You and your employees work hard for your business. Whether you’re in the healthcare business, practicing law, or owning your very own small business, your number one priority is to help create satisfied customers by providing quality goods or services. Growing a business takes time and care, not to mention plenty of blood, sweat and tears.
One way you can help create a desirable and happy workplace for your employees is by providing benefits such as 401(k) plans. 401(k) plans can offer you as a business owner plenty of different pros as well. You may not know this, but 401(k) plans can actually save you money every year!
401(k) plans can be a little tricky when it comes to understanding the plethora of different options available and how exactly they work. You’re a master in your field, but maybe when it comes to finance and benefits, the waters get a little murky.
Understanding administration costs for 401(k) plans and investment fees are another. These plans are complex and require assistance from financial advisors for quality hands-on care to those business owners and employees who enroll.
401(k) plans don’t need to be rocket science. We’ve broken it down for you to make it easy to understand. You’ll be not only a 401(k) plan expert, but a hero at the office. Read on to learn more about 401(k) plans, how they work, how they can benefit you, and how to hone in on the best possible plan to suit your individual needs!
What are 401(k)s?
So, what exactly are 401(k)s anyway? Besides being a key benefit that almost any potential employee looks for, they’re an important facet of any quality business. Simply put, a 401(k) plan is a form of retirement savings plan that is sponsored by an employer. This means that while your employee is active full time providing you their unique skill set to help create your successful business, they can lay the groundwork for a successful future for themselves.
Retirement is an important milestone in every worker’s life. It’s a long awaited transition from active employment into the well-earned relaxation of retirement. After many years of tireless service, you and your employees will be able to enjoy the fruits of their hard-labor.
401(k) plans help pave the way to a stress-free financial future.
After retiring, most people depend on whatever money that they’ve been able to save throughout their working lives to live a comfortable life. In retirement, people wish to enjoy taking part in various hobbies and other activities without worrying about making ends meet. Helping your employees meet their professional and personal goals is important, and here’s how 401(k) plans can do that.
How Do 401(k)’s Work?
401(k)s are a way for employees to invest a predetermined portion of his or her salary into a savings account. The money is taken out prior to any income taxes, meaning that the money will always be pre-tax. 401(k)s allow your employees to avoid paying income taxes in the current year on the amount of money that you put into the plan.
The two main kind of 401(k) plans are either a traditional 401(k) plan or a Roth 401(k) plan. 401(k)s are a way for employees to invest a predetermined portion of his or her salary into their own account.
In traditional 401(k) plans, money is taken out prior to any income taxes, meaning that the money will always be pre-tax. The traditional 401(k) plans allow your employees to avoid paying income taxes in the current year on the amount of money that you put into the plan. However, when money is withdrawn later on in retirement, the taxes are then implemented on the money being removed from the account.
Roth 401(k) plans are the opposite. With Roth 401(k) plans, the money is taxed prior to being contributed to the plan. While the taxes are taken out at the start of the process, this option allows for taxes to be avoided in the long-run when the money is removed. In a Roth 401(k), money taken out of the account during retirement is tax-free.
Both of these features of a 401(k) plan are optional. They are also able to be set up individually. These options will be based upon the business and/or the employees and how their money will go into the 401(k) plan.
This is of course up to the legal allowable 401(k) contribution limit that you put into the plan.
The money will then continue to grow tax-deferred within the 401(k) plan. This means that while the invested money amass investment income, you do not pay any taxes on these investment gains each year. The only time that any taxes are taken out is on the amounts that you may withdraw at the time. However, be wary, because if any money is taken out prior to the designated retirement age of the 401(k) plan, both penalty taxes and income taxes will be required.
As the employer, you have the ability to create or choose the best plan to benefit both you and your employee. This means that you’ll have the wiggle room to make the important decisions on things like employer contribution and vesting periods.
Which is the Best for Fit for You?
