Roth 401k for Small Business

I have recently opened my own pet boutique. Although I haven’t started drawing in many customers yet, I am sure that in the coming years I will be making a comfortable living from this business. Should I choose to set up a Roth 401k for my business instead of a traditional 401k plan? Elvia B. Allen, South Bend, IN 46625

Elvia, for a business like yours that is in a nascent stage but is sure to grow big in the years to come, a Roth 401k is definitely the better plan. This is because with the Roth you pay taxes now at the time of making contributions to the plan. That is, you contribute after tax dollars. In exchange you avoid paying tax at the time of withdrawing your funds. This is exactly the opposite of what happens with a traditional 401k. With this plan, you contribute pre-tax dollars and pay tax at withdrawal time.

If you believe that your business is likely to be generating more income in future, then you will probably fall in a higher tax bracket then than you do now. By making contributions to a Roth 401k you pay your current lower tax rates. At withdrawal time, you can avoid paying tax at the higher brackets that you may be in then. The net result of participating in a Roth program is that in total, less of your hard earned money will be going to theIRSin the form of taxes.

Look at a few DIY software packages to set up your Roth 401k. Some popular ones that offer several excellent features are listed on http://401k-network.com. You will find that using such packages lets you save significantly on set up and administration costs too.

More about Hardship Withdrawals

Should I allow a hardship withdrawal provision for my small business 401k? Can my employees withdraw funds from their 401k interim even if I do not specifically allow hardship withdrawals for the plan? Lisa C. Page, Providence, RI 02908

You definitely need to expressly allow hardship withdrawals for your employees to be able to withdraw funds in this way. If your plan document does not clearly state that such withdrawals are possible, your employees cannot use their 401k funds to meet financial emergencies. TheIRSleaves it entirely to your discretion whether you want to include this option in your plan or not.

Enabling such withdrawals makes it possible for employees to meet non reimbursable medical expenses that are due, buy their first home, pay off debts to avoid foreclosure or eviction or pay for a family member’s education. In fact, the funds in your employee’s 401k account can be used for such purposes for a spouse or dependent child too. It is a wonderful financial backup in event of a financial emergency. Your employees will surely appreciate if you do have a provision for hardship withdrawals included in your 401k plan documents.

Keeping track of such withdrawals is very critical because the employee who withdraws in this manner needs to adhere to certain conditions. For instance, if he is not over 59 ½ years old, he is liable to pay a 10% penalty from the withdrawal amount. Plus, the employee cannot contribute to the 401k for the following six months. Unless you are using a DIY software suite like http://401k-easy-online.com/ to manage your 401k, tracking withdrawals can pose problems.

Remember that the withdrawal is not a loan from the 401k and cannot be paid back. Make sure that your employees know that any withdrawals will permanently reduce their 401k balance. This should help them objectively decide when they should resort to this provision.

401k Catch Up Contributions

What are catch- up contributions to a 401k? Can my employees make such contributions to the small business 401k I offer? Katie D. Harris, Beaverton, OR 97005, manages a home furnishing outfit.

Catch up contributions are a means by which you or your employees can make up for starting your retirement planning late in life. Those people who failed to set aside some portion of their earnings through the early years of their career get a second chance for future financial security through catch up contributions. Employees above the age of 50 can make their catch up contributions into their 401k account. TheIRSallows them to make an ‘extra’ contribution over and above the maximum allowed by law for other participants.

What you should know as employer is that the ‘extra’ allowed by theIRSis dependent on the plan’s features and conditions. For example, a Simple 401k allows a much smaller ‘extra’ contribution than a traditional one does. Also, theIRS’s allowance for the extra contribution depends on whether or not your plan assumes additional contribution limits from your employees.

TheIRSmay change its own allowance for the extra contribution subject to fluctuations in the inflation index. If inflation rates are going through the roof then above 50 participants may be allowed to contribute a bigger sum in addition to the regular contributions.

One critical aspect for you to remember is that your employees can make catch up contributions to their account only if you have made provisions for this in your plan. The law does not require you to allow such contributions. This is a provision you make at your discretion if many of your employees request you to do so.

Adding this provision can show your employees that you prioritize their best interests. This will lead to better loyalty and improved employee morale in your business. Use a DIY package like http://401k-easy-online.com/ to make keeping track of various employee contributions easy. This package will help you manage the 401k funds and keep records updated with just a few minutes of work each month.

A 401k Summary Plan Description

What is a summary plan description and why should I have one for my 401k? Glenn A. Rivera, Harvey, IL 60426

Glenn, a summary plan description is the document that tells your employees about the 401k plan you offer for their benefit. This document has to explain the plan to the participant employees in a clear and comprehensive manner. You need this document to educate your employees about the 401k you are offering and to ensure that they do not sign up for participation harboring any misunderstandings.

