Updated: Sep 12, 2022
As you grow your business, you also need to start making big boy decisions like setting up a 401(k) plan. Saving and helping your employees save is always a good thing. What is most important when evaluating a retirement plan?
Having flexibility in plan rules and employer contributions.
Having the ability to contribute as much as you can for retirement and reducing taxable income.
Having a plan that is easy and simple to set up and administer.
Here are a few different flavors of 401(k) plans that are available:
Traditional 401(k): This is the plan most of us have seen. It allows for discretionary employer contributions. Contributions can be as much as $56,000, subject to testing, and it offers the most flexibility. You need to comply with testing requirements and regulations to administer the plan. If you don't have the ability to deal with the compliance requirements, this may not be the plan for you.
Safe Harbor 401(k): This plan is much easier to administer, and many small businesses choose this one. Employee contributions can't exceed $19,000 and there are mandatory employer contributions of 3-4%. Make sure you can maintain the employer contributions before considering this plan.
SIMPLE 401(k): If you have 100 or fewer employees that have earned $5,000 or more last year, this might be a good option. It is easier to set up and maintain than a traditional 401(k) and has loan features. Employee contributions can't exceed $13,000, and there are mandatory employer contributions of 2-3%. Again, make sure you can handle the employer contributions for this plan.
Solo 401(k): If you don't have employees and are looking to contribute more than 25% of your net compensation, consider this plan. Contributions can't exceed the lesser of 100% of compensation or $56,000.
SEP IRA: This plan is for business owners that don't have employees and are not looking to contribute more than 25% of net compensation to the plan. Contributions can't exceed the lesser of 25% of net compensation or $56,000, and it is one of the easiest plans to administer.
There are several 401(k) plan options available that can fit almost any business situation. It's a big step that will help you grow your savings, retain and attract employees, and ultimately grow your business. Feed the pig!