Recommending or offering 401(k) plans to small business clients can help expand your business.
Eligible 401(k) plans offer meaningful tax advantages to small businesses.
There are many components to a 401(k) plan, and it’s important to know, beyond affordability, what a good 401(k) provider should offer.
While accountants are tax pros, many are not necessarily retirement specialists. Nonetheless, as an accountant, you may have small business clients asking for 401(k) advice or about other types of retirement plans.
Being able to answer questions or offer retirement plans is a valuable service that accountants can provide your clients. This can help your clients save on taxes and attract and retain employees—while expanding your billable services. Perhaps you’ve even thought about offering retirement plans to these clients, particularly since these plans can offer meaningful tax advantages to both employers and employees.
We’ll take a look at what accountants need to know about 401(k) plans to provide reliable advice or offer 401(k)s as an option for your small business clients.
The tax advantages of a 401(k)
Accountants are likely familiar with the tax benefits and contribution limits of 401(k) plans, but there’s a lot more to know, especially if the goal is to help your clients actually select a retirement plan. Before we get to an overview of 401(k) plans for small businesses, let’s review the 401(k) tax advantages for small business clients.
Small employers may be eligible for several tax credits when they set up a retirement plan: the startup credit, employer contribution credit, and an automatic enrollment (auto-enroll) credit. In addition, businesses may be able to take a deduction for employer contributions.
Startup tax credit: For eligible businesses with up to 50 employees, SECURE Act 2.0 doubled the existing retirement startup tax credit to cover 100% of plan start-up costs (up from 50%), capped annually at $5,000 per employer for each of the first three years. This could mean a total of $15,000 in tax credits over three years. Small businesses with more than 50 but fewer than 100 employees remain eligible for the original SECURE Act tax credit of up to 50% of start-up costs, capped annually at $5,000 per employer for three years.
Employer contribution tax credit: A new credit offers small businesses with up to 50 employees up to $1,000 in tax credits per employee based on their receipt of employer contributions. This is applicable only to employees making less than $100,000 in the prior tax year.
Employers with between 51 and 100 employees can also qualify for a credit phase-in equal to:
A percentage of 2% points for each employee for the preceding taxable year in excess of 50 employees.
The credit phases out for all employers based upon the number of years the plan has been in existence:
100% in the first and second years
75% in the third year
50% in the fourth year
25% in the fifth year (no credit thereafter)
Tax credit for auto-enroll: SECURE 2.0 also established a new tax credit for eligible small employers who set up their retirement plans to automatically enroll eligible employees. The credit provides $500 for the first tax year that the employer first includes this option in an eligible retirement plan, and $500 for each of the following two tax years (for a total of three years), provided that employers continue to maintain auto-enroll at any time during the applicable tax year. No credit is allowed for any other tax year.
Tax-deductible employer match: 401(k) matches are a popular benefit and can be a more tax-efficient way to reward employees compared to a bonus or raise. In fact, matches are a double-sided tax benefit, since they’re tax-deferred for both the employer and employee.
How accountants and bookkeepers can help select retirement plans
In addition to tax advantages, 401(k) plans come with more benefits for employers. Retirement plans are the second-most sought-after benefit among job seekers, so offering one can help attract and retain employees. The U.S. Bureau of Labor Statistics noted that only 53% of businesses with fewer than 100 employees offered any kind of retirement plan. And according to Employee Benefit Research Institute data, only about half of all employees are satisfied with their current retirement benefits.
Offering a 401(k) can be a significant differentiator for small businesses in attracting and retaining employees. To take advantage of that, however, businesses should offer a plan that makes sense both for the business and their employees.
What type of retirement plan is best for your clients?
There are several 401(k) plan design types and options. We’ll quickly break down the specifics to help you decide which might be best for your clients. Quick tip: Knowing the size of a business can help identify which type of plan may be best.
|401(k) type||Generally a good fit for||Employer contribution required?|
|Traditional 401(k)||Businesses that are looking to scale their employee headcount, or want the flexibility to offer other retirement benefits.||No|
|Roth 401(k) deferrals (add on feature for 401(k) plans)||Businesses that want to offer a second way for their employees to contribute to their retirement savings. There are also no income limits.||No|
|Safe harbor 401(k)||Businesses that want to automatically pass some key Internal Service Revenue (IRS) nondiscrimination testing.||Yes|
|SIMPLE 401(k)||Small businesses with less than 100 employees that want to offer a plan with less stringent IRS requirements.||Yes|
|Solo 401(k)||Self-employed individuals or owner-only businesses including spouses.||N/A|
For more information on each of these types of retirement accounts, check out our guide: Types of 401(k) plans.
What should accountants look for in a 401(k) provider?
When you’re figuring out what to look for in a 401(k) provider or plan administrator, remember that retirement plans can be complex—but plans don’t have to be confusing. You and your clients should seek a reliable provider who makes the process of offering and maintaining a 401(k) simple and affordable. We’ll review the different pieces of a 401(k) plan and what you need to know to assess a provider.
Here are the fundamentals of a 401(k) and what you need to know about them.
