Frequently Asked Retirement Questions (FAQs) for Small Businesses

+ Does a small business have to offer a 401(k)?

Not quite. Legislation has passed in ten states that makes it mandatory for small businesses to offer a retirement program to their employees. The States that currently make it mandatory are. California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont and Washington. Each state has their own requirement. For example, California’s program is called “Cal Savers” which requires business with five or more employees to offer a retirement plan through private market or through a state offered retirement plan. This push from states to make it mandatory to offer a retirement plan is another push to solve the U.S. retirement crisis.

+ What type of business can set up a Small Business 401(k)?

Whether you are a sole proprietorship, LLC or nonprofit, you can offer a retirement program. Non-Profits can open a 403(b) plan which very similar to a 401(k) but has slightly different rules. If you are a Sole Proprietorship, you can open a Solo 401(k) plan which allows you to bypass the Form 5500 provided the account is below $250,000. With the most common types of business offering retirement plans being LLC or Corporations. 1099 employees are not eligible to contribute towards a 401(k) plan. W-2 and other compensation that is subject to payroll taxes (Social Security and Medicare) will be eligible to contribute towards the 401(k).

+ How do I set up a small business 401(k)?

There are several factors involved when setting up a 401(k) plan as a business owner. I would first determine why you are wanting to open a 401(k) plan. Is it for the employer's benefit? The employees benefit.? Or both? Once you determine that, you will want to decide what type of 401k plan you will be offering. Specifically, what your plan design will look like. It really depends on if you ware wanting and able to offer a company match or not. If you are, the Safe Harbor 401(k) option is suitable and very popular for small businesses. If you are not looking to offer an employer contribution, the Traditional 401(k) will be the best option. The setup process at LT Trust is simple and won't take longer than an hour of your time during a 30-day process. Within the 30 days, you will complete a plan document which shows what type of plan you will have. After the plan document is created, enrollment will begin, and the saving will start! You can visit our guide on how to start a 401(k) for your small business.

+ What are the potential tax benefits of a 401(k)?

There are several tax advantages regarding a 401(k). Let’s start with the employer. All employer contributions will be pretax therefore lowering the taxable income for the business. Those employer contributions are deductible as a business expense. The business will also receive tax credits the first three years. the IRS has created a small business tax credit to incentivize business to start 401(k) plans. Currently, employers with 100 or fewer employees can write off up to 50% of startup costs of a new 401(k) plan, up to $5,000 per year for the first three years of a plan. The participant also has several tax benefits towards saving for retirement. If the participant contributes pretax, they can lower your taxable income by that amount in the present and defer paying taxes on that money until you withdraw it in retirement. If the participant contributes after-tax Roth, the participant can pay taxes on the contribution now and then the earnings will be tax free during retirement. Both employer and employee will be able to benefit from tax savings offered by a 401(k) plan.

+ How much can employers contribute annually?

Employers will have three options to choose from when deciding to offer an employer contribution. First, the employer can decide not to contribute at all. Secondly, you can fall within the Safe Harbor requirement (recommended for small businesses) and offer either a 3% non-elective or 4% match. Lastly, you can customize your company match to your liking. Around 80% of our plans chose a Safe Harbor 401(k) Plan. A Safe Harbor 401(k) will benefit both the employer and employee. The employer is only able to match on a salary of $290,000 or less. Anything above that salary will not be eligible for a match. Employers can also utilize profit sharing. This allows the employer to contribute up to 100% of an employee’s annual salary or $58,000 for the year 2021 ($64,500 for employees 50 years and over), whichever is higher. That $58,000 limit is a combined top end, meaning employee and employer contributions combined cannot exceed it.

+ How much can employees contribute annually?

The maximum amount employees can contribute to a 401(k) for 2021 is $19,500 if you're younger than age 50. If you're age 50 and older, you can add an extra $6,500 per year in "catch-up" contributions, bringing your total 401(k) contributions for 2021 to $26,000. Contributions to a 401(k) are generally due by the end of the calendar year.

+ Does my business have to contribute to employee accounts?

No, employer contributions are optional. If the employer elects not to contribute towards the 401(k) plan, the plan will be subject to non-discrimination testing. If your plan is subject to that testing, key employees and HCE’s will be limited on their annual contributions. If you do decide to contribute to your 401(k) plan, you have further options. You can contribute a percentage of each employee’s compensation to the employee’s account (called a nonelective contribution), you can match the amount your employees decide to contribute (within the limits of current law) or you can do both.

+ How do you choose a 401(k) provider?

Choosing a 401k provider can be overwhelming, time consuming and confusing. Since there are many providers to choose from, keep in mind that not all will offer the same services or prices. Some 401(k) plan providers will cater more to smaller companies, while others are set up for medium-sized or large businesses. There are usually three providers involved in a 401k:

1. Financial Advisor
2. Third Party Administrator
3. Recordkeeper

LT Trusts acts as the Third Party Administrator and Recordkeeper and works with several financial advisors throughout the country.

+ How much does it cost to set up and administer a small business 401(k) for my company?

401(k) costs have become more transparent within the last 10 years. Fees typically come in two different types; hard dollar and percentage. 401k fees consist of but not limited to:

• Recordkeeping fees
• Third Party Administration fees
• Per Participant fees

Bundled 401(k) packages will usually be more affordable than unbundled 401(k) packages. Bundled is when one service provider performs as both the Recordkeeper and Third Party Administrator. LT Trust bundled pricing is below:

• $1600 Base (paid by company)
• $36 per participant (paid by participant)
• 0.10% of assets (paid by company)

LT Trust will soon be offering an extremely competitively priced 401k product geared to small business owners starting a 401k for the first time. Contact us to learn more.

You will want to be sure while researching 401(k) providers to find all fees for Recordkeeping &Third Party Administrator duties.

+ When are contributions fully vested?

As a 401k participant, your employee contribution is 100% vested immediately. When it comes to employer contributions, it depends. In a Safe Harbor 401k plan, employer contributions are vested immediately. In a non-safe harbor plan, you have a few options. The most popular vesting options are:

Graded vesting schedule:

• After one year of service: 0% vested
• After two years of service: 20% vested
• After three years of service: 40% vested
• After four years of service: 60% vested
• After five years of service: 80%vested
• After six years of service: 100% vested
• Cliff vesting schedule:
• After one year of service: 0% vested
• After two years of service: 0% vested
• After three years of service: 100% vested

Cliff vesting schedule:

• After one year of service: 0% vested
• After two years of service: 0% vested
• After three years of service: 100% vested

+ What investment choices are offered?

LT Trust offers true open architecture 401(k) plans. Open architecture ensures that a client can satisfy all their financial needs and that the investment firm can act in each client’s best interests by recommending the financial products best suited to that client, and not proprietary products that are prevalent with insurance based recordkeepers. LT Trust has access to over 30,000 mutual funds and ETF’s.