Benefits and Compensation

The Small Business 401(k): Everything You Need to Know

The U.S. economy is the strongest it’s been in decades, but American small business employees are facing a dilemma when it comes to saving for their futures.

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According to the CFP Board, less than a quarter of Americans feel financially prepared for retirement.

The best tool for retirement savings is a 401(k) plan, but only 86% of small businesses—which employ almost half of the country’s labor force—provide them, according to the GAO.

As employers are working to promote wellness among their employees, it’s important to look beyond just physical well-being. By providing a 401(k) plan, small business owners can also help improve their employees’ financial wellness, as well as recruitment and retention.

Why Small Business Owners Fear 401(k)s

In a 2018 survey, Transamerica found that one of the primary reasons employers don’t offer 401(k) plans is because they’re concerned about cost. Another obstacle is the daunting tasks of ensuring the plan stays compliant and is administered and reported correctly.

If you’re running a small business, a 401(k) may have seemed out of reach in terms of both money and time. But this is no longer the case. Because tech-enabled 401(k) providers are building products that address these concerns for small businesses, an affordable, hassle-free 401(k) is now possible for all employers.

Running a company is a lot of work, and you likely don’t have the time and resources to take a deep dive into your plan and all of your options. Fortunately, modern 401(k) providers are more than happy to take the administrative work off your plate and ensure your 401(k) remains compliant while you focus on growing your business.

The Benefits of the Modern Small Business 401(k)

While it’s true that 401(k)s have historically been expensive and difficult to manage, that’s no longer the case with modern 401(k) providers. Here are some things to know about how a modern 401(k) can help your small business.

Technology Makes the Benefit a Reality

401(k) plans require a lot of paperwork, which is expensive to manage manually. With new technology, however, some 401(k) providers have automated this process, cutting down on costs and taking much of the administrative burden off of business owners.

With some providers, you don’t even need to worry about keeping your plan in compliance with government and tax regulations—the provider does all that legwork for you.

Not only are modern 401(k)s cheaper, but they’re also easier to provide as a benefit.

Tax Credits Can Help Reduce Costs

Under the current tax code, eligible employers can qualify for a tax credit of 50% of eligible start-up costs up to a total of $500 each year for the first 3 years of the plan.

However, there is a tax bill that’s in the works called the Secure Act, which could provide even more value. The bill, which has received bipartisan support in both the House of Representatives and the Senate, increases the existing credit from $500 to up to $5,000.

The bill also adds a second tax credit of up to $500 for new 401(k) plans that include automatic enrollment.

Automatic Enrollment Can Improve Participation

By automatically enrolling new hires into the 401(k) plan, they’ll need to opt out rather than opt in. Automatic enrollment can monumentally increase plan participation rates. In fact, among our customers, we have seen a 24% higher participation rate in plans that include automatic enrollment versus those that require employees to enroll themselves.

Automatic enrollment is one of the best things you can do to encourage employees to save. And if the Secure Act passes, it can also net you a tax credit.

Also, keep in mind that you can deduct ongoing fees and contributions you make to employee 401(k) accounts as business expenses.

Consider Matching Contributions

With a 401(k) plan set up, you can choose whether to match your employees’ contributions up to a certain percentage of their salary. This perk helps accelerate their savings by boosting their overall savings rate and gives you a deductible expense.

It is worth noting that while an employer match is a great incentive to add, it’s not a requirement for a 401(k) benefit. If budget is an issue, forgoing the match is one way to cut costs without cutting out the option of a 401(k) plan altogether.

If you’re going to add an employee match, you’ll need to know the best way to go about it. For example, you may choose to vest the company’s contributions, either gradually or all at once after a set period, to encourage employees to stick around longer. Also, consider how you want to structure your match. For example, you may choose to match 100% of employee contributions, maxing out at a percentage of their salary. Or, you may choose to offer a 100% matchup to a percentage of their salary, then 50% up to a second tier.

Whatever you choose, matching contributions can provide more help to employees and keep them more satisfied with their jobs.

The Bottom Line

Almost half of small businesses don’t offer a 401(k) plan, a benefit that’s becoming increasingly essential for workers who can’t rely on pensions and may not have the same level of access to Social Security in the future.

Fortunately, 401(k)s are cheaper and easier to manage than they used to be, making them more accessible to small business owners. As you consider the benefits, be sure to shop around and compare several 401(k) providers before you pick the one that best suits your needs and your budget.

Roger Lee is the Cofounder of Human Interest. Based in San Francisco, Human Interest helps small businesses all over the country offer 401(k)s to their employees. Lee and his team focus on increasing 401(k) access through a high-quality, affordable solution that lowers the administrative burden for businesses and prioritizes employee experience and education. He is a member of the Forbes Finance Council and the Young Entrepreneurs Council. He was formerly a cofounder at Thunder and has a degree in Applied Mathematics from Harvard University.