Most small business owners that start a 401(k) plan opt for a special design called a Safe Harbor 401(k). The Safe Harbor enables small-business owners and any highly compensated employees to make the maximum contribution ($17,000 for those under 50 years of age; $22,500 if 50+) either tax-deferred or after tax in the Roth 401(k) regardless of income in 2012 and on-going.This can be a big personal tax break for owners and employees that choose to participate alike. An owner in the 25% tax bracket who contributes the $17,000 max tax-deferred would save $4,250 in taxes for 2012 – four to eight times more than what the plan costs to setup.
And there is more good news. Businesses with less than 100 employees who are starting their first 401(k) qualify for up to a $500 tax credit each year for the first three years the plan is in place. This helps offset administrative costs from providers that typically run between $1,000 and $2,000 a year. Also, employee matching is tax deductible for the business.
To take advantage of these generous tax incentives, the safe harbor does require employers to provide a nominal match to employees. The match satisfies the safe harbor and automatically satisfies IRS non-discrimination testing so any employee can max out contributions. While there are 401(k) options that do not require a match, restrictions on contributions may apply.
Many small business owners are afraid to invest in the equity markets, given the past volatility and uncertainty. This is a mistake and explains why many people lose money in the equity markets. In a retirement plan you must think long term.
Please comment or call to discuss how you business can benefit from a 401(k) plan.