Because people who exit their working years without the money needed to sustain themselves can place a strain on government resources, businesses are given incentives to provide these coveted benefits. Therefore, small businesses have two reasons to provide 401(k)s.
About 401(k) Plans
According to the IRS, “a 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.”
Basically, employees can have a predetermined amount of their salary taken out of their check and placed into a tax-exempt account, which either bears interest or contains investments. In many cases, the employer matches a portion of the employees’ contributions.
Why Offer a 401(k)?
According to the United States Dept. of Labor, 401(k) plans can help employers attract the best employees. It also affords businesses a tax deduction if they decide to contribute to their employers’ plans. It may also relieve your business of administrative pressure by allowing employees to take their plans with them if they leave the company.
Establishing a 401(k)
In order to set up a retirement plan for their employees, a business must take four steps.
1. First, they must adopt a written plan.
2. Next, they have to establish a trust for the plan’s assets.
3. Next, they have to establish a system for keeping records
4. Finally, they have to provide plan information to eligible employees.
Educate Your Employees
Don’t presume that employees are educated on retirement planning. Provide them with literature that explains the basics of tax incentives, employee matching and basic strategies. This may involve telling them that younger employees should contribute as much as they can afford or how older employees can benefit from catch-up rules.
As the following article shows, advise your workers to use a retirement calculator to determinate a course of action depending on what they already have saved.
Setting up 401(k) retirement funds for your employees is a complicated affair that involves a range of tax issues, legal issues and governmental regulations. But the basic premise is simple. 401(k) plans are excellent benefits to offer employees because it gives them a simple, tax-free vehicle to engage in the important, yet often neglected task of saving for retirement. Tax incentives are given to businesses that offer retirement accounts because it benefits the government and society in general to have self-sufficient, comfortable retirees.
Good for you, good for your workers, good for the government—everyone wins.
Author: Andrew Lisa is a freelance business writer. He covers retirement funds and stock investing.