The SPD generally covers the following aspects of the plan:

  • Eligibility criteria to participate in the plan- includes when and how employees become eligible
  • Information about contributions
  • Vesting schedule
  • How and when employees can start getting benefits
  • Process of filing claims for benefits
  • Withdrawal/ loan eligibility, process and interest rates
  • Rollover procedures
  • Description of the employee’s rights and responsibilities with respect to the plan as specified by the ERISA
  • The expenses that will be incurred and paid by the plan

Every employee participant should be given a copy of the plan’s SPD. You also need to ensure that the SPD is given out at periodic intervals to all employees of your business. The employees will also receive a copy when they start getting their first benefits from the plan.

The SPD is different from the 401k’s plan document. While the SPD contains a brief outline of the plan’s key features, the plan document is a long winded full description of the plan. Consider the SPD a reference document for your employees when they need to clarify a doubt about a 401k feature, process or a procedure.

A clearly written SPD is a very helpful document for your employees because it acquaints them with the basics of your 401k. Once they have read and understood this document they can easily track and manage their 401k plan with a DIY plan like http://401k-easy-online.com/.

Nondiscrimination Testing with 401k Plans

I want to set up a 401k plan for my auto parts shop. Do I need to ensure that it complies with the nondiscrimination regulations year after year? Michael P. Ladd, Oklahoma City, OK 

A 401k plan is a retirement benefit plan that was created with the intent of allowing employees to save in an effective manner for their future. The many benefits and tax advantages offered with these plans are all established in line with this objective. This is also the reason why the government insists that these plans are offered to all employees irrespective of their position within your business or the total compensation they earn.

To get all the tax benefits that a 401k plan offers to participants, it should give benefits to all employees, including the rank and file staff. A plan that only benefits the business owner or top level management fails to pass theIRS’s non discrimination test. This test compares the plan’s participation as well as contributions made by rank and file employees with those of top level employees and the owner/ management.

Annual testing is mandatory for all regular/ traditional 401k plans to verify that they are non discriminatory. Through this testing it is verified whether the contributions made on behalf of rank and file employees is in proportion with that made for the top brass of your business.

If you want to avoid getting into the testing and verification loop then aSafeHarbor401k is the right 401k plan for your business.SafeHarborplans are exempt from the annual non discrimination testing that is required for the other 401k types. This plan has some inbuilt features that ensures that all employees are given equitable treatment when it comes to contributions.

Talk to an investment advisor to know more about Safe Harbor 401ks and the advantages they offer for your business. If you will be using a DIY 401k package like http://401keasyonline.com/, you can browse through their website or ask their support staff for help on setting up and managing aSafeHarbor plan.

Nondiscrimination Testing with 401k Plans

I want to set up a 401k plan for my auto parts shop. Do I need to ensure that it complies with the nondiscrimination regulations year after year? Michael P. Ladd, Oklahoma City, OK

A 401k plan is a retirement benefit plan that was created with the intent of allowing employees to save in an effective manner for their future. The many benefits and tax advantages offered with these plans are all established in line with this objective. This is also the reason why the government insists that these plans are offered to all employees irrespective of their position within your business or the total compensation they earn.

To get all the tax benefits that a 401k plan offers to participants, it should give benefits to all employees, including the rank and file staff. A plan that only benefits the business owner or top level management fails to pass the IRS’s non discrimination test. This test compares the plan’s participation as well as contributions made by rank and file employees with those of top level employees and the owner/ management.

Annual testing is mandatory for all regular/ traditional 401k plans to verify that they are non discriminatory. Through this testing it is verified whether the contributions made on behalf of rank and file employees is in proportion with that made for the top brass of your business.

If you want to avoid getting into the testing and verification loop then a Safe Harbor 401k is the right 401k plan for your business. Safe Harbor plans are exempt from the annual non discrimination testing that is required for the other 401k types. This plan has some inbuilt features that ensures that all employees are given equitable treatment when it comes to contributions.

Talk to an investment advisor to know more about Safe Harbor 401ks and the advantages they offer for your business. If you will be using a DIY 401k package like http://401keasyonline.com/, you can browse through their website or ask their support staff for help on setting up and managing a Safe Harbor plan.

Safe Harbor 401k

Should I set up a Safe Harbor 401k plan for my employees? Is this a better option than other 401k types and why? – Larry E. Davis, Newark, NJ, runs a ready- to- eat foods business.

A Safe Harbor 401k plan was introduced to the American public as a retirement savings plan that was simpler than the regular plans available to employees. The safe harbor plan lets employers meet the non discrimination requirements for retirement benefit plans in a much easier way. A highly compensated employee gets the same treatment as one who is lower on the salary scale with this kind of 401k plan. This is definitely in the interests of your employees because they need not fear any unfair distribution of employer contributions.

