401(k) Benefits For Business Owners

So What Are The 401(k) Benefits For Business Owners?

I’ve written recently about many different reasons individuals should embrace their company 401(k) plans, but what about business owners? The same 401(k) benefits employees enjoy from a retirement plan can extend to business owners—and then some. Truly, a 401(k) plan is something like a multi-purpose tool for business owners. Depending on their need, small business employers can use a 401(k) as a tool to lower their taxable income, to grow their savings for retirement, and even to manage the future of their companies.

401(k) Tax Benefits: Lower Your Taxable Income

Who here likes paying more taxes than they need to?” This might sound like a silly question, but it’s one I ask whenever I meet with employers and employees to talk about retirement. It probably doesn’t surprise you that I never see a hand go up. But, nevertheless, I still meet people who choose not to participate in the company plan but could still afford to. In my opinion, this is a bit like sending extra dollars to the tax man every paycheck.

Annual pre-tax contributions limits are $23,000 a year as of 2024, with an extra $7,500 in catch-up contributions allowed for individuals over 50 years of age. That means anybody, including business owners, could be reducing their taxable income by as much as $30,500 per year! It’s especially easy for employers to maximize their contributions if they adopt a Safe Harbor 401(k) plan, which involves making a standard contribution to all employees, regardless of how much they contribute to the plan, or a matching contribution that meets the safe harbor requirements. There are also other plan types, like profit sharing, which allow business owners to save as much as $69,000 per year before taxes—or $76,500 per year with catch-up contributions.

But tax benefits don’t stop there for business owners. There’s also a tax credit available for many small businesses with 100 employees or fewer starting a small business 401(k) plan for the first time. If you qualify, you can get a $500 credit for each of the first three years of a new plan. You can also deduct as business expenses any plan management expenses you pay and any matching contributions the business makes to employees participating in the plan.

Recruitment Benefits: Employee Retention Strategies To Recruit Talent, Retain Talent, And Get Better-qualified Employees

Hiring is a real challenge for many employers in today’s job market. As of January 2024, the national unemployment rate is only 3.7%, which means it’s particularly difficult to recruit the skilled employees any business needs.¹ The most qualified job candidates are in high demand, and they generally garner interest from many companies when they’re “on the market.” Many highly-skilled or specialized workers are more likely to take the position with a more robust retirement plan, as retirement benefits are cited as the second most important perk behind health insurance.

But a 401(k) isn’t just about attracting new employees, it’s also about keeping the ones you already have. Many companies lose highly-skilled individuals to competitors with better benefits. Nearly every valuable employee scours the job market for a better career opportunity at some point, and better retirement benefits might be a difference maker.

Personal Benefits: Increase Retirement Readiness

I recently met with a company that had several owners, most of whom were participating in the company plan. One owner had chosen not to contribute at all, preferring to save his profits in cash and wait to invest them in a future business venture. This is surprisingly common, even among employers who do offer a 401(k) plan. Many business owners believe they’ve got enough money from their business, and they don’t need a retirement plan. Others might plan to sell their business someday to build their nest egg. Others still plan to draw income from their businesses after retirement—but I can speak from experience that you can’t always count on your business remaining profitable for years after you leave it.

For the owners of profitable businesses, a 401(k) is a great way to secure a retirement with the same standard of living they enjoy today. There are many creative ways for business owners to save a lot of money into a retirement account without having to break the company’s bank, like profit sharing 401(k) plans with cross testing. These plans allow employers to put employees into different groups, allowing higher employer contributions to some—like the business owners—while still providing a valuable benefit to every employee. That way, employers can work towards a higher maximum contribution of $69,000 or more.

Long-term Planning Benefits: Help Employees Retire

Nearly 8-in-10 Americans are concerned they won’t be able to afford a comfortable retirement, and two-thirds believe they’ll outlive their retirement savings.² Without the savings needed to retire, this means an increasing number of today’s workers won’t be prepared to retire when they reach retirement age. Even those who have been working for many years are worried, as 65% of Baby Boomers plan to work past 65—or not retire at all.³

This is obviously a major issue on an individual level, but it also represents a larger issue for businesses—specifically in the management of their rising payroll costs.

Consider this: If your more highly-paid veteran employees can’t make their exit for five or even 10 years past when you expect them to, how much more will you pay to keep them? Each individual who does not retire at retirement age costs companies an average of $50,000 per year in extra payroll expenses.⁴ Even on small levels, the ripples are still quite noticeable; if 4% of your workforce is of retirement age and even half of those people don’t retire, it could block advancement of up to 10% of your workforce.⁵ In short, the only way to avoid the inevitable negative outcomes is to prepare and plan for the current and future landscape of retirement.