A crucial facet of a retirement plan is employer contribution. Employer contribution is when the business matches the employees’ contribution to their retirement plan. Much like employee’s investments, employer contributions are also pre-tax in a traditional 401(k) plan. This means that when the funds are withdrawn in retirement, the funds will be taxable at that time. Again, in the case of a Roth 401(k) plan, the taxes are implemented when the money is contributed to the plan but exempt when being removed.
There are three main types of employer contributions, all with their own pros and cons. It’s up to you, the employer, to decide which type is the best match for you and your employees needs.
The three types of employer contributions are as follows: matching, non-elective, and profit sharing. Each of these types are broken down for you so you can select the type of 401(k) plan that works for your business.
Matching is a feature of 401(k) plans in which the employer will only put money into the 401(k) if the employee is. An employer matching program will typically operate with a general contribution of 3% to 6% of the employee’s pay. In order for the employee to receive a contribution from the employer, he or she must be contributing a specified percentage into the plan. After that, the employer will then contribute the same amount, or “match”, the contribution to the retirement plan up to a certain percent.
For example, in the case of a 5% contribution of salary, you may match dollar-for-dollar up to the first 3% of the employee’s pay, and then 50 cents on the next 2% of the employee’s pay.
In the case of a non-elective contribution, you may choose to designate a set percentage into the plan for all employees. This operates whether the employee is putting any of their own money into the plan or not. For example, in the a non-elective 401(k) plan, you’ll be investing 3% of pay to the plan each year for all eligible employees.
Profit sharing contributions work in a different manner entirely. When your company makes a profit, you as an employer may decide to put a set dollar amount into the 401(k) plan. There are a number of different mathematical formulas that can help decipher how much of the money is delegated to each employee. Typically speaking, however, the most commonly implemented formula is that every employee on a profit sharing 401(k) retirement plan receives his or her contribution that is proportional to his or her pay.
Who Do They Benefit?
401(k) plans are a great way to both benefit your business. 401(k) plans have the ability to only provide your employees with a great benefit, but to even save you money. There are different rules and guidelines in place that are enforced by the Department of Labor (DOL) division known as the Employee Benefits Security Administration. Their purpose is to regulate the offerings of 401(k) plans and the rules surrounding them.
The Employee Retirement Income Security Act was first put in place in 1974. The Employee Retirement Income Security Act (ERISA) is “a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.” The Department of Labor uses this law to help continue to regulate and ensure the best practices are being followed with 401(k) plans.
In addition to the ERISA, each plan is required to go through an annual test by the Employee Benefits Security Administration to ensure that plan meets these rules. That is, unless you set up a type of plan known as a Safe Harbor 401(k) Plan. These plans allow you to bypass the sometimes complex testing process. If you opt for a Safe Harbor 401(k) Plan, as long as you are putting in a legally required amount of money into the 401(k) plan in either a non-elective or matching contribution, than the plan will automatically pass any of the DOL’s tests.
With Safe Harbor 401(k) Plans, any of the non-elective or matching contributions you make to the plan are immediately vested. With profit sharing plans, however, these contributions may still be subjected to a vesting schedule. While the money that the employee puts into his or her 401(k) plan is always his or her’s, your contribution to their plan is protected. An employee must stay with your company for a required amount of time before your contribution is theirs. The vesting schedule that you select for your plan will set these active service time requirements for your employees.
This means, depending on the amount of time that the employee works for you will decide how much of your contribution stays with the company should they depart. This helps protect your investment as well as theirs.
401(k) plans are excellent tools for providing your business another opportunity to save money. Finding the best 402(k) plan administration and providers is important when looking for the lowest rates. Making wise investments is an important aspect of any business, and this also applies to selecting the best 401(k) plan for your company. At the Storick Group, we have the best bang for your buck and help take the guesswork out of choosing the right plan to save you money.
Our competitors simply can’t compete with our low annual fees, with annual fees as low as $65! Between our low prices and great options, the Storick Group is here for your business. Stop overpaying for 3rd party administrator retirement plans, choose the Storick Group for your inexpensive pension administration!