With a Safe Harbor 401k all your employer contributions are vested with immediate effect. You are required to keep the employees informed of their rights as regard this plan at all times. In short, a 401k plan is a more equitable and highly transparent retirement savings plan. This is one main reason why employees prefer this kind of plan.

If you set up this kind of plan for your business, you can match every eligible employee’s contribution fully up to a maximum of 3% of his total compensation. Beyond this max limit, you can match his contribution 50 cents to every dollar up to 5% of his total compensation. Otherwise you can opt for a 3% non elective contribution to all eligible employees. Keeping track of the employees contributions and your matching inputs can become a very complex task unless you are using a DIY package. Choose a fully featured 401k software package like http://401keasyonline.com/ that has the advantage of a budget price to keep your overall costs well within your means.

Non-Elective contributions and Matching Contributions

What is the difference between non-elective contributions and matching contributions to my employees’ 401k plan? How does either affect me, the employer? Richard E. Simpson, Brooklyn, NY owns a bookstore.

Learning the difference between non-elective contributions and employee match contributions is one of the most important first steps when you have decided to set up a 401k plan for your small business’ employees. These are the two ways in which you, the employer, can choose to make contributions to your employees’ retirement savings plan.

When you decide to contribute a percentage of every employee’s salary to his 401k, you are making a non elective contribution. For example, you may choose to make a non elective contribution of 30%, which means for every dollar from the employee you contribute an additional 30 cents. Remember that non-elective contributions have to be made to an eligible employee’s account even if he does not make any contribution from his side to the 401k.

A matching contribution is a better way to encourage employees to start saving for their future. Here, you contribute as much as your employee does to his 401k account. If your employee defers a specific amount from his salary into the retirement planning account, you match his contribution.

The IRS allows you to make both kinds of contributions simultaneously for your 401k plan too. Of course, you will need to read up on current tax law stipulations before you can determine exactly in what manner and how much to contribute. A traditional 401k plan can also be modified with respect to the amount that you will contribute as an employer. If your business is going through a bad patch you can minimize your contributions, if necessary.

Choosing an IRS compliant 401k suite like http://401keasyonline.com is a great advantage if you find it difficult to keep track of the various legal guidelines and regulations. Such a package keeps your 401k plan perfectly aligned with the currently applicable legalities.

Self Directed Brokerage Accounts

My employees want me to set up a 401k self directed brokerage account. What are the special advantages of such plans?- Edward L. Pittman, KensingtonKS runs a confectionary shop.

A Self Directed 401k plan gives the employee a great deal of control over his investments. Each of your employees is likely to have different investment objectives. An ideal 401k plan is one where each can decide where to invest and also manage investments individually. When you offer them a self directed 401k plan that has a whole host of low cost investments, retirement planning becomes easy for them. With such a plan every employee can optimally use the 401k plan to save the maximum amount in the investments that are best suited to his needs. This is probably why your employees want you to set up a self directed 401k brokerage account in your business.

You can open such an account with firms like Charles Schwab or Fidelity using a DIY software package like http://401k-easy.com. Such packages allow the employee to manage and track his retirement planning account on his own. This specific 401k plan lets your employees invest in several attractive investments other than those offered directly by Schwab.

For you, the employer, a self directed 401k plan is a good money saver. This is because you can process all the data pertaining to the plan within your organization. You avoid incurring the cost of hiring a plan administrator to take care of the plan’s assets and to manage the plan.

In addition, by offering a plan that gives employees this degree of control over their retirement saving, you can improve employee loyalty. A flexible 401k plan with a good choice of investments makes your business a desirable employer. This means that this plan will help attract the best talent in the market to your business.

Converting Your Existing Plan to a DIY 401k Software Suite

I set up a 401k plan for my small business a few years back. I am not satisfied with the investment options offered by my vendor. Can I change over to a DIY plan that gives me greater control? Glen N. Ethridge, New York, runs an office renovation business.

Sure, Glen, you can change over to a 401k plan that gives you greater control and better investment choices. In fact, if you sign up for a DIY package like http://401k-easy.com/, the conversion should not take more than a few days at best. Plus it is entirely free of cost. There may be many reasons for you to convert to a better plan that:

  • Offers more investment options
  • Is easier to track
  • Simple and quick to set up
  • Is cost effective
  • Can be used with ease by your employees

If you have made up your mind to change over to a DIY 401k plan then make sure all of the above are satisfied by your new one. Many small businesses save substantial sums of money (some businesses save up to 90%) every year simply by switching to an easy to administer and low cost plan like this one.

Another important feature to look for is whether the new plan still lets you go with your existing investment options. Although your new 401k may have a number of attractive no-load mutual funds on offer, some of your employees may want to stick to their existing investments. Your new plan should allow them to do so.

Also ensure that your new 401k suite makes the overall plan administration easy for you by automating many of the processes you are currently doing on your own. This lets you save much of the effort and time that a 401k plan usually requires you to invest.