Discussing retirement planning options with your small business clients
Recent research by the Pew Charitable Trusts shows that just over half of the small and midsized businesses surveyed offer a retirement plan.
While there are a number of reasons small businesses don’t offer retirement benefits, making them available is a smart idea that’s good for both owners and employees. As an accountant and trusted financial advisor, you can help your small business clients understand the value of 401(k) plans and how they contribute to business success.
The first step in helping small business owners understand the benefits of offering a retirement plan is dispelling some of the common myths around 401(k) offerings. One such misperception among many employers is that the cost of offering a 401(k) plan is too expensive. However, tax benefits often help offset the cost. New plans are eligible for tax incentives of up to $1,500 ($500 per year for three years). Plus, 401(k) expenses and contributions may be deducted on business taxes. In terms of contribution amounts by plan participants, it doesn’t take much to get started. Just $1.64 per day in 401(k) contributions (less than the average daily cost of a small cup of coffee) can amount to $60,644 over 30 years with the help of compounding interest.
Another myth around 401(k) plans is that employees are uninterested in retirement benefits or can’t afford to contribute. The truth is, 401(k) offerings can play a role in attracting and retaining top talent. A study by MetLife found that 64 percent of employees said that a retirement plan is critical or very important, and a recent survey by Paychex found that small business owners reported minimizing turnover as the most important reason (23 percent) for offering retirement benefits.
Once small business owners make the decision to offer a retirement plan, the next step is choosing a plan from a wide range of options that meets their business needs. One retirement option often selected by small businesses is a safe harbor 401(k) plan. While traditional 401(k) plans offer many benefits, they can also limit business owners and other highly compensated employees from maximizing contributions based on certain non-discrimination testing requirements. Mandatory employer contributions (either a match or a non-elective contribution) through a safe harbor 401(k) automatically satisfy most testing requirements, allowing business owners and highly compensated employees greater ability to maximize salary deferrals, and encouraging employee participation in retirement planning.
Each plan comes with its own set of rules and deadlines, and ensuring your clients understand the regulations associated with retirement benefits after they’ve decided on a plan type is essential to appropriately utilizing the potential tax breaks and incentives these plans offer, as well as avoiding penalties and fines. For example, new 401(k) plans with a safe harbor provision must be started before October 1 of a given calendar year, and a traditional 401(k) must be amended to add a safe harbor provision at least 30 days prior to the beginning of the calendar year.
Another important regulatory consideration for all employers offering their employees a qualified retirement plan is IRS Form 5500 regulations, including the rule that plan sponsors must deposit employees’ salary or wage deferrals into their accounts as soon as administratively feasible, but no later than the 15th business day of the month following the month in which the contributions occurred. A missed deadline can result in penalties from the Department of Labor; however, businesses with 100 or fewer employees are subject to a "safe harbor" deadline that gives them seven business days after collecting employee deferrals to deposit them into the plan. To help avoid the penalties and administrative burdens associated with missing an employee deferral deposit deadline or other retirement plan regulations, small businesses can integrate retirement plans with payroll and other systems. Automation diminishes the risk of missing a deadline or data entry errors, and makes for one less thing that already busy small business HR managers have to worry about.
Retirement benefits are no longer a nice-to-have. For many employees, retirement plans are a deciding factor for taking a job or not, making them a must-have offering for any business owner. Your guidance, along with consultation from plan providers, can help small business owners determine the right plan for them and help employees and business owners alike plan for the future.