SBO 401K for Partnership Businesses: Easy Method of Making Retirement Contributions

I run a small business partnership with two others. Am I limited to the SIMPLE IRA for retirement planning or is there any 401k plan that I can go for?Chris Epperson, Arkansas

A SIMPLE IRA is a good retirement plan for your business if you have employees who meet eligibility requirements that you have set for your company sponsored retirement plans. For example, consider that in addition to your business partners, you also have employees who are employed with your business for 5 years and are above 21 years of age. Then you have to make the retirement plan available to them as well.

If your business does not employ any more people other than yourself and your partners, then you have yet another option open to you- the SBO 401k. The SBO 401k or Small Business Owner 401K is a retirement plan especially designed for business owners like you who do not have other employees who qualify for the plan. You and your partners are considered business owners for the purpose of the plan, irrespective of the terms of your partnership.

You can make contributions from your salary to this 401k plan as well as opt for a profit sharing contribution. That is, a part of the salary you draw from your business in your capacity as partner is deposited into the account. In addition, a predetermined portion of the profits is also added in lieu of the ‘employer contribution’ that is made with regular 401ks.

The best part about SBO 401ks is that it is easy to set up the plan, administer it, and track the deposits and withdrawals you make from it. There are several options you can choose for online DIY SBO 401ks but make sure that you partner with a reliable provider like The software that this site provides helps you manage the plan easily, conveniently and quickly. This package is adaptable and flexible too, allowing you to choose from a range of investment options to park your 401k funds in.

Types of 401k Plans for Small Businesses

I know about the traditional 401k plan. Are there other kinds I can choose for my small business? – Della Freeman, Texas

There are actually three kinds of 401k plans you can choose from if you want to set up a retirement plan for your small business. Here’s a brief overview of your options:

The traditional 401k is the most flexible among the three without doubt. As the employer, you choose if you want to make contributions towards every employee or match employee contributions. You can have a clause in your traditional 401k plan outline describing the vesting schedule you want for the contributions. Overall, this plan gives you much more control than the other two over how you and your employees make contributions.

A safe harbor 401k is the second type of retirement plan you can choose for your small business. Employer contributions are mandatory with these plans. You have to put in a certain level of contribution towards these plans for your employees. There is a variant of this plan you can opt for- the DASH or double advantage safe harbor 401k. With this plan, you add a profit sharing plan to your 401k that makes it interesting for your employee. The bigger tax benefits make it attractive for your business.

An automatic enrollment 401k is the third option you can choose. Every employee is automatically a participant in the plan and deductions are made directly from his/her paycheck every month and go right away into the 401k. You select default investments for your employees. But, you have the liberty to change the preferences if you so choose. This gives you enough flexibility with your contribution to ensure continued participation.

If you already have a 401k in place you can simply switch to one of these options by making use of a 401k software suite like the one offered by With this kind of package you can take care of all the administration and tracking that is needed to be done with 401ks easily and quickly.

Using Matching Contributions to Increase 401k Participation

How Do I Use Matching Contributions to Encourage My Employees to Participate in the 401k Program? – James W. Medlock, San Diego, CA

The best thing about 401ks is the fact that other than the contribution made by the employee for his future saving, he gets a little extra in the form of employer contributions. Advertising this fact to your employees can interest them into voluntarily making their own contributions to your small business 401k plan. After all, your employer contribution is based on what the employee contributes from his or her own salary.

Typically, most employers specify the percentage of the employee contribution that will be deposited into the 401k plan as matching contribution from the business. Some employers also opt to have a profit sharing contribution in addition to this. If you want to encourage employees who show promise or who put in extra effort for your business, a profit sharing contribution is a great way to do it. This is because this kind of matching contribution lets you use your discretion in rewarding employees. Many small businesses use this as a means to improve productivity and motivate promising employees to excel.

If you are hesitant to add a profit sharing feature to your 401k because this will give rise to complexities in managing the contributions made by you and your employee, you can leave these worries behind. All you have to do is choose a ready to deploy 401k management package like the one offered by With this package you can set up the plan quickly and also administer it by spending just a few minutes a month.

Tax Advantage of 401k Plans

I run a quite successful burger joint and employ around 20 people. Does having a 401k Plan for my employees really give my business a tax advantage? Please advise. – Jack McAdams, Restaurant Owner, Phoenix

401k plans aren’t just a wonderful opportunity for the employees of a business to save for their retired lives. They also let the business owner save money by offering many tax advantages. Otherwise, few business would be encouraged to set up a 401k plan for their employees, let alone make contributions to match theirs!

The tax benefits you get from setting up and managing a 401k plan for your small business employees can have a significant positive impact on your total payables to the IRS. There are two distinct advantages to consider. First, your business’ first 401k plan gets a $500 IRS tax credit every year for three years if you employ less than 100 people and have costs over $1000. Second, any contributions that you make to your employee plans are deductible for your business. Deductible employer contributions include both employee contribution matching as well as profit sharing contributions.

