Offering a 401K plan can be a great benefit for both the owner of a business and its employees. But a 401K requires time, money and some human resource acumen to set up and maintain. In addition, offering a 401K plan is a serious commitment that requires the employer, as the plan sponsor, to follow rules established by the Employee Retirement Income Security Act (ERISA) and enforced by the US Department of Labor and the Internal Revenue Service.
So should you consider a 401K plan for your business? Here are some things to consider:
Do consider offering a 401K if:
- You, as the owner, can afford to contribute at least $20-$30K per year into the plan for yourself and/or an employee spouse.
- You can afford to make contributions on behalf of your employees of about 3% of wages and salaries and are happy to do so.
- You are willing to commit about 5-7 hours of time to set up the plan, and another few hours annually to do some basic administration.
- You have a trusted staff person who is organized and savvy with payroll and human resource issues who can assist with the ongoing maintenance of the plan.
- You are willing to pay the fee to a third party administrator to administer the plan; a fee that typically starts at about $2500 per year.
- You have several key employees who are asking for a plan, and/or you can use the plan to recruit talented people to join your team.
Do not consider offering a 401K if:
- You can only contribute a small amount for yourself and/or an employee spouse.
- You cannot afford to or do not care to make the required employer contributions for your employees
- Your employees have no interest in participating in a 401K and will not value the contributions you make on their behalf.
- You or a trusted staff person cannot handle the administrative and HR related work involved in maintaining the plan and keeping it compliant.
Every situation is different, so consult with an advisor about your specific circumstances. If you have any questions, feel free to contact our offices at 561-624-2118.
Schanel & Associates is a CPA firm specializing in accounting, tax, business valuation and litigation support serving Palm Beach, Martin and St. Lucie Counties and beyond since 1993. Our CPAs and accounting professionals work with individuals, businesses, estates and trusts to provide everything you need under one roof. For more information, contact us today at 561-624-2118.
Todd Schanel has been a principal at Schanel & Associates since 2004, where he specializes in financial planning, tax planning and consulting services. He also serves as Founding Principal and Director of Investment Advisory Services at Core Wealth Management, our sister company, where he leads an accomplished professional team offering independent and objective financial advice to help clients achieve their financial goals. Todd has been a CFA Charterholder since 2005, and in 2007 he earned his Certified Financial Planner® designation and became a licensed CPA. In 2015, he earned the Certified Valuation Analyst (CVA) designation.