The simple 401(k) plan for small businesses
401(k) plans are a popular option for small businesses because of the flexibility they offer.
With Simply Retirement by Principal®, you’ll get that flexibility and more. Our 401(k) plan solution is designed to make plan management easy for you while providing a way for your employees to save for their retirement.
Why consider a 401(k) plan?
A 401(k) plan is a valuable employee benefit that can help you recruit and retain top talent. It’s also an effective way to help your employees save for the future.
What’s a 401(k) plan?
401(k) plans allow employees to set aside a portion of their compensation. Business owners can make contributions to the employees' retirement plans.
Normally, a 401(k) plan is designed to help employees maximize their retirement savings by deferring the payment of income taxes until they withdraw the money in retirement. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don’t have to pay taxes when they withdraw the money as long as distribution requirements are met.
A 401(k) plan offers the flexibility to design a plan with:
- Tax benefits for your business and your employees
- Pre-tax salary deferrals
- Profit sharing with the option to offer matching contributions
- The option for your employees to request a loan from their 401(k) plan balance
- Convenient automatic payroll deductions for employee contributions
Tax credits are available for small businesses just starting a new retirement plan.
SECURE 2.0 Act legislation could help offset some of your plan start-up costs.
The SECURE 2.0 Act allows small businesses with no more than 50 employees to claim a tax credit of 100% of the qualifying start-up costs for a new employee retirement plan (up to $5,000 per tax year for the first three years*). SECURE Act of 2019 allows a tax credit of 50% of the qualifying start-up costs for a new employee retirement plan for 3 years if the employer has 51-100 employees (maximum $5,000 a year).
There’s also an extra tax credit for 5 years of up to $1,000 per employee a year for employer contributions made if employers have no more than 50 employees. For employers with more than 51-100 employees, the credit is reduced by 2% for each employee in excess of 50. Under SECURE of 2019, an employer may also be eligible to claim up to $500 tax credit for including an eligible automatic contribution arrangement, of the Simply Retirement by Principal® 401(k) plan. Plus, matching contributions you make to employee retirement accounts as noted above can be tax-deductible. For example, a company with 25 employees can see the 2022 plan start-up fee change from $2,200 per year to potentially offset the expenses by 100% with tax credits. See your tax advisor for guidance on how these credits may apply.
Advantages of a Simply Retirement by Principal® 401(k) plan
Consistent flat fee
Business owners pay the same flat recordkeeping fee, so you don’t have to worry about pricing that goes up as your plan assets grow or wonder if you’re getting the same rate as others.
Completely online
You can make all of your plan design selections, sign forms, add employees, and manage contributions in one central online location—when and where it’s convenient for you. And if you have questions, help is just a phone call away.
Payroll provider integration
Ubiquity Retirement + Savings® supports integrations with select payroll providers like Paychex, ADP, and QuickBooks, helping business owners save time and reduce errors by automating contribution reporting.
How does a 401(k) plan compare to other retirement plans?
If you’re looking for a workplace retirement plan, a 401(k) plan isn’t your only option. See how it compares to other plan types below. This is just an overview, so talk to your financial professional if you’d like more details about each plan option and how they might fit your needs.
401(k) plans allow employees to set aside a portion of their compensation and also allow business owners to make contributions to the employee’s retirement plan if they choose. Loans can be allowed, providing flexibility for employees. Normally, a 401(k) is designed to help employees save for their retirement where they won't pay taxes until they withdraw the money in retirement. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don't have to pay taxes when they withdraw the money as long as distribution requirements are met.
A 403(b) plan is like a 401(k) plan; however, 403(b) plans are used by tax-exempt businesses, religious organizations, school districts, and governmental organizations. The law allows these organizations to be exempt from certain administrative processes that apply to 401(k) plans.
A Simplified Employee Pension (SEP) Individual Retirement Account (IRA) allows self-employed individuals or small business owners to save toward retirement. Business owners who have employees are required to contribute on the employee’s behalf.
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a simpler version of a 401(k) plan that works like a traditional IRA (Individual Retirement Account). Business owners are required to contribute to the plan, regardless of the employee participation and participant loans are not available. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don't have to pay taxes when they withdraw the money.
A defined benefit (or pension) plan is a form of retirement plan in which the business owner sets aside money for their employee while they are working to provide them with guaranteed monthly income in retirement. Money will then be paid out to the employee, usually on a monthly basis, after they have retired. Employees cannot contribute additional money. A formula is used to determine how much the business owner will contribute to a pension plan.
A 403(b) plan is only available to:
- Employees of tax-exempt organizations established under section 501(c)(3)
- Employees of public school systems who are involved in the day-to-day operations of a school
- Employees of cooperative hospital service organizations
- Civilian faculty and staff of the Uniformed Services University of the Health Sciences
- Employees of public school systems organized by Indian tribal governments
- Certain ministers (see irs.gov for criteria)
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This allows employees to defer paying income taxes until they start to withdraw the money in retirement. This also lowers their taxable income for their current payroll.
