Last Updated: Mar 11, 2017
Thinking about starting a 401(k) retirement plan for your small business employees and for yourself? There are several types of plans to choose from. Here’s an overview of options for businesses with employees and for 1-person businesses.
As a small business owner, you may decide to start a 401(k) plan for any number of reasons including the fact that a quality 401(k) plan can be a powerful recruiting tool. Every business wants to attract the best and the brightest. Showing potential employees you have a concern about their future retirement can be a big plus.
A well-constructed 401(k) plan can also provide incentive for talented employees to stay. Once you’ve invested the time and expense required to train a quality employee, keeping them on board is in your financial best interest.
Choosing a Plan
The Solo Participant plan is also known as the One-participant or Uni-k plan. it is not a separate type of plan, but rather a traditional plan designed for a business owner with no employees. (Or, a sole owner with family members.) The rules for this plan are the same as those for a traditional 401(k) plan. The plan is discussed at length here.
A safe harbor 401(k) plan is much like a traditional 401(k) plan. Your contributions as the employer, however, must be considered fully vested when made. These plans are not subject to the same nondiscrimination tests as the traditional 401(k) plans.
A SiMPLE 401(k) plan is attractive because, as with a safe harbor 401(k) plan, the annual nondiscrimination tests do not apply. Also, as with the safe harbor 401(k), your employer contributions must be considered fully vested when you make them.
This plan is available to you if you have 100 or fewer employees and they each received $5,000 or more in the previous calendar year. Your employees in a SiMPLE 401(k) plan are not allowed to participate in any other qualified retirement plan.
Roth 401 (k) Allowance
Under iRS rules, 401(k) plans allow your employees to designate some or all of their elective deferrals as “Roth elective deferrals.” These deferrals generally follow the same rules as Roth iRAs. Page 18 of IRS Publication 560 discusses the Roth allowance.
Automatic enrollment – A 401(k) plan can have an automatic enrollment feature. The employee, however, must be able to choose not to have his or her wages reduced and select the percentage of their pay to contribute.
Other employer contributions – if the plan allows, you can make additional contributions on top of the employee match for participants, including those who don’t want to contribute elective deferrals to the 401(k) plan.
Which Should You Choose?
Each of these plans is designed for a different type of business making a specific recommendation impossible. if you are unsure, a tax professional, attorney, or accountant can help. Also, ask other small business owners for their experiences with the plans.