Consider how the provider is paid and what costs your clients will be paying. At Human Interest, we generally categorize most fees into three types of categories:
Asset fees: The costs to manage the investments in your plan and are usually charged as a percentage against your assets under management (AUM).
Administrative fees: The costs associated with operating or providing services to your plan, and are generally paid by the plan sponsor.
Service fees: Many plan providers charge service fees for specific plan features, and usually the employees pay for service fees. Examples of service fees include distribution fees, plan termination fees, and loan initiation fees.
There are five basic characteristics that plan sponsors (your clients) will need to make decisions about:
Eligibility and vesting: A retirement plan’s eligibility rules determine which employees can participate in the plan, when they can start participating, and when they can begin earning credit in deposited employer contributions (if a matching or nonelective contribution is made). These options not only impact the bottom line but can also be used to support attracting and retaining employees. See The basics of 401(k) plan eligibility for more information.
Compensation: What counts as compensation in determining retirement contributions? Employers may exclude specific types of compensation in calculating employee deferrals and employer contributions, including compensation earned before plan entry and fringe beneﬁts. Other types of compensation (e.g., bonuses, overtime) may be excluded if the document allows, and these exclusions may require annual nondiscrimination testing.
Contributions: In a defined-contribution plan like a 401(k), employees contribute a portion of their wages—either a specified dollar amount or percentage of a paycheck—to their retirement account. Employees can change their contribution rate as specified in the plan document. Employer contributions may be optional, depending on what provisions you include in your plan. For more information on the types of employer contributions, see the contributions section of our plan design guide.
Distributions: A distribution is when an employee withdraws money from their retirement plan, including required minimum distributions after retirement, rollovers, and in-service distributions. Allowing in-service distributions is optional.
Loans: The ability to take a loan from a retirement plan may result in taxes or penalties if not timely repaid, which adds a layer of administrative work for an employer or their recordkeeper.
It’s worth noting that there are other features small businesses may want to consider including or offering. At Human Interest, we believe that automatic 401(k) enrollment combined with automatic escalation and high default contribution rates may help boost both participation and deferral rates.
Administration and recordkeeping
The nuts and bolts of a retirement plan are depositing contributions and deferrals, tracking transactions and balances, and processing distributions, loans, hardship withdrawals, and more. Providers who have their own recordkeeping and administrative platforms may be able to provide faster response times and customer service. Learn why finding the right 401(k) recordkeeper matters.
Additionally, plan administrators must act as an ERISA fiduciary—that is, perform the duties as outlined in the Employee Retirement Income Security Act. The primary duty is running the plan solely in the interest of participants and beneficiaries for the exclusive purpose of providing benefits and paying plan expenses. For more about ERISA fiduciaries, read 401(k) plan administrator and sponsor duties.
Compliance and reporting
Compliance is a critical component of maintaining a 401(k), and one of the most complex. In addition to preparing and filing Form 5500 annually, plan administrators must also perform annual nondiscrimination testing (NDT) and process any compliance-related refunds. Some providers, like Human Interest, provide mid-year NDT testing projections, which can help small businesses take steps to avoid NDT failure, or help them better prepare for an upcoming failure and its implications.
Why low fees aren’t enough
Cost is an essential component of a good retirement plan, but it shouldn’t always be the only factor in choosing a plan provider. Different clients of yours will have different needs—and a provider should be able to offer flexibility to fit these requirements. Here are other factors to consider.
Ease of integration
Will the provider’s platform integrate with your client’s payroll? If you’re considering offering 401(k) plans to your small business clients, this applies to you, too. How easy will it be to maintain the plans of multiple clients? Human Interest offers a single interface and integrates with over 400 top payrolls.
Easy enrollment and ongoing education
Plan administrators must manage participant eligibility and enrollment and provide participants with the requisite disclosures. Providers can be a crucial partner in educating your client’s employees about the plan and its investment options, which can affect the rate of participation in the plan and how much employees save. At Human Interest, we provide enrollment webinars, planning tools for employers and employees, and an online Learning Center for employers and employees.
While some providers offer a set of portfolio options, others offer open-architecture investment options, which enable participants to have flexible savings opportunities.
For example, Human Interest Advisors LLC, a Registered Investment Adviser and subsidiary of Human Interest Inc., can serve as the 3(38) investment manager for your clients. In this role, Human Interest Advisors will have the discretionary authority to select, monitor, and revise the menu of investment options. Alternatively, Human Interest Advisors can serve as the 3(21) investment advisor for your clients. In this role, Human Interest Advisors will help your clients determine recommended additions to, and/or, replacements of the main menu of investment alternatives; however, your client would retain the ultimate authority to monitor and select investment options for the menu. Your clients can also opt to bring on their own financial advisor to assist with selecting the lineup.
Human Interest Advisors also offers 401(k) automatic rebalancing, which can help maintain a participant’s desired level of risk. Please note that portfolio rebalancing does not ensure a profit or protect against loss.
Dedicated partner support
You want your clients to be supported—but it’s equally important that you’re supported as well. That’s why it’s important to consider working with a provider that works with a variety of partner support options. At Human Interest, you’ll receive support from a local Partner Account Manager who can answer ongoing questions and provide resources on tax-saving opportunities. Contact us today to learn more.
Article ByThe Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.