If your business employs only you and your spouse then you may qualify for tax deferred contributions. That means your contributions are not taxed when you make them but only when you withdraw them from the plan. Best part is, this means that your taxable income is reduced by the chunk of your paycheck that you pay into your 401k. Tax savings plus secure finances for your retirement- isn’t that a great combination?

If doubts about the tax advantage have been keeping you from setting up a 401k plan for your small business, then you have been missing out on a great tax saving tool. Sign up with a 401K plan center like and you will have your own retirement planning account set up in no time at all so that you can start saving money right away.

Encouraging Employee Participation in 401k Plans

How can I get more employees from my company (a print shop with 3 branches) to participate in a 401k Plan? – Tom Miller, Print Shop Company Owner, Philadelphia

Getting employees to make contributions to a 401k plan is a tougher job than it seems. After all, you would think that asking them to save now to secure their future should be real easy. But often, the thought that a part of their paycheck will not be available for immediate expenses puts them off from participating in such plans. Auto enrollment 401k plans are your best bet if you want to set up a retirement plan for your small business that encourages employee participation. Managing the plan itself takes just a few minutes of your time if you choose to go with a customized DIY 401k software like the one offered by

Every employee is automatically enrolled in an auto enrollment 401k plan and you simply divert a portion of his/ her salary into the plan from every paycheck. Remember that the employee does have the option to choose a different contribution percentage or to even opt out of the plan. But, you will find that once he starts making an ‘enforced’ contribution, he quickly realizes that saving is not so tough after all and often, voluntarily starts making bigger contributions if possible.

As the 401k provider/ owner of the small business, it is up to you to tell all employees about the plan, how they stand to gain from it and to promote the fact that their savings will be magnified by your matching contributions. Draw up a detailed 401k plan document that is circulated to all new employees telling them all they need to know about the automatic enrollment 401k. Don’t forget to mention the tax benefits they will get from their plan participation.

Remember that not all employees may be able or willing to contribute to the plan. For instance, some may already be contributing to an IRA, in which case, a second deduction from their pay check may not be affordable. Employees who haven’t completed one full year in your organization are not eligible either.

Setting Up Automatic Enrollment 401k Plans

How do I set up an auto enrollment 401k plan for my small business? – Julian McNamara, Auto Parts Dealer, New Jersey

Setting up an auto enrollment 401k plan for your small business is not a complex task at all, unlike what many small business owners think. You can set it up yourself or get a financial institution (bank, mutual fund, insurance company) to do it for you. The advantage of getting an institution to do it for you is that the plan will be maintained on your behalf by them.

If you want to do it yourself, then using a 401k software package is the easiest way to go about setting up your own plan. You will find versatile software at that is not just easy to use, but also very adaptable so that you can continue to use the same software even as your business grows and more employees are added to your rolls.

The first steps to setting up this kind of auto enrollment 401k plan for your small business are as follows:

  • Get the plan document drawn up
  • Set up a trust fund that will take care of the assets that will form part of your 401K
  • Set up the records and record maintenance systems to keep track of contributions and withdrawals from the 401K (check the provisions for this in your 401k software before you start)
  • Once the plan is set up, tell your employees about eligibility criteria, contribution requirements, your matching contributions, withdrawal details etc

Make sure that when you set up your 401K plan for your small business, your employees have enough investment options to choose from. This makes the plan truly attractive for the varying investment temperaments that different employees are bound to have. If you are using a 401k software to manage your plan, then check if it enables investment in various avenues.

Taking Loans from a Solo 401k

I run my own florist’s shop where the only employee is my wife. Can I set up a Solo 401k plan for my business that I can take a loan from in future? I do hire some help occasionally but have no other full time employees as of now.- Herman F. Stout, Pullman, WA 99163 

Businesses like yours that do not employ full time employees can set up a Solo 401k or Self Employed 401k, as it is also called. The fact that your wife is a full time employee does not prevent you from opening this retirement benefit plan. To all intents and purposes, the IRS considers your wife as a partner in your business rather than an actual employee.

You can take a loan from this account at a future date if you have a financial emergency. There are some stipulations and restrictions regarding taking loans in this way. A most important one is that you have to limit your loan to half of your account balance in the 401k account. Plus, the total loan should not exceed $50,000. When you repay the loan, the money goes back into the account and so does any interest you pay on the loan. In effect, through the Solo 401k loan you give yourself a loan and pay yourself back too.

Making sure that you do repay on time is very critical because you would end up paying penalties otherwise. If you fail to follow the loan repayment terms you may even end up paying tax on the amount you have withdrawn. A good way to keep track of your loan is to use a DIY 401k suite like With this software package it is an easy task to view your account status, get monthly statements as well as manage the account by just investing a few minutes of your time every month.