How to address unique retirement benefit concerns of small businesses
More than half of small business owners don’t have any type of retirement savings program for their employees, according to a recent survey by Paychex. And there are a number of reasons they don’t, from perceived cost to administrative burden and regulatory guidelines.
But, as an adviser, you can help your small business clients understand the value of retirement benefits by helping them get over the often-misunderstood aspects of 401(k) plans.
For example, many employers think the cost of offering a 401(k) plan is too expensive. However, tax benefits can help offset the cost. New plans are eligible for tax incentives of up to $1,500 ($500 per year for three years). Unlike with SIMPLE IRAs, matching is not required with a 401(k) plan, but matching helps maximize the employer’s personal contributions and business owners can deduct 401(k) expenses and contributions, such as matching, profit sharing, or administrative fees on business taxes.
Another myth around 401(k) plans is that employees are uninterested in retirement benefits or can’t afford to contribute. Of those small business owners who do not offer retirement plans, 44% did not see the need or benefit, according to the Paychex survey. The truth is 401(k) offerings can play an important role in recruitment and retention. In the same survey, 56% of small business owners who do offer retirement plans cited attracting and retaining top talent as a reason they offer retirement benefits. In terms of employee contribution amounts, it doesn’t take much for plan participants 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 (assuming an investment return of 7%).
Arming your small business clients with correct information means they’ll be ready to hear about the different plan options available to them and work with you to choose the one that best meets their business needs. One retirement option often selected by small businesses is a safe harbor 401(k) plan, because 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.
No matter what benefits option your client chooses, each plan comes with its own set of rules and deadlines. Not only can you ensure your clients understand the regulations associated with their selected retirement benefits, but you can also reassure them that you’ll be there along the way to help them appropriately utilize the potential tax breaks and incentives these plans offer, as well as avoid penalties and fines. For example, new 401(k) plans with a safe harbor provision must be started before Oct. 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, you can make your clients aware and help them prepare for such deadlines.
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 can help small business owners better understand their options, determine the right plan for them, and help employees and business owners alike plan for the future.