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This allows employees to pay income taxes now and not when they start to withdraw the money in retirement as long as distribution requirements are met. This could be beneficial if your employee expects to have a higher monthly income during retirement.
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There is a minimum amount that your business would be required to contribute to your employees’ retirement.
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Safe harbor is just a type of 401(k) plan that allows you to bypass some of the compliance testing required by the IRS to make sure the plan is fair. In return, you’re required to help your employees save for retirement by making matching contributions to their 401(k) accounts. With safe harbor, you’ll contribute more money, but there’s less paperwork and administrative hassle. With a non-safe harbor plan, you have the option to contribute less, but you can’t bypass compliance testing required by the IRS. For more details, check out our safe harbor resource page.
*Eligible employees must be notified prior to plan start date.
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A loan provides the ability to withdraw funds from your retirement account early but it will need to be paid back based on plan terms. Money is taxed again when withdrawn in retirement, so those who take out a loan are subjecting themselves to double taxation.
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A hardship withdrawal is an emergency withdrawal of funds from a retirement plan due to what the IRS calls “an immediate and heavy financial need.” There are certain criteria for why the funds are needed and their amount in order to avoid penalty, but, even if penalties are waived, the withdrawal will still be subject to standard income tax.
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A vesting schedule is the time frame it takes for employees to own the assets that a business owner contributes to the employee's retirement plan. This is determined by the business owner and may be used as a retainment incentive.
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Automatic enrollment is a plan provision which automatically enrolls participants into the retirement plan at a specified pre-tax salary deferral percentage. This can help increase participation, simplify administration, and help employees save for retirement. Participants in the Simply Retirement by Principal® 401(k) plan are automatically enrolled, but can change their contribution details or opt out at any time.
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A rollover is when you transfer the money in your retirement account to a new plan or IRA. The IRS gives you 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. You’re allowed only one rollover per 12-month period from the same IRA. This one-rollover-per-IRA limit doesn’t apply to plan-to-plan rollovers and some other types of rollovers.
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Any acceptable investment under the plan
Any acceptable investment under the plan
Only mutual funds and annuities
Individual stocks, bonds, mutual funds, ETFs, and others
Individual stocks, bonds, mutual funds, ETFs, and others
Any acceptable investment under the plan
*Up to $5,000 per tax year for the first three years:50% of the qualified startup costs paid or incurred, but limited to the greater of (1) $500 or (2) the lesser of (a) $250 for each non-highly compensated employee who is eligible to participate in the plan or (b) $5,000. Qualified startup costs (1) In general “qualified startup costs” is ordinary and necessary expenses of an eligible employer which are paid or incurred in connection with – the establishment or administration of an eligible employer plan, or (ii) the retirement-related education of employees with respect to such plan. (2) Plan must have at least 1 participant: would not apply if plan does not have at least 1 employee eligible to participate who is not a highly compensated employee. Information about the SECURE 2.0 Act is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other financial professionals on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
*Automatic enrollment: Automatic enrollment is a plan provision which automatically enrolls participants into the retirement plan at a specified pre-tax salary deferral percentage. This can help increase participation, simplify administration, and help employees save for retirement. Participants in the Simply Retirement by Principal® 401(k) plan are automatically enrolled, but can change their contribution details or opt out at any time. This credit is for plans that include the eligible automatic contribution arrangement (EACA) feature only.
*19,500: Up to $30,500 for employees age 50 or older. Amounts are for the 2024 tax year.
*19,500: Up to $30,500 for employees age 50 or older. Amounts are for the 2024 tax year.
*19,500: Up to $30,500 for employees age 50 or older. Amounts are for the 2024 tax year.
*13,500: Up to $19,500 for employees age 50 or older; can’t exceed 100% of compensation. Amount is for the 2024 tax year.
Start-up tax credit modification: Small employers with 50 or fewer employees may apply 100% of qualified start-up costs towards the tax credit formula (up to $5,000 per year).
New tax credit for start-up plans offering employer contributions: A tax credit equal to the applicable percentage of employer contributions, capped at a maximum of $1,000 per employee.
- Applicable to small employers with 50 or fewer employees.
- For employees with 51-100 employees: The credit is phased out by reducing the amount of credit each year 2% for each employee in excess of 50.
1st and 2nd year = 100%, 3rd year = 75%, 4th year = 50%, 5th year = 25%, 6th year = 0%
No contributions may be counted for employees with wages in excess of $100,000 (inflation adjusted). If taking advantage of this tax credit, employer contributions may not also be counted towards “start-up costs” in the start-up tax credit calculation.
*Eligible automatic contribution arrangement: The SECURE 2.0 Act of 2019 provided an automatic enrollment one-time tax credit possible to be up to $500 per tax year for each year of the 3-taxable-year period beginning with the first taxable year for which the employer includes an eligible automatic contribution arrangement. This credit is for plans that include the eligible automatic contribution arrangement (EACA) feature only. Information about the SECURE Acts is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other financial professionals on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
