A Small Business Owner’s Overview of 401(k) Plans 

In November 13, 2018

A Small Business Owner’s Overview of 401(k) Plans 

Did you know that only half of all Americans are set up to meet their saving goals for retirement? As a small business owner, you may be thinking about the best way to save for retirement – and if you are not, you probably should be! Although many different retirement options are available, we will address 401(k) plans below. 401(k) plans are popular among small business owners and can be offered by small businesses to their employees, contrary to popular belief.  

401(k) Plan Options 

Each plan offers something different although all allow participants to make salary deductions that will contribute to their 401(k) accounts. As a small business owner, it is up to you to determine which plan best meets your needs.  

Traditional 401(k) Plan 

Traditional 401(k) plans are sponsored by employers, enabling a number of investment options to employees. With a traditional plan, the employer gets to decide whether to match employees’ contributions, contribute a percentage of income to each or both. Several administrative costs and testing requirements apply to traditional 401(k) plans. 

Traditional plans are flexible, enabling small business owners to change the amounts of contributions each year. One of the drawbacks of traditional 401(k) plans is that they tend to be more expensive due to heightened administrative costs.  

Individual 401(k) Plans 

Individual 401(k) plans are also known as self-employed or solo plans. These are similar to the traditional plans yet are designed uniquely for sole proprietors or partners who do not have employees.  

The benefits of individual plans are numerous, enabling you to contribute to savings for retirement as both an employer and employee. This allows you to contribute more toward your retirement than any other plan. Individual plans are not a good option, however, if you plan to bring employees on board (unless you are okay with transitioning). 

Simple 401(k) Plan 

A simple 401(k) plan is yet another type of retirement plan. Eligibility depends on whether you have less than 100 employees working for your business and whether they have been compensated at least $5,000 during the previous year. A simple 401(k) plan is a blend of both a simple IRA an a traditional 401(k), offering features that appear in both types of plans. Employees can contribute from their salary up to $11,500 each year.  

Simple 401(k) plans are easy to administer and do not require lots of testing. This plan does make it harder to save aggressively, however.

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