But… isn’t my business too small for a 401(k) Plan?

As a community bank serving small businesses in Tennessee for over 85 years, we’ve heard that often. And, increasingly, the answer is no!

There was a time when high fees and administrative burdens put employer-sponsored retirement plans out of reach for all but the largest and richest corporations. Today, smaller enterprises can harness the power of automation to streamline benefits systems, minimize costs, and manage fiduciary liability.

These process improvements – combined with new tax breaks and other advantages – have made 401(k) Plans a smart solution for businesses of virtually all types and sizes.

But first, let's review what a 401(k) Plan is: 

401(k) Defined

A 401(k) Plan is an employer-sponsored pension plan named after a section of the United States Revenue Act of 1978. It has become one of the most important tools for retirement savings, with about 60 million Americans participating each year.

Employees typically contribute a portion of each paycheck directly into an investment account. Employers may match all or part of those contributions. Contributions are subject to annual limits set by the IRS each year.

There are two basic types of 401(k) plans, and employers can choose to offer either or both:

  1. Traditional 401(k) Plans

This type deducts contributions from the employee’s gross income for the year – so no taxes are due on that money and its investment earnings until it is withdrawn in retirement.

  1. Roth 401(k) Plans

This type deducts contributions from the employee’s after-tax income for the year – so there is no tax advantage during those working years, but withdrawals in retirement are tax-free.

Click here for more information about choosing, establishing, and maintaining 401(k) Plans from the IRS.

What to Consider

So, should your small business start offering a 401(k) Plan? Here are four key points to consider:

  1. Recruitment and Retention

In today’s ultra-competitive labor market, the benefits package that you offer your employees can make or break your company. In one recent survey,  88% of job seekers said that 401(k)s are a must-have. Even if you aren’t able to commit to matching contributions, providing this powerful savings vehicle to your employees can strengthen your offer.

  1. Tax Credits

401(k) overhead is lower than ever. The SECURE Act of 2020 increased tax credits available to small businesses who are establishing a 401(k) Plan to $5,000 per year for the first three years. This can be used to cover up to 50% of setup expenses. Plus, there’s an extra credit for plans with automatic enrollment.

  1. Tax Deductions

Your potential tax benefits don’t end with credits. In nearly all instances, small businesses can deduct their contributions to 401(k) Plans, whether they opt for a full dollar-for-dollar match, a partial match, a flat amount, or some type of profit-sharing system. What’s more, employer contributions aren’t subject to Social Security, Medicare, or other payroll taxes.

  1. Savings for You, Too

Your employees deserve to be rewarded for their hard work – and so do you! Entrepreneurs often struggle to set aside enough money for their own retirement, in part because they haven’t had access to tax-advantaged tools that can help them grow their nest eggs faster. Today, even sole proprietors can establish and benefit from 401(k)s.

We’re Ready to Help

Our business-savvy Raymond James Financial Advisors here at Citizens Bank can give you professional advice about 401(k) Plans, asset management, portfolio development, life and health insurance, and more – all backed with research provided by S&P, Value Line, and Credit Suisse. Want to speak with our local advisors in Kingsport and Johnson City? Reach out today.


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Any opinions are those of the author and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Any information is not a complete summary or statement of all available data necessary for making a decision and does not constitute a recommendation.

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