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May 22nd, 2011 admin

401k Business

 

Providing benefits like a 401k retirement plan enables small businesses to compete for and retain high quality employees who might otherwise be tempted to seek careers in larger industries. Small business 401k plans were designed by the federal government to provide greater financial security for entrepreneurs and employees at retirement. Enterprises owned by self-employed minorities, veterans, and women usually lack sufficient capital, credit, or financial backing to provide employee pensions and benefits. But a tax-advantaged retirement fund allows individual entrepreneurs and workers to pool resources to provide monies in the form of tax-free contributions. Any employee over the age of 21 is qualified to enroll. The federal government prohibits discriminating against employees who are close to pension age, but participants who enroll as young adults make the smartest move to secure a stable income for the future. Contributions have decades to accumulate and benefits from prudent investments have ample opportunity to accrue.

A 401k retirement plan is basically a corporate savings account into which workers and business owners make regular deposits, or contributions, which are not pre-taxed. Contributions are held in trust and managed by a trustee who ensures that assets are protected until distributions can be made to participants or beneficiaries — either at retirement, termination, or death. Monies deposited into a defined contribution fund can be invested in stocks, mutual funds, or other profit-making ventures to provide an opportunity for participants to realize added benefits, or returns, on annual contributions. Individuals, who could never amass sufficient cash alone, reap the rewards of collectively contributing funds into retirement. The small business 401k plan is actually a Biblical principle in action. In Acts 2:44-45, early New Testament church members pooled individual resources for the common good: “And all that believed were together, and had all things common; And sold their possessions and goods, and parted them to all men, as every man had need.”

Before deciding to operate a 401k retirement plan, entrepreneurs should consult a professional financial planner, banker, or insurance company to determine what type of plan best suits employer needs. Businesses of any size may qualify to operate a traditional plan, which can be included with other employee incentives to offer a more attractive benefits package. A well-thought-out, written document should outline how contributions will be made, specify the kind of plan to implement, and detail the procedure for keeping employees informed. A traditional 401k gives business owners the right to choose from three methods of making contributions. A SIMPLE 401k is best suited for employers with less than 100 employees who earn a minimum of $5,000 in the preceding year. However, the drawback to operating a SIMPLE plan is that it prohibits employees from receiving any contributions or assets from other employer-provided pensions. The third type, called a safe harbor, operates like a traditional 401k, but employer contributions must be fully vested when made. In other words, employees are entitled to all contributions made upon termination and contributions cannot be forfeited.

Depending upon the kind of plan a business owner chooses to operate, employers may make contributions that match each dollar paid in by employees; or they may choose to make contributions totaling as much as 3% of each employees wages. A third option for entrepreneurs is to make contributions which are a combination of employer-matched funds and employee wage percentages. Employee contributions are usually payroll deductible and are not taxed until distributions are made. A small business 401k plan qualifies employers for tax deductions, but limits the amount of contributions employers and employees can make in any given year. Pre-tax contribution limits for 2008 are $15,500 for individuals under 50 years of age and $15,500, plus $5,000 catch-up, for those over 50. To get the most out of a 401k retirement plan, individuals should strive to contribute the maximum money allowed by law each year.

A tax-advantaged pension must be operated according to stringent Internal Revenue Services (IRS) regulations. Workers and business owners must be given an accurate accounting of assets held in trust as documented proof that participants investments and earnings are properly managed. Vital to the efficient operation of the small business 401k plan is the selection of a qualified trustee and/or administrator. Trustees, fiduciary administrators, or accounting personnel should all be bonded to avoid fraud or embezzlement. Integrity and accountability are paramount when handling monies participants faithfully save and depend on for a comfortable retirement. A trustee will handle making prudent investments of contributions and assets, preparing and filing annual reports with the federal government, and distributing benefits to participants. Human Resource directors are usually charged with the responsibility of disclosing a summary plan description (SPD) to new employees, which outlines requirements of enrollment and the benefits of participation.

Operating a 401k requires considerable fiduciary housekeeping, and it can easily become a full time occupation. Small business owners may want to consider hiring an onsite professional financial manager or accountant to oversee the day-to-day administrative duties of the 401k. The owners lending institution or banker may also be helpful in establishing, implementing and overseeing the 401k retirement plan. Most importantly, all contributing employees, regardless of age or amount of contribution, must be treated fairly. Federally-mandated non-discrimination testing policies must be implemented annually to ensure that employers and employees benefit proportionately to respective contributions. A tax-advantaged pension is not designed to benefit the wealthy business owner at the employers expense, or vice versa. If business owners and workers faithfully contribute to the small business 401k plan, everyone can enjoy a comfortable and lucrative retirement.

About the Author

Mr Bappy is expert analytical person in 401k working Business. He special on Distributions.
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