Can I open a 401(k) on my own?
Anyone who has earned income and isn’t eligible for an employer-sponsored retirement plan can set up a 401(k) of their own. It’s not easy, but it can be done. The IRS has numerous administrative and recordkeeping requirements. There are forms that have to be filed at setup and annually – tasks that employee retirement benefits providers handle on a plan sponsor’s behalf.
Can you switch 401(k) providers?
If a 401(k) plan sponsor – a small business owner or self-employed entrepreneur with a 401(k) – is dissatisfied with their 401(k) provider, they can change providers. Making a change is typically inconvenient and involves meetings with employees for training and re-enrollment, but you can certainly do it if you aren’t satisfied.
How much can my business contribute to my employees’ 401(k) plans?
The IRS issues guidance on how much employers and employees can contribute to 401(k) plans each year. For tax year 2022, employers can contribute at most 100% of the employee’s total annual wages or $61,000 – whichever is smaller. This limit increases to $67,500 for employees ages 50 and older. However, the $61,000 figure represents the maximum allowed total for employee and employer contributions. Employees can contribute at most $20,500.
For tax year 2023, these figures will increase. The total maximum annual contribution will be $66,000, or $73,500 for employees 50 or older. Employees will be able to contribute at most $22,500.
Retirement options are only slightly different for small business owners with no employees other than a spouse. In that case, you can set up a self-employed 401(k) with a $20,500 annual contribution limit as of 2022 ($27,000 for people age 50 and over). Total employee and employer contributions cannot exceed $61,000. The corresponding figures for 2023 will be, respectively, $22,500; $30,000 for those 50 and over; and $66,000.
Has the COVID-19 pandemic affected retirement plans?
During the first nine months of the pandemic, 8% of employers suspended or reduced their 401(k) contributions. This trend has only continued since then, with major companies such as Amtrak and Lockheed Martin canceling their retirement benefits programs.
This may be a factor in the ongoing “Great Resignation.” According to WTW’s 2022 Global Benefits Attitude Survey, 47% of employees could be convinced to join a company based on strong retirement plan offerings. Similarly, 60% would keep working at a company with strong retirement benefits. These findings imply that companies that lack retirement plans may experience higher employee turnover.
Can my business save on taxes by providing an employee 401(k) plan?
Small businesses that have fewer than 100 employees and are setting up a retirement plan for the first time may be eligible for the Retirement Plans Startup Costs Tax Credit. For the first three years you offer a retirement plan for employees, you can earn a credit for up to 50% of the plan’s setup costs (up to $500 a year). Contributions for employer matching are also tax deductible.
Do I have to offer a 401(k) plan?
Some states have either passed or are considering legislation requiring businesses to provide a retirement plan or to register with a government-sponsored retirement plan. These laws are aimed mostly at larger businesses, but some apply to small businesses as well. For example, California now requires businesses with five or more employees to enroll in the state CalSavers program if they don’t already offer retirement benefits. Employers pay nothing for CalSavers and have few responsibilities, but noncompliance can result in a fine of up to $750 per employee.
Max Freedman contributed to this article.