Your 401(k) plan has a lot of potential to reward your employees while also preparing them to retire by retirement age. Features like profit sharing and employer match can jumpstart your employees’ savings and incent them to save more of their own income. Additionally, catch-up contributions allow employees age 50 and over to save an extra $7,500 beyond normal limits as of 2024.

Retirement Plans For Small Business Owners

In addition to 401(k) plans, small business owners might choose to utilize a different type of retirement plan. These plans aren’t traditional 401(k) plans and operate a little differently from a 401(k), but they offer the same primary benefit of being able to save for retirement.

Simplified Employee Pension Plan (SEP IRA)

SEP IRAs have high contribution limits of up to $69,000, or 25% of earnings (whichever is less), meaning that a business owner can save more for retirement with a SEP IRA than with a traditional 401(k). These are also technically IRAs, so they don’t require a recordkeeper or a third party administrator, and there is very little administrative upkeep required—including no IRS Form 5500, no compliance testing, and no payroll deductions—making it a cheaper option than a 401(k).

However, employees aren’t allowed to save any of their own money into the plan, meaning it is entirely up to the business owner to fund their employees’ accounts. Owners saving to their own retirement accounts are required to make equivalent contributions to their employees’ accounts; a business owner saving 10% of their salary will therefore have to make a 10% contribution to each of their employees’ accounts. This can get expensive with a lot of employees, but it makes a SEP IRA a great option for a business with a small number of employees or anyone with a freelance income.

Savings Incentive Match Plan For Employees (SIMPLE IRA)

Many of the benefits of a SEP IRA are applicable here—cheap, easy to set up, no IRS reporting or nondiscrimination testing—with a couple key differences. Employees are allowed to save their own money, making it a little cheaper for business owners who still want to provide a savings option for their employees but can’t fund their retirement contributions on their own. Contributions are more limited than with a SEP—up to $16,000 per year for anyone in the plan, so business owners hoping to maximize their retirement contributions would be better off with another option.

SIMPLE IRAs also require an employer to offer a match of 3% of an employee’s salary or make a 2% non-elective contribution. So, if an employee is saving 3%, they’ll receive an additional 3% from the employer. But if the employee chooses not to save, they’ll still receive a 2% contribution from their employer.

For more information about retirement plan options, check out what a well-designed Start-Up 401(k) can do for your business.

Maximize Your 401(k) Benefits For Employees

In order to increase your 401(k)’s positive impact on your employees, there are some steps you can take today. These tactics will not only improve the benefit your employees derive from your company plan, but help you to maximize your own retirement strategy:

1. Increase Employee Education

Our own research shows that 69% of employees can’t pass a basic 401(k) knowledge quiz, and the same number says the financial sources they have don’t make them comfortable about their financial future. Your 401(k) provider can play a big role in this step by offering plenty of employee and support and education, from online tools and resources, to one-on-one meetings and access to retirement specialists. Plain and simple, the earlier employees feel empowered to plan and save for retirement, the better prepared they’ll be.

2. Add An Auto-enrollment Feature

We know that employees want to save for retirement, but many avoid participating in their company 401(k) plan because they aren’t prepared to make decisions about savings rates and investments. You can add an auto-enrollment feature to your plan that automatically enrolls any eligible employees into your plan at a set savings rate with a default investment selection. Rather than “opting in” to the plan, employees have the option to “opt out” of the automatic enrollment, or to enroll the traditional way and set up their own accounts. It’s easier for business owners and other highly-compensated employees to save as much as they’d like in their own accounts when a larger number of employees choose to participate.

3. Add Or Increase Employer Match

Incenting employees to save money in their 401(k) is another huge aspect in retirement readiness, and you can do so through an employer match. If you don’t currently offer one, weigh the cost of starting with an employer match of 4% or so versus the potential costs of keeping employees past retirement age. You can also increase your employer match or consider a stretch to match $.50 on the dollar for your employees’ contributions up to, say, 8% of salary—which costs you the same as a straight 4% match, but incentivizes a higher overall saving rate.

4. Emphasize Catch-up Contributions For Older Employees 

Feeling unprepared for retirement is disconcerting for employees of any age, but those individuals closer to retirement may be downright scared. Participants over 50 can contribute an extra $7,500 to 401(k) as of 2024. Combined with the normal $23,000, that’s $30,500 per year your employees closest to retirement can contribute and start growing right now.

