefits both employers and employees in numerous ways, but the most significant advantage is the tax benefits.
### Long-term Individual Tax Benefits
Employees can invest their money into the 401(k) plan before taxes are taken out of their paychecks. This means that when they retire and start withdrawing money from their 401(k) to live on, they will be taxed at their income tax rate at the time of retiring, as opposed to their current (typically higher) income tax rate.
### Short-term Individual Tax Benefits
Each year, any pre-tax contributions made to a 401(k) account can be deducted from their taxable income. This means employees pay less in income tax. Employers can also receive corporate tax deductions for contributions to their employee accounts. Even better, employers can receive a flat tax credit (up to $500/year) for the first three years of a new plan.
## No HR Department Needed
Even if you’re not a huge corporation with an HR department focused on taking care of benefits and payroll, a 401(k) is still a realistic possibility. Several new 401(k) startups and even small business 401(k) offerings from large financial institutions have sprouted up specifically focused on creating 401(k) options to suit small businesses.
At Human Interest, we’ve designed our 401(k) product and services to suit our small business clients. We work exclusively with small businesses across all industries and understand that they have unique needs and considerations. Everything involving 401(k)s – payroll, compliance, employee management, and more – needs to be adjusted to suit the reality of small business operations and budget constraints.
## The Lower Fees Trend
The intricacies of 401(k)s aren’t common knowledge, and unlike a concrete “product” like a hamburger, it’s often fairly complicated to understand just how much a 401(k) should cost and who is responsible for paying. 401(k) fees are decreasing due to consumer demand for greater transparency and accountability.
When shopping for a 401(k), make sure you understand exactly who is paying for what features and services you will receive in return. Find out if the 401(k) provider serves as a fiduciary. If not, it means that they’re allowed to receive kickbacks from the investments they recommend, which means your employees may be stuck paying high investment fees.
Interestingly enough, a 401(k) for an entire small business can cost less than what is paid for a single employee’s health insurance.
## What to Consider When Choosing a 401(k) Plan
When choosing a 401(k) plan, there are several things to keep in mind:
1. Investment options: Find a 401(k) provider that offers a wide range of investment options so your employees can make informed decisions about their retirement.
2. Accessibility: Ensure that the provider offers easy access to the 401(k) plan and has a user-friendly interface.
3. Compliance: Make sure the 401(k) provider remains compliant with regulations to avoid legal complications down the road.
4. Customer service: Look for a provider that offers exceptional customer service and support, as well as educational resources to ensure employees make informed decisions about their retirement.
In conclusion, a 401(k) is a thoughtful and strategic benefit that provides a concrete financial benefit to employers and employees. It has a proven impact on recruitment and retention and is no longer only reserved for large businesses. Thanks to the growing number of tech-enabled products, it’s no longer a burden for employers, even those without an HR department, to offer employees a robust 401(k) benefit.
Don’t delay setting up a 401(k) any longer, the longer you wait, the more you’re missing out on investment gains and tax savings. As a small business owner, offering a 401(k) is a win-win situation benefiting both your employees and your business.
