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Common Questions about Small Business 401(k) Retirement Plans

When discussing retirement plans, you’re always going to run into 401(k)s. It is certainly the plan we are most familiar with and is usually the plan of choice for major enterprises, but it’s not only for the big guys. In fact, any business entity can establish a 401(k) plan. Here are answers to common questions about business 401(k) retirement plans.

WHAT IS A 401(K)?

A 401(k) plan is a defined contribution plan that allows employees and employers to contribute to a tax-deferred account. Both the employee and the employer can contribute to the plan, although not required to. Employees contribute to their plan either on a pre-tax or after tax (ROTH) basis through salary reduction. Employers have many options available to them when making contributions, popular methods include matching or profit sharing. 

Self-Employed 401(k)s function just like any 401(k) plan, they are subject to all the same limitations and benefits. The only difference is that they are intended for business owners with no employees other than a spouse. 

WHAT ARE THE ADMINISTRATIVE RESPONSIBILITIES OF A 401K PLAN?

The administrative responsibilities of a 401(k) are critical. Establishing a 401(k) requires an adoption agreement or plan document. Your business must also file an IRS form 5500 and be subject to special IRS testing to ensure your plan does not favor highly compensated employees. In the case of a Self-Employed 401(k) plan, an IRS form 5500-EZ may need to be filed in the event your plan assets reach over $250,000.

It may be pertinent to hire a third-party administrator (TPA) to ensure compliance and proper administration of your plan. Most retirement plan managers will take this role on for you, confirming that your provider offers this service is beneficial. Finally, your plan will also be responsible for providing employees with notices covering issues like distributions or announcements.

WHAT ARE THE BENEFITS OF A 401(k) PLAN?

The benefits of a 401(k) for an employer are primarily based on flexibility when offering contributions to the plan for employees. As an employer, your contributions to the 401(k) are tax deductible to your business. 

The overarching benefit for your employees is that they will have higher contribution limits than a personal IRA and tax deferred growth in their account. If a matching or profit-sharing employer contribution is possible, this is another benefit as well. Finally, 401(k) plans give your employees the ability to take out loans up-to 50% of their vested balance. This allows your employees to pay themselves back with interest which is added to their vested balance.

401(k) CONTRIBUTION LIMITS FOR 2019

Employee Maximum
Deferral Contributions
Catch-Up Contributions
(if age 50 or Older)
Employer Contribution
Match or Profit Sharing
Total Employer/Employee
$19,000
Per Individual
$6,000 
($25,000 Total)
25% of compensation up to a maximum of $56,000
Contributions cannot exceed $56,000
($62,000 if age 50 or Older)

RESOURCES FROM IRS.GOV: 401(k) Plans Page --  401(k) Plan Overview -- 401(k) Resource Guide – Plan Sponsors – Starting Up Your Plan -- One-Participant 401(k) Plans --  Publication 4222 – 401(k) Plans for Small Businesses -- Form 5500 Corner.

IS A 401(k) THE BEST OPTION FOR MY BUSINESS?

This is a needs-based question and should be evaluated on a case-by-case basis for all businesses. Typically, a 401(k) is utilized by medium to large scale businesses (50-100+ employees), but again, it can be used for any business. It all comes down to your tax needs and your ability to pay for the plan’s expenses. 401(k)s tend to have higher maintenance fees than other plans. Having flexibility regarding matching or profit-sharing employer contributions are the key benefit of this plan. 

WHO CAN I WORK WITH TO MANAGE MY RETIREMENT PLAN?

Financial coaching and development should be an important part of your retirement plan and is a value-added benefit for you and your employees. A financial advisor can provide the investment guidance needed to help you and your employees achieve retirement goals. You and your employees deserve to know that your retirement is being taken care of and that you have a coach available to assist you in these matters. 

Is Your Business in California?

Did you know that California businesses will be required to offer their employees retirement plans? Any California employer with five or more employees is required to establish a company sponsored retirement plan or must provide their employees with the opportunity to participate in the CalSavers program starting July 1, 2019.

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Our Firm Can Help Your Small Business

MCF Capital Management, LLC is an independent, family-run, financial advisory firm that bases its investment approach on quantitative market data analysis. One of our key focuses is small and medium-sized businesses. Our firm’s dedication to business owners not only covers managing the needs of your business, but also the needs of your employees. 


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