How Business Owners Can Maximize Their Personal 401(k)

Your employees love the 401(k) plan because it gives them an opportunity to achieve their retirement dreams. As a business owner, that makes you feel good. Of course, you have the same opportunity. The key is to take full advantage of your plan.

The strategies that help your employees maximize their retirement benefits also apply to you.

It may be years or it may be decades, but one day you’ll be ready to retire. When that day comes, you’ll be glad you decided to leverage your retirement plan. It’s a great resource for your future, and even more so if you use it wisely. So, what are the most important steps you can take to maximize the plan personally?

Save The Maximum

Depending on how much other employees save, you might have the opportunity to increase your own savings in the plan.

It's true there are limits on how much you, as a business owner, can save in your company's traditional 401(k) plan. For most people in 2024, the limit is $23,000, plus an additional $7,500 for those age 50 and over. But as an owner, the amount you can contribute is dependent on how much your employees contribute. If they save very little, your ability to contribute is lower. Encouraging all employees to save more will benefit everyone throughout the length of the plan.

Figuring out how much you can save in the plan each year may be challenging, because it is based on the amount others are saving in the plan. Annual tests are required to ensure your savings rate isn't outpacing the rate of your employees’ savings. If you find you are unable to save as much as you would like, there are some strategies that may help:

• Use a safe harbor plan. This structure allows you to avoid the annual testing requirements by setting certain requirements for contributions by the company.
• Improve plan participation. Because your own contributions are based on the rate of saving and participation of employees, you can improve your own savings by improving everyone else’s. Better plan education may lead to stronger participation and savings rates. Communicate regularly about the benefits of the plan and make the communications relevant to different employees. Remember that someone who is just starting out in their career sees things differently than someone who is nearing retirement. Therefore, different messages may appeal to different age groups. A 401(k) adviser with an emphasis on service should be able to help with this.
• If you find you’re still not able to put away enough money in the plan, investigate other retirement savings strategies, like IRAs or a defined benefit plan.

Look Closely At Plan Fees

This is an important factor in the success of the plan as a whole, and for each individual participating—including you.

Fees can vary widely from one provider to another, and you should understand why for at least two reasons: You have a fiduciary responsibility to make sure you’re not overpaying, and employee accounts (including yours!) are impacted by them. 

How much impact can fees have on your retirement savings? A study by NerdWallet found that just a 1% fee over a period of 40 years could ultimately make a difference of more than $500,000 to a saver.⁶ Because of this potential impact on everyone’s ability to retire, it’s important to review the value and service you are receiving for the fees you are paying at least once each year.

Invest Wisely

When managing your 401(k) plan, select investments based on the big picture, not emotion.

When selecting investments, people often fall back on the notion of risk tolerance—something that changes over time. For example, if the market is up, people tend to feel more optimistic and invest in stocks with more risk. On the other hand, when the market is down, people tend to get nervous and shift away from stocks toward cash and bonds. The trouble with this approach is that it is based on yesterday, causing people to change their investments at the wrong time.

Goals-based investing prioritizes long-term goals in your investment strategy, not short-term, emotion-based decision making.

Overseeing your company’s retirement plan requires a thoughtful, strategic approach. Work with your 401(k) provider to ensure you are getting the most out of your plan to help both you and your employees set in motion their future security. Making the right choices today result in better prospects for all participants—including you.

401(k) For Small Business Owners: A Powerful Tool

As you think about what the future holds both for your business and for you personally, remember that a 401(k) plan can play a significant role in making your visions a reality. With its potential for lowering your taxable income, offering you a chance to grow your retirement savings, and helping you manage the future of your employee base, a small business 401(k) plan is a tool no business owner can afford to ignore.

Learn more and find useful tips, tools, and learning materials for improving your company 401(k) plan in our resource library.

¹https://www.bls.gov/news.release/pdf/empsit.pdf

²https://www.advisorperspectives.com/commentaries/2018/10/29/why-80-of-americans-face-a-retirement-crisis

³https://www.transamericacenter.org/retirement-research/15th-annual-retirement-survey

⁴https://www.plansponsor.com/older-workers-unable-to-retire-cost-employers-50000-a-year/

⁵https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/workers-not-retiring.aspx

⁶https://www.nerdwallet.com/blog/investing/millennial-retirement-fees-one-percent-half-million-savings-impact/