A 401(k) program is one of the most common benefits that large companies offer. But often times, small companies seem to avoid 401(k) offerings for one reason or another. It may be perceived to be too expensive, risky, or confusing to be worth the effort.
Your company is at a disadvantage if it doesn't offer a 401(k). Even if you’re a small startup, you risk losing top talent if you don't offer a 401(k) to your employees. You aren’t required to match employee contributions. The benefit actually lies in creating a system so that employees have an account to begin saving for retirement. Without a 401(k) account, employees have to find another — potentially less lucrative — alternative.
Offering a 401(k) option helps your small business attract and retain top talent and helps your employees start saving for retirement. Basically, it’s a benefit to both you and your team.
We've built a guide on employee savings. Download it for free to learn just how and why employee savings programs work.
What is a 401(k)?
While most people know that a 401(k) is an account for employees saving for retirement, here’s a quick overview of how these plans work.
Get the down low on 401(k) and other employee savings.
A 401(k) is a retirement savings plan that an employer sets up for their employees. In a standard 401(k), employees can defer a portion of their paycheck, pre-tax, to the retirement savings plan. This way, savings are set aside before an employee can even start spending. Employers can opt to match a percentage of the employee’s contribution, helping them to save more and creating an incentive to do so.
Assuming the employee leaves their money in a retirement savings account, they don’t pay taxes on their savings until retirement, when the money is withdrawn.
A 401(k) is an important investment option to an employee. Its compounding growth is key to saving money for retirement. It can be offered at rather minimal costs to your company — especially if you don't offer a company match.
Clearly, 401(k) plans are a great benefit to your team. Here are our top reasons to offer a 401(k) as a small business.
Offering a 401(k) Attracts Top Talent
Offering a 401(k) can be helpful in your company’s recruiting efforts. Like it or not, many job seekers expect to see a 401(k) as a part of their benefits package.
For example, if you’re trying to recruit an exceptional engineer and one of your competitors offers 401(k), you may need to increase the salary offer in order to compete. If your company's 401(k) offering could be a dealbreaker for top talent, and is a low-cost benefit, it just makes sense to offer it.
In addition to the recruiting aspect, benefits like 401(k) also help with retention. Recruiting, employee turnover, and hiring all cost money that could partially be prevented by taking care of your team with great benefits.
You Can Save on Small Business Taxes
Small businesses under 100 employees may qualify for a special tax credit for offering a 401(k) to their employees. For the first three years, you could get a tax credit of up to $500 off per year for your company.
However, it doesn’t have to end there. Company matches, if you decide to offer them, are tax deductible. You are offering an additional benefit to your employee and lowering your tax obligations — it’s a win-win.
You Can Personally Benefit from a 401(k)
The third reason that you should offer a 401(k) has nothing to do with your employees and everything to do with you as its CEO or founder. You are likely taking a salary every year, and you likely have a significant amount of your net worth tied up in your business. That’s the entrepreneur’s gamble, and it’s one that many take willingly.
However, if you set up a 401(k) for your employees, you also get to enjoy the benefits of pre-tax contributions. You get to reduce the overall risk in your personal financial portfolio by having the added security of that 401(k) account in your back pocket.
A 401(k) is a Must
The reality is, employees expect a 401(k). And for top prospects, that benefit can be a deciding factor. Putting yourself at a disadvantage by not offering 401(k) when trying to recruit top talent will only hinder your business. The sooner employees start setting aside those funds, the stronger their retirement savings will be down the line.
The ability to write off 401(k) employer matching contributions on your company’s taxes offers savings that you can use to provide your employees with other perks and benefits. To top it off, if you enroll in the 401(k), you’ll save money both on a business and personal level.
Offering a 401(k) as a small business doesn’t have to be difficult. There are many companies that offer low-cost options. If you decide to work with Justworks, 401(k) is built right into our platform for your employees to access. When you opt in, we help with setup so the hard part is off your plate. Simply sit back and watch your employees grow their retirement savings.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.