The cost of providing meaningful benefits to employees of companies in America is skyrocketing. In many businesses—perhaps yours—that cost amounts to an additional 30 to 35 percent of payroll!
Yet a strong benefits program is a must. Quality employees are the foundation of your business. There are few better ways to attract, retain, and motivate employees than by providing a company-sponsored savings and retirement plan. In today’s competitive market for attracting and retaining quality employees, 401(k) plans are critical to both large and small companies.
What Is a 401(k) Plan?
A 401(k) plan is a defined contribution retirement plan established under Section 401(k) of the Internal Revenue Code. It starts with a profit sharing plan, but allows employees to contribute a portion of their pay, before tax, to save for their own retirement. To enhance the value of the plan, employers can also make before tax contributions if they wish. In 2005, employees can contribute up to $14,000 before tax to a 401(k) account (those over age 50 can contribute an extra $4,000 as a “catch-up” provision). The limit for combined employer and employee contributions is 15 percent of the total compensation of all participants.
Benefits to Employees
• A 401(k) plan allows employees to invest for their retirement conveniently, through salary reduction. Investing through a 401(k) plan is widely recognized as one of the best personal financial planning strategies available to employees.
• Your employees pay no current federal (and, in most states, no state) income tax on the portion of their pay that goes into the plan. All contributions reduce taxable income dollar for dollar—and they compound tax deferred until they’re withdrawn.
• Now that Individual Retirement Accounts are no longer always deductible, 401(k) plans have become increasingly popular as a way to get all the benefits of the old fully deductible IRA—with higher contribution limits.
• Each employee may have a choice about how to invest the contributions in his or her account. Typically, 401(k) plans offer several investment options, and in some cases a guaranteed-interest account. (Note: The guarantees are generally based on the financial strength and claims-paying ability of the issuing company offering the guarantee.)
• Each employee decides independently how much to contribute to his or her own account. Employees can decide each year how much to contribute and how their contributions will be divided among their available choices. Matching contributions you add on your employees’ behalf can make it even more beneficial.
• Employees can borrow against the assets in their accounts under certain circumstances.
Benefits to the Company
• A 401(k) plan helps you promote good relations with your employees by demonstrating concern for their financial future.
• Employees consistently recognize a 401(k) plan as an important benefit: the average participation rate for eligible employees is about 75 percent.*
• In most cases, the employees bear most of the cost of building their own retirement accounts—funding the plan with before tax contributions. The average annual employee contribution is more than $3,000.*
• Contributions that you, as the employer, make to the plan are tax deductible. This alone can be a significant reason for you to establish a plan for your company.
• You may decide each year whether to make an additional contribution—and, if so, how much. So you have some control over what the plan costs.
• Nationally, 401(k) plans are within the reach of most businesses. Many such plans are provided by employers with fewer than 100 employees.
A 401(k) plan can seem intimidating to companies that haven’t pursued this benefit for their employees. But professional financial and legal advisors can help you make the most of your 401(k) choices.
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